Oddly Together

Banks Play the Foreclosure Blame Game

Big business plays the kind of blame game that makes four year-olds crying “He made me do it!” seemingly mature. So, I’m not surprised that yesterday before the US Senate Committee on Banking, House & Urban Affairs, Bank of America’s Barbara Desoer blamed investors for the financial institution’s inability to modify more mortgages. It’s not her fault!—she claims. She makes a strange distinction between investors and shareholders, in the process casting blame as misdirection from a much larger problem: Banks and other lenders mishandling mortgage/foreclosure paperwork.

I’m a longstanding critic of public companies, because of conflicting ethical objectives. It’s the great American contradiction: U.S. law treats businesses like people, but the organizations don’t share the same moral objectives as the human beings they represent. The “good of all” is the shareholder, not humankind. This moral difference is one of the major reasons some businesses egregiously act against the common good of all people—some of whom are their customers.

There is in business no moral high ground. The high ground is quagmire, because all public companies share a single, moral objective—to make profits for stockholders. By that measure, any action that undermines making money for shareholders is immoral. Similarly, investment banks and other Wall Street entities represent investors with the same moral objective and another: For those individuals servicing investments to make as much money as possible. Their self-serving objective often puts individual gain ahead of the good of investor customers.

I’m making a distinction between company shareholders and investors with broader portfolios, because Desoer does. From her prepared testimony:

Many investors limit Bank of America’s discretion to take certain actions. When working with delinquent customers, we aim to achieve an outcome that meets customer and investor interests, consistent with whatever contractual obligations we have to the investor. Duties to investors add complexities to the execution of modification programs and can result in confusion for customers.

Desoer isn’t talking about casual investors but the U.S. government. She explains that BoA only owns 23 percent of the loans it services. Of the remaining 77 percent, “Fannie Mae and Freddie Mac are the investors on 60 percent of these loans,” she blithely asserts, adding:

Treasury, investors and other constituencies often change the requirements of their modification programs. HAMP [Home Affordable Modification Program] alone has had nearly 100 major program changes in the past 20 months. Fannie and Freddie, as investors, have layered on additional requirements, conditions and restrictions for HAMP processing. When these changes occur, we and other servicers have to change our process, train our staff and update technology. These changes can also affect what is required of the customer, for example the need for new or different documentation.

Talk about playing the blame game. Desoer basically blames the government, creator of the HAMP program, for BoA’s inability to modify more mortgages. In making such audacious claim she shifts the focus away from the reason for the Congressional hearings—industrywide, pervasive mishandling of mortgage and foreclosure paperwork. Asserting that “changes” necessitate customers providing “new or different documentation” distracts from Bank of America’s mishandling of foreclosure paperwork, which by far is the greater problem.

Mortgage holders and servicers are sitting on a powder keg of toxic mortgages, potentially much greater than already revealed. Some of the mangled paperwork reveals that somebody awarded mortgages that home owners weren’t qualified to receive, such as “liar’s loans”. These risky mortgages were later bundled together as investment packages given AAA-ratings. That’s fraud, by several legal measures, securities and/or tax fraud depending on how the mortgages were packaged as investments.

In making such accusation and misdirection, Desoer is acting on behalf of BoA shareholders and their short-term interests. There’s the distinction between investors and shareholders—the latter being in Bank of America. Her first moral objective is to her shareholders, by using tactics to minimize risks that BoA’s mortgage portfolio will explode into financial hardship if not disaster. She has no incentive to be truthful or forthcoming.

That’s the problem unraveling foreclosure fallout resulting from the housing bubble collapse. Government agencies, Congress, aggrieved mortgage holders and many other outsiders expect one kind of behavior when they’re confronted by another. The highest moral objective of these investment banks and other mortgage holders or servicers is money—if not making it then not losing it. Journalist Matt Taibbi has recognized much of the behavior for what it is: Scamming. I highly recommend his book  Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America and regular writings for Rolling Stone.

By the way, Desoer’s investor accusation/misdirection is itself a scam. A lie. A cheat. From a story yesterday by Karen Weise in ProPublica:

Desoer’s testimony echoes what homeowners have long heard, that investors are frequently denying them help from federal program created to foster loan modifications. But as ProPublica has reported, that’s simply not the case. Investors rarely have a say in loan modifications or block such modifications.

Something else revealing in Desoer’s testimony: “Of the nearly 14 million loans in our servicing portfolio, 23 percent of the portfolio is owned by Bank of America.” That’s a stunning figure. More than three quarters of the loans being serviced by BoA belong to some other organization. That’s another context from which to look at her investors accusation/misdirection, as it’s essentially the 77 percent she uses to protect 23 percent obligation to her shareholders.

The investor blame game is but one tactic. Another is to blame homeowners for not paying their bills. Blame, blame, blame is meant to distract from the real problem. The mangled paperwork. In the latest Rolling Stone, issue 1118, Matt Taibbi writes in “Courts Helping Banks Screw Over Homeowners”:

Why don’t the banks want us to see the paperwork on all these mortgages? Because the documents represent a death sentence for them. According to the rules of the mortgage trusts, a lender like Bank of America, which controls all the Countrywide loans, is required by law to buy back from investors every faulty loan the crooks at Countrywide ever issued. Think about what that would do to Bank of America’s bottom line the next time you wonder why they’re trying so hard to rush these loans into someone else’s hands…

That’s why one banker CEO after another keeps going on TV to explain that despite their own deceptive loans and fraudulent paperwork, the real problem is these deadbeat homeowners who won’t pay their fucking bills. And that’s why most people in this country are so ready to buy that explanation. Because in America, it’s far more shameful to owe money than it is to steal it.

Photo Credit: Jeff Turner

[Editor’s Note: This post was moved from joewilcox.com to Oddly Together on May 21, 2011.]

Do you have a mortgage or foreclosure story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.

Foreclosure Fallout will Last 9 Years

Wall Street Journal’s number of the week is startling. “107: How many months it would take to sell banks’ current and shadow inventory of foreclosed homes.” If Journal reporter Mark Whitehouse is right, banks will need 9 years to clear their foreclosure inventory. But I wonder. Could it be longer?

The problem is this: Foreclosed homes typically sell for much less than their value—or at least as measured by what someone owes on the mortgage. Foreclosures, which in recent months accounted anywhere from 25 percent to one-third of home sales, pull down existing values. Homes in neighborhoods with foreclosures lose value.

Two Post-Bubble Disasters
For homeowners (let’s ignore investors, banks and other post-bubble casualties for now), the housing bubble’s collapse is not one but two disasters. The first is the subprime mess, where homeowners borrowed more than they could afford, something many folks didn’t understand until their ARM (adjustable-rate mortgage) or, worse, principal payments kicked in; many late-bubble borrowers took loans for which they only paid interest up front. Years later, principal payments drove up monthly mortgage obligations by double or more. This phenomenon precipitated the foreclosure problem, with millions of homeowners defaulting on their mortgages and rapid decline in home values (if there’s no demand for something, prices tend to fall).

The second disaster is foreclosure fallout’s ongoing impact on home values. In July 2009, I likened the econolypse to an atomic blast, with fallout, mainly in the form of debt, spreading across the American economy. Foreclosure fallout is devastating. As foreclosures continue, they push more homeowners underwater, meaning they owe more than the property’s value. Already, according to combined analyst estimates, one in four US homes is worth less than the mortgage note. As foreclosure fallout spreads and drives down existing home values, more homeowners are either forced to default or do so voluntarily, putting even more foreclosed properties for sale and further driving down existing home values. Its a vicious, virtuous cycle that must someday reach equilibrium, but the US housing market hasn’t yet achieved that state.

According to RealtyTrac, in September, the average foreclosed home sold for $170,814. One in every 371 homes received a foreclosure notice during the month. By comparison, the average selling price for new homes was $257,500, according to the US Census Bureau. A year earlier: $290,300. Additional Context: For 10 of the 12 months in 2007, average selling price was over $300,000. Inventory is another measure of the problem, and these figures often don’t account for the full load of foreclosures. According to the Census Bureau, there was eight months of new home inventory in September.

Healing is Risky Business
Foreclosure is exerting some negative pressure on house pricing, although it’s not the only factor at work, just the most recent with influence. Home prices have fallen 25 percent in many US regions from housing-bubble over-inflated values; it’s a necessary correction. Fundamentally, there is a problem of too much debt. Thirteen days ago I asked question “Should Barrack Obama bail out Americans?“—to which I answered “Yes.” The American government should aggressively intervene, buying up consumer credit card and mortgage debt for pennies on the dollar. This debt is a cancer, or you could call it cholesterol blocking consumer spending, which is the lifeblood of the American economy. A false, credit-driven economy created the debt but no longer exists to purge it. Drastic action is necessary.

America should look to Japan’s decades-long economic problems and learn lessons about what not to do. Perhaps the US government would have chosen a different stimulus package if more economists also were  sociologists. Too much economic theory is too far removed from human behavior or that of companies, which reflect the human beings who run them. Companies exhibit greed and self-preservation behavior that defies some economic math. Any stimulus package that fails to account for corporate or individual human behavior won’t be effective enough.

But the statistics, and even my intervention recommendation, simplify something complex. The housing market isn’t an independent entity, even though  yo-yo “it’s better, no it’s worse” news reports take too narrow and too singular a perspective. A sick or injured person is one way to look at the housing market. A change in temperature or blood pressure can have disastrous effects on someone seriously ill, and medicine or other interventions to heal can cause these or other side effects that might set back recovery or even kill. The housing market is that sick person.

For example, underwater mortgages partially explain why unemployment remains near 10 percent and more than 20 percent when adding underemployment. Fluidity, Americans’ ability to flow from a city with high unemployment to another where there are jobs, is a characteristic common among recent economic downturns. Fluidity stimulates recovery. People stuck in their homes, unable to sell, can’t easily move to localities where there are more jobs; underwater home owners have little to no fluidity. Freeing people to move would likely help reduce national unemployment but have negative effects on some localities from which people flee, such as less money for public services and schools because of lower tax base. The point: No matter what the cure, negative effects are likely somewhere else and any attempted cure could easily set back recovery or kill the patient.

It may be that the cure will require 9 years of rehabilitation. If so, the US economy will limp along for some time. Meanwhile, China’s economic miracle will increasingly define commerce and global politics. From a purely political protectionist perspective—the desire to keep America and its citizens safe—there is no Homeland Security agenda more important than economic recovery.

[Photo Credit: Charles Zoller; courtesy of the George Eastman House Collection]

[Editor’s Note: This post was moved from joewilcox.com to Oddly Together on May 21, 2011.]

Do you have an econolypse story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.

Should Barack Obama Bail Out Americans?

My answer is yes. Artificially created debt is cholesterol clogging the arteries of consumer spending. The economy that created the debt is gone. Only by surgically removing debt can Americans freely spend, thus pumping fresh blood to the heart of the U.S. economy. But, hey, I’m no economist, although in 2005 I rightly predicted the housing bubble’s collapse and much of the aftermath. Surely such insight is worth something.

TARP (Troubled Asset Relief Program) succeeded in bailing out the rich and made them richer—six days ago Wall Street Journal reported that “about three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year.” The paper describes the amount as a “record high”. The rich are richer, while most other Americans are poorer: At least one in five homes is worth less than the mortgage value; unemployment is stuck above 9 percent (not counting another 10 percent to 12 percent underemployed); and consumer spending spurts and sputters month-to-month.

The problem is this: Between 2002 and 2007, Americans amassed huge amounts of debt spurred on by an artificial economy sustained by greed and fear. While mortgage lenders and investment banks bear much of the responsibility, they’re not alone. Many Americans treated rising home equity values as ATMs. They cashed out equity to buy new cars, big-screen TVs and smaller items. Between 2001 and 2005, for example, consumer spending (spurred on by home equity ATMs) and new construction accounted for about 90 percent of U.S. GDP growth. More typically, consumer spending accounts for 60 percent to 70 percent of US economic activity, depending on which analyst does the estimates. A family that cashed out $50,000 in equity from their home during the bubble years contributed to economy-lifting consumer spending, but from debt. Since the bust, their $400,000 home might be worth only $300,000. Not only is the equity ATM gone, but they owe more than the property is worth.

I defined the situation in July 2009 post “Reich’s Right: No Economic Recovery in Sight”:

The boom gone bust left many, perhaps most, Americans in some kind of debt. Equity and billions of dollars in mortgaged-back spending are gone. Here’s the problem: The bubble was an artificial construct that created real debt. The equity and investment tools were mirages. They didn’t exist, because their values were arbitrary and not fixed to real assets. Yet they left behind real damage—economic devastation on the order of atomic blasts, with radioactive fallout continuing destruction. Recovery can’t come while fallout continues to spread across the economy…Americans have so much debt, and no longer the means to repay it.

The fictitious economy that created the debt is gone. The U.S. economy will limp along as long as Americans, whose spending is the country’s lifeblood, are burdened by debt.

The Foreclosure Bubble Deflates
Worse, there’s a bill that the United States has yet to pay for half a decade of debt-driven consumer spending and housing bubble mortgage lending. The housing market’s collapse has yet to exert its full impact on consumer spending, because millions of Americans in foreclosure stopped paying their mortgages, which freed up cash to spend on consumable goods and frivolities. But when forced out of their homes into the rental market, these people will suddenly have to pay for someplace to live (assuming they don’t end up homeless). Many of these foreclosure loafers will see their monthly expenses increase by one-third or more. Multiply the added monthly spending burden to millions of Americans and tepid consumer spending suddenly retracts; bad could be way worse.

How soon the remaining foreclosure loafers will be sent packing from their residences is ever-more uncertain. There is a sudden row of controversy about a September surge in repossessions and mishandling paperwork for many foreclosures. According to RealtyTrac, 1 in 371 homes received a foreclosure notice in September. Total number of homes currently in foreclosure: 2,021,675. The number of repossessed homes topped 100,000 for the first time in any month. However, the number of actual repossessable homes is likely much higher, with banks throttling back. Too many repossessed homes coming onto the housing market too fast could overwhelm it with cheap inventory. Such circumstance could further drive down housing prices and make even more neighborhoods undesirable to live because of the number of empty homes. From that perspective, non-paying residents are more desirable than vacant houses.

However, banks and other mortgage lenders may have other reasons for letting foreclosure loafers stay rent free: Fear and denial. Two years following the stock market’s tumultuous atomic blast, no one can safely say how much toxic fallout remains among mortgage-backed investments. The more banks dig into their foreclosure paperwork, the more debt fallout they are likely to find. There is fear of the unknown. It’s sadly ironic. Credit counseling services help consumers get over denial. Often consumers get into real financial problems after ignoring letters and other communications from their creditors. They pretend the debt problem doesn’t exist. Banks’ behavior is about denial, too. Attitude: They can be most hurt by what they know.

All this leads to the expanding controversy about the foreclosure paperwork trail, or lack of it. Major banks and other mortgage lenders suddenly are conceding there are lots of problems with their foreclosure paperwork. What’s disturbing is how endemic are the problems. Besides shoddy paperwork—an unsurprising circumstance considering how often these mortgages changed lenders—many foreclosures were processed by unqualified “robo-signers”. The situation suggests banks wanted to process the foreclosures as cheaply and as efficiently as possible, but I see something else: A lack of desire to thoroughly review the documents, which could reveal the extent of financial exposure everyone wants to deny. Repeated: Banks can be most hurt by what they know and must publicly disclose. Suddenly, economists and other informed onlookers (yes, even journalists) realize that banks might carry many more bad mortgage investments than even the most bearish onlookers considered—right, the same debt banks psychologically sought to deny.

Bank of America and JP Morgan Chase are among the institutions putting temporary holds on foreclosure sales. The suspensions are bags of mixed troubles:

• The actions give a temporary reprieve to people awaiting eviction. Their spending can continue much the same, which in aggregate is good for the U.S. economy.
• However, housing sales could suddenly stall; in any given month, foreclosures and other so-called distressed properties account for up to one-third of home sales.
• Banks are likely to lose millions, perhaps billions, from lost home sales, lawsuits for foreclosure fraud and declining valuations, as shareholders sell bank holdings.
• Banks are likely to reveal millions, more likely billions, in bad mortgage investments that had been obscured by or purposely hidden in shoddy paperwork.

October 14th New York Times editorial “The Foreclosure Crises” nails it: “This latest foreclosure crisis should settle one issue once and for all. The banks that got us into this mess can’t be trusted to get us out of it. The administration and Congress need to act.”

There’s a Bailout that Matters More
The impending crisis is opportunity for the Obama Administration to bail out the rest of America—its citizens. The rich got their bailout and in process kept thousands of fat cat banks from exhausting their ninth lives and clawing down the U.S. and other economies when dying. It’s time for the government to step in and buy up consumer debt for pennies on the dollar. My proposal:

1. The Obama Administration, with support from the post-election lameduck Congress, should empower the Consumer Financial Protection Bureau to aggressively intervene in Americans’ debt crisis.
2. The new agency then should put a temporary suspension on all consumer mortgage and credit card payment obligations acquired before a set date, such as January 1, 2010 or October 1, which is the start of the government’s fiscal year.
3. Banks and credit card holders should be given 60 days to produce documentation on all outstanding consumer debts greater than $5,000 for purchase by the Consumer Financial Protection Bureau. Any debts not produced by the set date would have their interest owed voided, including mortgages.
4. During the same time period, consumers could apply to have reduced any debts greater than $5,000 to any institution.
5. The new agency would buy back debt from banks and credit card holders for 10 cents on the dollar. For credit cards, the government would purchase debt accumulated as interest; citizens would still be responsible for principal payments; option for account suspension would allow reasonable payment plans interest free. For mortgages, the government would assume accumulated interest and lost value, meaning the difference between the home’s market price and amount owed against the title.
6. Government-backed Fannie Mae would assume responsibility for purchased mortgages, much as it has done during the bail out. However, banks demonstrating they can accurately manage paperwork could retain title on the mortgage, which would be refinanced for reasonable interest rate 10 percent below market value (as buffer against continued housing price declines).
7. The U.S. government should recover the 10 cents on the dollar from U.S. consumers, or simply forgive the payment obligations.

The proposal may seem to some people as extreme, but I say no less outrageous than the bank bailout (e.g. TARP) was viewed in late 2008. If not this intervention, the Obama Administration should consider doing something to achieve the same objective. Aggressive action is necessary because the artificial credit economy that produced the debt no longer exists and likely won’t for decades (hopefully never). By bailing out Americans, the Obama Administration can surgically remove artery clogging debt, shock the economy’s heart and start pumping the consumer spending lifeblood. If consumer spending accounts for as much as 70 percent of consumer spending but consumers can’t spend because they’re burdened by debt, how can the economy recover without changing the dynamics—either removing the debt or shifting the economy to another driving force?

Of course banks and credit card companies will balk at such drastic intervention. But it’s to their benefit, too. Banks would perhaps benefit more, by unloading toxic mortgage debt, whether securities or title holdings. By removing their debt and the fear that other banks and investment institutions have hidden liabilities, the Obama Administration could clear the arteries blocked from lending. For all TARP’s claimed successes, it’s marred by one glaring failure: Two years after the crash, credit markets are still largely blocked. Uncertainty about hidden debt and fear over taking on collateral damage has caused banks to withhold credit, even with the Federal Reserve holding interest rates near zero. Banks are unwilling to take the risk but are all too willing to reap other investment-related benefits from the Fed’s low-interest lending policies.

What About Moral Hazard?
Aggressive intervention on behalf of debt-ridden Americans also is a way of imposing some accountability on banks even while liberating them from consumer debt burden. Perhaps such action could address the problem of moral hazard, which contributed to the housing bubble and continues in other facets because the instigators got bailed out by the U.S. government rather than suffering financial ruin. In Cato paper “Moral Hazard and the Financial Crisis”, Kevin Dowd offers definition: “A moral hazard is where one party is responsible for the interests of another, but has an incentive to put his or her own interests first: the standard example is a worker with an incentive to shirk on the job.” He adds:

Many of these moral hazards involve increased risk-taking: if I can take risks that you have to bear, then I may as well take them; but if I have to bear the consequences of my own risky actions, I will act more responsibly. Thus, inadequate control of moral hazards often leads to socially excessive risk-taking—and excessive risk-taking is certainly a recurring theme in the current financial crisis…

Measures that rein in moral hazard are to be welcomed and will help to reduce excessive risk-taking; measures that create or exacerbate moral hazard (such as massive bailouts?) will lead to even more excessive risk-taking and should be avoided. In short, a key yardstick that should be applied to any proposed reform measure is simply this: Does it reduce moral hazard or does it increase it? The bottom line? If someone takes a risk, someone has to bear it. If I take a risk, then we want to ensure that I be made to bear it. But if I take a risk at your expense, then that’s moral hazard and that’s bad.

Fear that the U.S. government might someday intervene again creates risk that could help check bad behavior. I agree with Kevin. The major objective of any future financial regulations should be to decrease moral hazard. In the not so distant past, banks lent money solely from their own funds and typically held mortgages to maturity. They assumed the risk. But once banks could tap into outside capital to lend and they could sell off mortgages as investments, risk passed on. Strange, it seems, that one institution passing off risk to another failed to realize that the other institution might act similarly, by unloading risk in equally questionable mortgage investments.

There remains one question: What about Americans’ responsibilities? Should they be so lithely set free from their debts? If the U.S. government hadn’t let off the major instigators of the econolypse, I might answer no. But the rich got their bailout and now huge post-econlypse paydays by earning fat bonuses. They live in lofty cloud homes far above the economic fallout. Jack and Jane American deserve something, too, particularly since they can’t easily or quickly work off their debts given current circumstances. Meanwhile, their inability to spend hurts the entire American economy. It’s time for a bailout that matters at the supper table.

Photo Credit: Chuck Kennedy, courtesy The White House

[Editor’s Note: This post was moved from joewilcox.com to Oddly Together on May 20, 2011.]

Do you have an econolypse story that you’d like told? Please email Joe Wilcox: oddlytogether at gmail dot com.

Masters of the Econolypse

Rolling Stone issue 1099 arrived while I was flu-snookered last week. It’s the third issue received since my resubscribing after more than 25 years. Amazon made an offer I couldn’t refuse: Half-year subscription for a buck. The writing is better than ever, although a contributing editor wrote the best story—”Wall Street’s Bailout Hustle”. (If you see an illustration—meaning the link to it is still live—credit: Victor Juhasz.)

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Reich’s Right: No Economic Recovery in Sight

U Cal Berkley prof Robert Reich astutely and concisely sums up the prospects for economic revival in commentary “When Will the Recovery Begin? Never.” I saw it today at Salon, but Robert posted to his blog on July 9.

Other economic observers who talk about a recovery underway go oddly together with reality. There is no recovery now, and there isn’t going to be one in the foreseeable future. I’m no economist. but even I can see what’s going on, as I did about the housing crisis four years ago. Why can’t other people? The housing crisis and current situation are linked in ways few so-called experts are identifying. But Robert clearly gets it.

He writes about two camps predicting recovery. One camp (V-shaped) looks to past recessions as roadmap for faster recovery. The other camp (U-shaped) recognizes how weakened are asset markets, and sees a slower recovery.

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