I’d like your opinion on the following purely hypothetical scenario…

If a small group of individuals working within a nation’s government made a series of decisions that destroyed the economic security of tens of millions of the country’s citizens… decisions that literally cost thousands of lives, and in all likelihood shortened the life expectancies of hundreds of thousands more… failed to such a degree that it would be more than a decade before any recovery would be possible… then claimed economic recovery knowing that 93 percent of gains had gone to the top one percent… and they did all of this while failing to address the core issues that led to the crisis in the first place…

… should such individuals be prosecuted… impeached… or imprisoned?  

And I can’t help but wonder… again, purely hypothetically, of course… what sort of harm would such “leaders” have to cause before they should they be executed?  Because, it would seem obvious to say that they damn sure should not be reelected… or at least not allowed to continue on their chosen path.

Please don’t get agitated… I’m not suggesting President Obama be prosecuted, impeached, imprisoned… and, good Lord… certainly not executed.  Nor am I suggesting such fates as being appropriate for Messrs. Geithner or Summers.  It was a purely hypothetical scenario that I posed… not one I am suggesting exists in reality in the United States of America today.

But, you do know what I’m saying, right?  

And that you just answered that query in the affirmative… should alone be enough to give one pause.

Now, I’m not going to get involved in the mincing of words, nor am I going to suggest that the policy decisions made by the Obama Administration were in any way nefarious.  In fact, to the contrary… I’m willing to accept that the administration’s decisions to-date were made in the face of such unprecedented complexity and political impenetrability that some amount of reasonably momentous error was all but preordained.

I am also not writing this as some sort of political diatribe designed to potentially influence for whom one should or shouldn’t vote in 2012.  Our presidential elections are a choice between two, or perhaps more, candidates, and Americans are all quite familiar with a thought process that results in a vote against one… as often as for another.

And, while you should read these words as an indictment of the decisions made by the Obama Administration during its first term in office, you may also rest assured that the fact that the Republican party as a whole has done nothing to help the administration contend with the catastrophic economic situation our nation continues to face, has in no way been lost on me.

In point of fact, the Republicans have engaged in obstructionist politics during a time of national crisis and should be ashamed.  I don’t think there’s any question that were our crises made from war, their acts would have been seen as nothing short of treasonous and therefore would have been unthinkable.

20:20 Vision…

All told, as related to our nation’s economy, every American citizen today should view the on-going inaction on both sides of the aisle, as utterly intolerable.

The fact is that I could very easily make a list of government programs, each with budgets in the billions, all promoted as somehow mitigating the damage being caused by the foreclosure crisis, and all whose outcomes would have been identical to those reported… had the programs been administered by farm animals.

And that would be funny, were it not so literal and entirely accurate.

This past week, Kristin Roberts and Stacy Kaper, writing for the National Journal, documented the appalling story of the incomprehensible failure of the Obama Administration to arrest the damage being caused by the foreclosure crisis that’s still tearing through American families and households with the destructive force of a category five storm.

Roberts and Kaper began their article recounting a recent meeting at the Treasury Department, at which they said, civil-rights and housing advocates were “presenting a brutal reality check to President Obama’s Treasury secretary. The administration’s housing programs, they said, were ill-conceived, had failed woefully, and would be indefensible in an election year.”

Apparently, a woman by the name of Janet Murguia, president of the nation’s largest Latino-rights organization, gave Mr. Geithner an ultimatum:

“Make dramatic changes to your housing program, or the National Council of La Raza will be unable to carry Obama’s message to Hispanic voters in 2012.”

(I don’t know what if anything Secretary Geithner said after that meeting ended, maybe he said nothing… out loud.  But, I just have to believe that in his head the words sounded something like, “Si no le gusta Obama, estoy seguro de que vas a amar a Romney.” Assuming Tim speaks Spanish, of course.  Roughly translated it means… “Yeah, well if you don’t like Obama, I’m sure you’re going to love Mitt Romney.”)

Make no mistake about it, whether as a society or as an economy, we are unlikely to fully “recover” in my lifetime.  And truth be told, all I have left are tears, for never before in history has so much been so needlessly extinguished sans the millions of body bags that come home from a world at war.

It is incomprehensible that our plight is not even close to being over, but it should be sincerely humbling that, as I write these words, we don’t even have a plan on a drawing board that one could credibly claim has even the remotest chance of abating a crisis that can only continue to break the economic back of our middle class, ultimately destroying our citizenry’s faith in what has been referred to as “The American Dream” for more than 200 years.

For ours is not so much a financial crisis… nor a liquidity crisis… nor a credit crisis… nor a crisis caused by over-leverage and excessive debt.  What we are experiencing is a crisis that is being perpetuated by the near complete loss of trust on the part of investors and consumers.

And… “Once you lose trust you just don’t get it back… you just don’t.”

Investors lost trust…

During the summer of 2007, investors around the world lost trust in the mortgage-backed securities and their complex derivatives.  We haven’t had a meaningful private securitization of such debt since that time, and we aren’t going to see such private securitizations of mortgage debt anytime soon.

In fact, the only securitizations of mortgage debt we have today are government guaranteed via Fannie, Freddie, FHA, VA, et al.  Absent the government guarantee, there would essentially be no mortgages available… period.

Over the handful of years between 2003 and 2007, investors bought into securities rated AAA… but soon found out they should never have been rated AAA.  Almost overnight, demand for these securities dried up, and the banks that were holding Collateralized Debt Obligations (CDOs) on their books found that they couldn’t be sold… and if they couldn’t be sold, then what were they worth?  And the answer was that no one knew.

These are the “toxic assets” that then Treasury Secretary Hank Paulson was planning to buy with the TARP funds… until he realized that banks wouldn’t sell them at a discount, and that it would be political suicide for him to buy them at face value.

The result of all this was that housing prices that had started dropping during the summer of 2006 after Alan Greenspan raised interest rates 17 times in a row, now went into a credit crisis inspired free fall.  The further they fell the more people went underwater… and the more that went underwater… the more fell into foreclosure.

Without credit being available and with home equity evaporating, spending by consumers fell off a cliff… companies started laying off workers and unemployment had nowhere to go but up… which in turn increased the number of foreclosures, which in turn lowered housing prices… forcing more underwater, thus leading to more foreclosures still.

So… with the number of defaulting loans continuing to rise each year since 2006, investors have incurred losses that now total well into the trillions.  Some of these losses were the result of some variation of securities fraud, to be sure.  But as the crisis has been allowed to grow in size and scope, it’s become more and more difficult to tell which securities were fraudulently packaged and which were destroyed by the damage our government failed to mitigate at every single opportunity.

Not that I imagine investors care why, at this point.  They got burned big time, and their burning isn’t nearly over yet.  So, as far as selling them more mortgage-backed securities rated “investment grade” by Moody’s or S&P… I don’t think you need an MBA from Harvard to come to the conclusion that the prospects of that happening anytime soon are… shall we say… “BLEAK.”

Chris Whalen knows banking…

Just a few weeks ago, Institutional Risk Analytics (“IRA”) Vice Chairman, Christopher Whalen, speaking to the audience at American Enterprise Institute, described quite succinctly why talk of housing recovery is premature.  Not to put too fine a point on it but the phrase used was “dead cat bounce.”  As the IRA blog stated:

“… you won’t here that from any politicians from either of the institutional political parties in this election year.  Politicians and their enablers in the economics professional all want to believe that the US housing sector is on its way back.”

Yes, well… I want to believe that maybe I’ll win the Masters one day as a senior citizen, but although I wouldn’t want to rule out the possibility, I likewise wouldn’t want to find out that policymakers in Washington D.C. are basing anything on such fanciful ideas.

As Mr. Whalen said at the conference…

“There is no private label market nor is it likely that the private label market for RMBS is going to recover anytime soon. Memo to Peter Wallison, Rep. Scott Garret (R-NJ) and our other friends in Washington working to eliminate Fannie and Freddie: Stop talking about a private sector alternative to the GSEs in the near term. There is no private sector alternative to the government housing agencies.”

 

“The lack of credit availability is the chief reason that housing will not recover in the near term.”

Whalen also points out that beyond the issue of investors losing trust, until the Fed raises interest rates the private label market for non-conforming loans and RMBS won’t be back no matter what.  It’s not hard to understand… with rates at zero there is simply no incentive for private investors to take on the risk of non-conforming residential mortgages.  Or, in other words, if the spread isn’t there, you might as well just buy Treasuries.

Things are getting tighter…

According to Jonathan Corr, Chief Operating Officer of Ellie Mae, a company that tracks the characteristics of loans, credit standards are tightening.

Corr told Nick Timiraos of the Wall Street Journal that conforming loans, which are those made by Fannie Mae and Freddie Mac, that were approved for purchases in February of this year had an average credit score of 764 and an average down payment of 22%.  Applications that were DENIED had an average credit score of 732 and an average down payment of 19%.

And as far as refinancing goes, Ellie Mae’s report shows Fannie and Freddie February borrowers had an average credit score of 770.

With the FHA looking like the next mega-billion dollar bailout, even FHA loans are getting harder to qualify for… in February, the average credit score for someone trying to refinance through an FHA loan stood at 722, which is up from 706 last August.  Purchase loans approved by the FHA had an average credit score of 701 with an average down payment of 5%.

In addition to all of this, according to Laurie Goodman at Amherst Securities, the total population of homebuyers in the US has declined by roughly 20% since 2005.  She points out that Americans are not deleveraging in terms of reducing debt.  More accurately, “the remaining 80% of homeowners/buyers continue to labor under excessive levels of debt.  If these families are ever able to sell their homes, it is a pretty good bet that they will either downsize to smaller dwellings or rent.”

Chris Whalen said it more bluntly to the audience at AEI few weeks ago…

“… forget the economist twaddle about consumer deleveraging. We have merely charged-off the worst defaults in the population, leaving the survivors to service mortgages that are at or below water in terms of LTVs.”

None of this should be difficult to understand…

Historically, at least two-thirds of homebuyers are also home-sellers, that is to say they are selling a home in order to buy another.

But, if half of today’s homeowners are underwater or effectively underwater, meaning they owe more than their homes are worth, or they would if sales commissions and other moving expenses were factored in… then they can’t sell… so they can’t buy.  Many won’t be able to sell for a long, long time, and with housing prices continuing to fall (more on that in a moment), more and more are being cemented into this group all the time.

As Goodman explained in a recent presentation, at best all we’re doing is charging off the debt of defaulted borrowers, thus leaving behind a smaller pool of homeowners who have too much debt to function in the housing market.

Just do the math… if historically two-thirds of homebuyers were also home-sellers, but half of those home-sellers now can’t sell… then the future demand for homes is going to be significantly lower than it has in the past.

Yes, there are first-time buyers, although not nearly as many as in the past.  Many aren’t rushing to buy after seeing their parent’s equity evaporate over the last few years, and student loan debt is causing a delay in family formation and hence reducing first time home purchases.  And yes, there are investors, but it should be easy to see that the number of investors is nowhere near large enough to make up for half of the two-thirds of buyers we’re used to seeing in our housing markets.

All told, demand for homes in the future will be significantly lower than in the past… period.  And if demand is going down, prices cannot be going up… simple as that.

The Elephant in the Room…

And, all of that ignores the elephant in the room that is the increasing numbers of foreclosures and their associated backlog, referred to as the “shadow inventory,” neither of which are capable coexisting with a recovery in housing prices.

You see, in 2011 the number of foreclosures slowed down, in some states quite significantly, but not because of borrowers becoming more able to pay their mortgages.  Foreclosures fell because of banks holding back as they awaited final determinations on things like the Attorneys General national mortgage settlement, and some states, specific court decisions.

I haven’t seen any conclusive numbers yet, but I’d bet money that 2011 will look flat when compared with 2010 instead of increasing as it otherwise should have, and this will make for some deceptive statistics showing the crisis being somehow nearer its end… when it’s not.  In fact, all reports already indicate that the number of foreclosures is increasing as we speak.

Here’s how Reuters reported such news on April 4, 2012…

Many more U.S. homeowners face the prospect of losing their homes this year as banks pick up the pace of foreclosures.

“We are right back where we were two years ago. I would put money on 2012 being a bigger year for foreclosures than 2010,” said Mark Seifert, executive director of Empowering & Strengthening Ohio’s People (ESOP), a counseling group with 10 offices in Ohio.

“Last year was an anomaly, and not in a good way,” he said.

In 2011, the “robo-signing” scandal, in which foreclosure documents were signed without properly reviewing individual cases, prompted banks to hold back on new foreclosures pending a settlement.

Signs are growing the pace of foreclosures is picking up again, something housing experts predict will again weigh on home prices before any sustained recovery can occur.

Mortgage servicing provider Lender Processing Services reported in early March that U.S. foreclosure starts jumped 28 percent in January (of this year).

More conclusive national data is not yet available.

However, RealtyTrac has published estimates showing that the number of foreclosures in February of this year as compared with January’s numbers increased in 21 states and, “…jumped sharply in cities like Tampa (64 percent), Chicago (43 percent) and Miami (53 percent).”

According to RealtyTrac’s CEO, Brandon Moore, the “numbers point to a gradually rising foreclosure tide as some of the barriers that have been holding back foreclosures are removed.”

Other evidence of foreclosures not happening in 2011, but set to happen this year are seen in a January 2012 report by the Neighborhood Economic Development Advocacy Project (“NEDAP”) in New York.  According to Reuters, that group’s study found that…

 “… in the first half of 2011 the number of 90-day pre-foreclosure notices in New York City outnumbered court foreclosure actions by a ratio of 14 to one, indicating that while proceedings were initiated against many homeowners, they were left incomplete.”

“Now the banks have a settlement, foreclosure numbers for 2012 are going to be high,” said NEDAP co-director Josh Zinner.

Reuters went on to report that…

“One big difference to the early years of the housing crisis, which was dominated by Americans saddled with the most toxic subprime products — with high interest rates where banks asked for no money down or no proof of income — is that today it’s mostly Americans with ordinary mortgages whose ability to meet payments have been hit by the hard economic times.”

This statement, however, is really just twaddle, to borrow Chris Whalen’s word.

Other than some fringe number of truly unfortunate borrowers who bought at the worst time under the worst terms… or those that were speculating on the edge who lost homes as soon as the home loan market froze… foreclosures have always been caused by negative equity colliding with a “life event.”  If you’re underwater and something bad happens… with divorce, illness/injury, or job loss being the BIG 3… you’re a foreclosure waiting to happen.

It can and does literally happen to anyone and everyone.  I speak with homeowners at risk of foreclosure every day and have been doing so for over three years.  I’ve seen people whose incomes were $50,000 a month for twenty years lose homes to foreclosure… and people whose incomes temporarily dropped from $3,000 a month to $2200, do the same.

Of course, it’s true that the foreclosure crisis has hit minorities harder than middle class whites, but that’s just a function of two things: predatory lending practices that preyed on lower income minorities… and people with further to fall taking longer to do so.  (That’s why when people ask me if I’m losing my home I always answer by saying, “not today.”)

Life events are called “life events” for a reason… they happen as a result of life happening.  And they happen to everyone… eventually.

A friend of mine who is a banker explained to me that lending is really just a game of hoping a loan is refinanced before a life event hits.  If I loan you money for one year, I can charge you a very low interest rate because it’s unlikely that you’ll get hit by lightning… or divorced, laid off, injured or seriously ill… within a year.  But, if I loan you money for 30 years… well, now all kinds of crap can happen that can impair your ability to repay the loan as agreed.  Pretty simple stuff, right?

When Countrywide originated a mortgage, it may have said 30 years on it, but no one at Countrywide thought that the loan would be around for 30 years… in fact, they figured it would be around for maybe seven years… tops.  By then it would either be refinanced or paid off when the house was sold.

But… what’s happening today?  Millions of people cannot refinance or sell their homes… so, that means millions of loans are going to be around a lot longer than anyone expected.  And the longer a loan is around, the greater the likelihood that a life event will show up and slap you off your track at least for some period of time.  And when that happens while you’re underwater you can’t sell… so, BINGO!  You’re a statistic in the foreclosure crisis… an “irresponsible borrower,” a deadbeat debtor… shhhh… whatever you do don’t tell anyone.

Tell your own mother and she may very well launch into a diatribe about how you have always spent too much on “those kids.”  Tell Dad and he’s likely to lecture you about how you shouldn’t have bought the car you’re driving.  Your next-door neighbor finds out and he or she will be looking in your garage for a jet ski or your living room for a flat screen television.

I’ve explained this before… in behavioral economics it’s called the “just world hypothesis.”  We need to believe that when something bad happens to someone, it’s somehow that person’s behavior that caused the bad thing to happen.  That’s how we make ourselves feel safe… by believing that we live in a just world.  Random bad things that could happen to anyone are terrifying… like shark attacks, lightning striking… 9-11.

Our foreclosure crisis is a tragic and awful thing that has literally caused thousands to take their own lives out of shame and despair. And it’s a quiet crisis because no one tells anyone when they’re at risk of foreclosure, or when they lose their home… or when they save it through some sort of loan modification.  You can’t see or feel the foreclosure crisis until it touches your life, and then you say… “I can’t believe this is happening to me… or to (insert someone you know).

Until then, you look the other way… assume that the person losing a home was irresponsible… shouldn’t have bought a home in the first place… is nothing like you.

Consumers lost trust…

The National Journal’s reporters, Roberts and Kaper, whose story titled, “Out of their depth,” I referenced near the beginning of this article, tells of an Obama Administration that, in their words, failed to help homeowners because it just “didn’t have the stomach for it.”

Their article starts out talking about the administration’s more recent posture as being determined to do something right about the foreclosure crisis… as follows…

“The turnabout followed three years of tepid, halfhearted, and conflicted policies driven by a desire among Obama’s most senior advisers to avoid political risks and insulate the financial sector from further losses. It was a disastrous approach that did little for a market in free fall or for the millions of Americans still underwater and facing foreclosure.

 

National Journal spoke with more than two-dozen sources involved in creating and implementing the Obama administration’s many housing initiatives, from Election Day 2008 to the present. The result is a story of missed opportunities, competing priorities, out-of-whack expectations, and a few subtle, yet noteworthy, successes—all impelled at least as often by political, rather than economic, calculations.

 

The approach remains haunted by a primal decision made almost immediately after Obama’s economic team took office. Although the federal government would spend reams of cash to stanch, to some degree, the losses suffered by the financial sector, the auto industry, and state and local governments, suffering homeowners would see no such relief, at least not on a widespread basis. Their bailout never arrived. It appears that the administration simply didn’t have the stomach for it.”

Now, first of all… no, never mind… keep going…

“Housing clearly was an area where Obama’s team thought it needed to take quick action simply to stop the bleeding. “Housing was 30 months in the hole when Obama was elected,” said Peter Swire, a member of the transition team who, after the inauguration, became one of the economic officials leading the effort. “The first goal was to stabilize.”

 

To its credit, Obama’s policy group recognized just how unprecedented the crisis was, and that realization helped to elevate the discussion about solutions to the highest levels, placing decision-making authority in the hands of Lawrence Summers, who would be director of the National Economic Council, and Geithner. Others, such as Housing and Urban Development Secretary Shaun Donovan and bank regulators, were called to the table inconsistently. Treasury was the department running the nation’s housing policy.

 

But the task was enormous—and enormously complicated. The economic team was committed to some form of government intervention, but it could find little consensus on the scope and scale necessary for that effort to succeed. Compounding the problem, the deterioration of housing markets throughout the country, and of the U.S. economy overall, accelerated between the election and Inauguration Day.”

Okay, so look… HORSEPUCKY!

The “task” as Roberts and Kaper phrase it, was not so terribly complicated that it was beyond these genius IQs’ abilities to do something right… something at least marginally effective in the eyes of America’s homeowners.  They didn’t because they didn’t care to… and every single American homeowner who has paid the least bit of attention should recognize that as being the truth.  My Lord… what do they need to do, come to your door and spit in your face?  They didn’t because they didn’t care… and my problem isn’t even that… I could forgive them for that, somehow… not easily, but somehow.

My problem is that they still don’t care… and yes, I’m talking today… right now… headed into the election and clearly they still have learned essentially nothing about a crisis that’s plain as day, completely out of control.

And that’s just unacceptable in so many ways that I can’t talk about it without wanting to smack someone across the face… Larry Summers would do just fine… Geithner… sure, why the hell not?  Obama… no.  Him I want to grab by the shoulders and shake.

Amherst Securities forecasts another 9.5 MILLION homeowners at risk of foreclosure… almost ten million more coming soon to a theater near you.  That’s in the neighborhood of being twice as many as we’ve had to-date… not quite, but in the neighborhood.

And why on Earth anyone with any critical thinking skills would possibly think that after another 9.5 million foreclosures they’d be over… well, it’s sheer lunacy, that’s what it is.  Another 9.5 million foreclosures and the only homeowners with equity will be those who own their homes free and clear.  And the closest I’d let my wife or daughter get to a bank would be the ATM at a 7-11.

Here’s what the article by Roberts and Kaper says about the two principles that drove the administration’s housing policy…

From the start, two principles would drive the housing-policy team’s debate about the form that government intervention would take. First, Geithner and Summers sought to preserve the sanctity of contracts, and that commitment determined the structure of the president’s core housing programs.  The government would not force banks to modify loans, and any changes made to mortgage terms would have to work for investors as well as homeowners.  Those requirements led to hours of discussion and proposal drafting around the idea of “net present value,” or NPV—a formula used to determine whether modifying or foreclosing on a mortgage would result in higher profitability for investors.

(First was “the sanctity of contracts?”  How about the sanctity of accounting principles, you pompous pair of pathetic Pecksniffians.)

Now I’m not saying that there was anything wrong with the idea of a Net Present Value test, in principle… it’s in the execution that fell apart.  That’s what caused Americans to lose trust in government.  Summers and Geithner were simply the wrong people to execute this sort of program, and Obama should have known that by… oh, I don’t know… how about by 2010 or 2011?

And here’s their second guiding principle…

Moral hazard was the other debate driver. Having witnessed Main Street’s reaction to the Wall Street bailout under the Troubled Asset Relief Program, Obama’s team went to great lengths, time and again, to promise Americans that taxpayer money would not be used to help people who had simply purchased too much house. This was assistance built for “responsible” and “deserving” homeowners, the story went. So your neighbor got in over his head? Or a friend bought a house to flip and then couldn’t sell it? Their fault, the White House was saying. “That narrative is one we had to be careful with,” a senior administration official said.

Taken together, contract sanctity and moral hazard set the parameters for the president’s housing policy. And within four weeks of Obama’s swearing-in, his team proclaimed itself ready to unveil the sharply tailored strategy.

Okay, so there you have it.  The two individuals in charge were more concerned with the possibility of helping a homeowner who “got in over their head,” which by the way they didn’t give a rat’s petute about when discussing laws to prevent predatory lending or any other restriction on mortgage lending that might stop someone from getting in over their head, but never mind that nauseating hypocrisy.

The article says something else worthy of note…

“… housing had so quickly turned from tremendous boom to disastrous bust that the mortgage industry was unable to cope. Lenders and loan servicers had never operated in that kind of environment and had no mechanism to respond to the dramatic surge in delinquencies and foreclosures. One senior administration official called the servicing system “dysfunctional” in 2008 and 2009, and an industry representative agreed. “The system was not designed to deal with massive foreclosures,” he said. “It simply was not clear what was the response to take.”

Okay, so that being the case, and I have no trouble believing that absolutely was the case… let’s not worry about what you do… instead, let’s look at what you don’t do:

You don’t announce your “sharply tailored strategy” within four weeks of being sworn in. 

“A handful of core officials—at least one each from the White House, Treasury, and HUD—bought coffee and doughnuts and then wheeled chairs into an empty conference room. They listened to the loan servicers’ concerns and questions, discussed the complexity of their operations, and hammered home what servicers needed to do.

 

One of the main questions centered on up-front documentation: Did Treasury want the process to happen so rapidly that servicers should put mortgagees into trial loan modifications based on verbal statements alone? Yes, the officials said. Don’t worry about the documents. Just put loans into the “trial mods” and then get the documents in order before the time comes to make the changes to the loan permanent, they said. “Just do it,” was the message.”

And you absolutely don’t instruct mortgage servicers that they should just put everyone into trial modifications with no systems, no training, no infrastructure and no real solid idea of what will happen next.

You don’t do any of that.  These are people’s homes you’re talking about.  And sure, there were some small percentage of folks that went out and bought their homes without a contingency plan for the Great Depression Part 2 coming around the corner… and yes there were some that should not have borrowed as much as they did for any number of reasons.  The proliferation of television ads and even television programs instructing people to do just that, come to mind.

Marlboro wants to run a beautiful 30-second commercial showing me a handsome man riding a horse in the snow while smoking a cigarette and the federal government loses its mind taking them off the air.  But a 60-minute infomercial that provides detailed instructions and fake testimonials on how to get rich safely by borrowing 125 percent of your home’s value in order to buy condos in the middle of the desert… no problem at all, right?

And better yet, why not do so using a spring-loaded, snapping turtle-styled mortgage that requires neither down payment nor job and increases in balance owed and monthly payment whenever Greenspan feels itchy… but hey… who are we to stand in the way of the American Dream, is that about right?

And, finally this…

“They (servicers) insisted to us they could not do this program, they were not ready to do this program, and we told them they had to,” said Treasury’s Tim Massad, then chief counsel in the department’s financial stability office.

And therein lies the rub… I’m going to say something many are not going to like… I’m tired of blaming the banks alone for this mess because in large part it’s simply not their fault… this failure belongs to the Obama Administration… from start to flummoxed… plain and simple and in no uncertain terms.

And what a spectacular failure it continues to be… absolutely stunning in its completeness… in its flagrant ineptitude… in its degree of insensitivity… in its ongoing utter folly.  It’s down right peerless, that’s what it is… it stands without equal.

The core problem: Estimates for both programs were based on faulty, incomplete data. “There was always a huge degree of uncertainty around those forecasts, which reflected the limitations of the data available at that time,” said John Worth, who helped design the two initiatives as director of Treasury’s Office of Microeconomic Analysis. “We were sort of building the airplane as it was trucking down the runway, because there was a real sense of urgency to deliver help to homeowners.”

Yeah, it reminds me of the real sense of urgency that must have surrounded the readying of the Space Shuttle Challenger back in 1986.  I’m sure those NASA managers were in a hurry to help school teachers get into space, so they disregarded warnings about the O-rings, launching in low temperatures, and whatever else, so that the damn thing exploded 73 seconds into its flight as tens of millions of young children watched on national television.

So… bang up job there, Mr. Geithner, Mr. Summers… and President Obama… absolutely crackerjack work all around.

Is it the banks that are to blame?

Admittedly, I’ve done more than my share of bank bashing over the last few years, and I haven’t been alone by any means.  But, I’ve gotten to know more about the crisis from some of the banks’ perspectives, and I think we should consider what’s really gone on here.

Don’t start throwing tomatoes at me in your mind… just yet.  I’m serious about this… so, hear me out.

Tens of millions of Americans saw themselves lied to and abandoned by their obviously unfeeling government, who then walked them right into the totally unprepared arms of financial institutions bound by no rules, responsible only to shareholders, as they were reeling from a crisis that had bankrupted all of the investment banks on Wall Street in one fell swoop.

Oh, don’t get me wrong… I’m not ready to give the entire banking industry a pass by any means.  Fannie Mae and Freddie Mac… are certainly among the worst offenders of all.  And Wells Fargo is inexplicably immoral and entirely malevolent at every single opportunity.

But, Bank of America was doing principal reductions before the ink was even close to dry on the AG settlement… I personally have seen several dozen of them.

BOA is the first to admit that it’s a long way from perfect, but I’ve seen them resolve things quickly and fairly every single time they’ve been at fault.  And they have modified more than 200,000 mortgages over the last couple of years.  Not enough, you say?  Perhaps, but they appear to me to be an organization trying hard to make things better and get things right as they continue to deal with the now infamous acquisitions of Countrywide and Merrill Lynch.

And Ocwen has been doing principal reductions as part of their shared equity program for almost a year, as far as I know… maybe even before that.  They were founded on the principal that loans should be modified before foreclosed if at all possible.  I’ve even seen the executives at One West Bank jump through hoops to stop sales and get loans modified that had fallen through the cracks.  Oh, and Impac Mortgage… well, they’ve always been leading the pack on the loan modification front.

I don’t think there’s any question about it… getting your loan modified is much easier than it was two years ago, or even last year… unless you’re with Wells Fargo, of course.

Conversely, what have I seen from the Obama Administration?  Nothing but intermittent lip service and an ongoing stream of ill conceived, half-hearted programs, each entirely predictable as to its ultimate failure.

On January 15, 2009, Larry Summers made a written commitment to spend $50 to $100 billion on, “a sweeping effort to address the foreclosure crisis.”

And yet… as of the end of 2011, the administration had spent less than $3 billion on a situation their chief economic advisor acknowledged to be a “CRISIS” almost three years earlier… without so much as an apology to those whose lives their inaction had ruined.

Dodd-Frank made $1 billion available for an emergency program that was purported to help those unemployed people in their homes.  But, the money had to be out the door by a specific date and HUD delayed issuing application requirements, which left potential beneficiaries with only weeks to assess qualifications, apply, and submit the necessary paperwork.

And that was a $1 billion “emergency program” to help the unemployed save their homes.  If HUD handled medical emergencies, everyone would die.

The Fraud in the Foreclosure Process…

It’s hard to imagine, but even with a presidential election coming up, an election in which the winner must carry such foreclosure-riddled swing states as Ohio and Florida, there’s just more and more and more and even more… and none of it good as far as the Obama Administration is concerned… and yet the administration appears wholly unconcerned.

The Attorney General settlement with the five largest servicers is another example of a cowboy that’s all hat and no cattle.  To listen to the Obama Administration, it’s an important settlement, meaningful to the homeowners in America, many of whom… according to the administration, were foreclosed on either illegally, fraudulently, or improperly… it’s kind of hard to tell which.

Regardless, if the homeowner lost a home to foreclosure between 2009 and 2011, they are said to be receiving between $1,500 and $2,000 as compensation for some unspecified degree of improper or fraudulent foreclosure having taken place.

The absurdity of this component of the overall settlement was not lost on anyone, even for a moment, and in Obama’s typical fashion, he held a single press conference, said some great sounding things about justice for homeowners and making banks pay, and we haven’t heard from him on the subject since.

Meanwhile, if you really did lose a home to a wrongful foreclosure, you now know no one cares, as two grand is hardly compensation for losing a home that shouldn’t have been lost.  And if you didn’t lose your home improperly, then you just got two grand for absolutely nothing.  As settlements go, this one managed to do something not often seen… it managed to please no one, and since it hasn’t even begun to disperse checks, no one is even sure how the whole thing will or won’t work.

The only thing that’s certain about the settlement is the level of skepticism present among homeowners, and that’s either being expressed through jeers or barbs.

Mickey Mouse signed it, and Donald Duck notarized it… but who cares?

The problem with the whole “fraudulent or improper foreclosure” aspect of the crisis is that it’s not helping homeowners, in fact in many instances its caused more harm then good.

For one thing, it’s driving false hope.  For another, it’s driving bad decisions.

Even when used successfully as a defense in a foreclosure proceeding, the improper signing of affidavits or assignments has proven itself, at least in the vast majority of instances, to at best result in a delay.  The servicer attempting to foreclose may be forced to re-file with proper documents, but they almost always do… and the foreclosure proceeds in almost every single case.

More importantly, however, the use of improperly signed documents as a defense in a foreclosure is more often than not, simply ineffective from the homeowner’s perspective.  No delay is granted and the foreclosure proceeds as if the documentation was flawless.  Judges simply care more about a borrower not having made a payment in two years than who signed the assignment of the deed of trust.

Foreclosure defense lawyers all tell me that they raise issues pertaining to document signing as they might visit any port in a storm… hoping to gain some leverage that leads to their client’s loan getting modified.  None seem to believe that borrowers are truly damaged by such improper signing, and most judges evidently agree.

The moral of the story about foreclosure defense is that, in almost all cases, if you haven’t made your mortgage payment for a couple of years, the safest path to saving your home is through a loan modification.  And don’t shoot the messenger, but if you’re trying to save your home… you should also be saving money.

You may need the money to save your home, and even if it turns out that you don’t, once your situation gets resolved, you’ll definitely need a vacation so having extra money saved is a no lose proposition.

The other problem with our current fascination with who signed what is that it’s driving homeowners to buy forensic loan audits, securitization audits and countless other reports of questionable value to those trying to save homes from foreclosure.  They find out that something was done improperly and think that it means that they can use it to save their home from foreclosure.  In almost every single instance, they find out they were wrong… and by then, it’s too late to get their loan modified.

My point is that these are the facts… the unpopular and perhaps unfair facts that are the result of the Obama Administration’s handling of the foreclosure crisis.  You can continue to blame the banks and mortgage servicers if you want to, but their role has never been to ensure societal fairness… they are, after all, bill collectors and as such they are responsible to their shareholders and investors… not to you or me as delinquent borrowers.

When you want companies to all do something that’s not in their financial best interests, that’s when government has to step in.  For example, if you want cars to have safety belts or catalytic converters, you don’t just leave it to GM, Chrysler and Ford to figure it out… you pass legislation that mandates the adoption of such things because its been decided that they are for the good of our society.

That’s precisely what the Obama Administration has failed to do during this crisis… mandate what is best for our society, and instead its just been left to the for profit corporations to figure it out for themselves.  And we’re surprised that didn’t work?  Really?  Why?  Who thought it would, besides Larry Summers and Tim Geithner?  Because for sure I could have told them it wouldn’t… saved everyone a lot of aggravation, to say nothing of several trillion dollars.

We tried the same thing during the Great Depression of the 1930s… a voluntary loan modification program, I mean.  It’s true.  Didn’t work then either, and the St. Louis Federal Reserve has a paper all about it.  Do you think Geithner and Summers missed reading it?

In Conclusion…

It’s year six of the most severe balance sheet recession that this country has experienced in 70 years and once again we’re right in the middle of our annual faux recovery.

The global credit crisis that ended our housing bubble in 2007 left us with housing prices in a free fall and a growing foreclosure crisis about which essentially nothing has been done, or at least nothing has been done right.  The result of the collapse in credit card availability and home equity have left American consumers with only two options: default or attempt to repay massive debt burdens.

We’ve seen something like $10 trillion in accumulated wealth evaporate, mostly in the form of lost home equity, and so it should come as no surprise, except to economists unable to see things beyond their charts and models, that consumer spending as measured by consumption has gone down enormously since 2006.

Simply put… we are earning less today because we are consuming less today.

And yet, we continue to ignore or mishandle the foreclosure crisis that is clearly THE ISSUE that prevents any sort of economic recovery from talking hold.

That’s not the fault of banks and mortgage servicers… and it’s not the fault of courts failing to prevent foreclosures based on improperly signed documents used in the foreclosure process.  Clearly, this monumental failure belongs to our elected officials in federal and state governments… and to the policy decisions made by the Obama Administration.

Again, I’m not saying you should vote for Mitt Romney… or that you should vote for Barack Obama, for that matter.  What I am saying is that we should not be tolerating any more of what we’ve been fed since the crisis began, because for six years we’ve been told things about our housing markets and the impact of foreclosures that have been proven repeatedly to be wrong and by a long-shot.

As 2008 began, the Congressional Budget Office (“CBO”) forecasted that the budget deficit in 2009 would be just 1.4 per cent of GDP.  As it turned out, 2009’s budget deficit skyrocketed to 10 percent of GDP.  (And to the CBO I would just like to say… “Thank you for playing.”)

The cause of the dramatically increasing deficit in 2009 is found in the fallout from the housing bubble… not irrationally exuberant spending programs and not excessive tax cuts.  The CBO’s 2008 forecasts were obviously made before our government understood the impact that the housing bubble’s collapse would have on the economy.  The question is, do they understand it even now?

According to a disturbing recent study, while during the Clinton Administration the top one percent got 45 percent of our economic growth and during the Bush Administration that affluent group got 65 percent of our growth… in 2010, the top one percent picked up an unconscionable 93 percent of the gains in that year… and 37 percent of the gains went to the 15,600 uber-rich households that make up the top one-tenth of one percent.

So, very well done there.

Perhaps even more alarming, there were no gains at all for those in the bottom 90 percent, and in fact, this sizable group has seen their average annual adjusted gross incomes fall by $4,843 since 2000 to $29, 840 (adjusted for inflation, by the way).

Don’t be confused by any of this, once again, the culprit is housing.  If you’re in the top 10 percent club, you’re doing well in large part because of your investments in the stock market, which saw an increase in value of $1.46 trillion in the fourth quarter of 2011 alone.

But, if you’re in the bottom 90 percent, chances are you don’t own a whole heck of a lot of stocks… for you it’s your home’s value that makes up the lion’s share of your wealth, and home prices once again fell in 2011.  The median home was worth 6.2 percent less in February of this year as compared with the prior year.  And yes… if you haven’t figured it out yet, home prices are still falling with no end yet in sight.

According to a recent article on Bloomberg/Businessweek, “Home prices seen dropping 10% in U.S. on Foreclosures”…

“A lot of people look at bumps in the monthly data and say we’re reaching a bottom,” said Joshua Shapiro, chief U.S. economist at MFR Inc. in New York. “We won’t be there until this supply of foreclosures clears.”

It’s also worth noting that the sinking housing market has hit minority households much harder than whites.  According to the Pew Research Center, Hispanic households have lost 66 percent of their net worth during the recession while whites have endured only a 16 percent loss.

Fed Chief Ben Bernanke says our economy needs to grow faster in order to reduce unemployment, and thank you Professor Bernanke for that brilliant insight.  But, as former labor secretary Robert Reich pointed out recently…

“We can’t possibly grow faster if the vast majority of Americans, who are still losing ground, don’t have the money to buy more of the things American workers produce. There’s no way spending by the richest 10 percent – the only ones gaining ground – will be enough to get the economy out of first gear.”

All of this should paint a clear picture… even under the most optimistic set of assumptions we’re not looking at any sort of real recovery… the kind you can feel as well as read about… being a possibility this year… and not next year either… or even during the year after that.  Our accumulated wealth has been stripped, and Bernanke can lower interest rates until he literally can’t and we’re still going to save for quite a while before we spend again.

Economists point out that savings rates are only hovering around 5 percent, but you have to consider that represents savings at roughly zero interest.

Of course, at some point rates will have to rise, and while some point out the benefits that come along with higher rates, I’m pretty confident that the Fed Chief is in touch with the concept of what will happen to the millions of underwater adjustable rate mortgages when rising rates make for higher monthly mortgage payments that cannot be refinanced.  Get ready, ‘cause when rates do rise, there’ll be a whole new group of the “irresponsible,” arriving on the scene.

Where the crisis will meet the people… all the people. 

On “AUSTERITY STREET.”

Allow me to offer you a glimpse into the future… the near future… as in a year or two from now when the foreclosure crisis will collide with the realities of state budget deficits, which are the kind of budget deficits that can’t be addressed by printing money.

Remember President Obama’s very first bill… the economic stimulus bill that finally passed with a $700 billion price tag, but ended up stimulating almost nothing, economically speaking?  Well, it may not have accomplished what the administration wanted it to, but it did accomplish something.  It provided roughly $500 billion for the states, which is why we haven’t had any state budget crises making headlines over the last couple of years.

Well, guess what?  The money’s gone… there was something like $6 billion left going into this year.  But, the states fiscal problems are still very much around.

According to the Center on Budget and Policy Priorities…

The Great Recession that started in 2007 caused the largest collapse in state revenues on record.  As of the third quarter of 2011, state revenues remained 7 percent below pre-recession levels, and are not growing fast enough to recover fully soon.

 

State budget estimates for the upcoming fiscal year show that states still face a long and uncertain recovery. For fiscal year 2013, thirty states have projected shortfalls totaling $49 billion.

 

Meanwhile, states’ education and health care obligations continue to grow. Some 5.6 million more people are projected to be eligible for health insurance through Medicaid in 2012 than were enrolled in 2008, as employers have cancelled their coverage and people have lost jobs and wages.

 

Extremely large shortfalls addressed in recent years have led to deep cuts in critical public services like education, health care, and human services; the new shortfalls likely will prompt legislators to make further cuts in those areas on top of those already enacted.

 

So state budgets are poised to continue to be a drag on the national economy, threatening hundreds of thousands of private- and public-sector jobs, reducing the job creation that otherwise would be expected to occur.

 

These shortfalls are all the more daunting because states’ options for addressing them are fewer and more difficult than in recent years. Temporary aid to states enacted in early 2009 as part of the federal Recovery Act allowed states to avert some of the most harmful potential budget cuts in the 2009, 2010 and 2011 fiscal years. But that aid expired at the end of fiscal year 2011, leading to some of the deepest cuts to state services since the start of the recession. The federal government is now moving ahead with spending cuts that will very likely make states’ fiscal situation even worse.

 

Unfortunately, the hole is so deep that even if revenues continue to grow at last year’s rate — which is highly unlikely, it would take seven years to get them back on a normal track.

 

Continued slow job growth will restrain the rise in state tax receipts. This is especially true for the sales tax. High unemployment and economic uncertainty, combined with households’ diminished wealth due to fallen property values, will continue to depress consumption, keeping sales tax receipts at low levels.

 

Spending cuts are problematic during an economic downturn because they reduce overall demand and can make the downturn deeper. When states cut spending, they lay off employees, cancel contracts with vendors, eliminate or lower payments to businesses and nonprofit organizations that provide direct services, and cut benefit payments to individuals. This directly removes demand from the economy.

 

Tax increases also remove demand from the economy by reducing the amount of money people have to spend.  At the state level, a balanced approach to closing deficits — raising taxes along with enacting budget cuts — is needed in order to maintain important services while minimizing harmful effects on the economy.  Ultimately, however, the actions needed to address state budget shortfalls place a considerable number of jobs at risk.

Want to know what all of that refers to in a nutshell: AUSTERITY.

As the states cut services and programs, people feel them from the bottom up, and the deeper the cuts get, the bigger their impact on our society.  For example in California and Florida over the last two years, state college tuitions have risen by roughly a third… that’s a 33% increase in the cost of going to college, and it means that many students won’t be attending as planned.

This is life-altering stuff, and the impact to states can last for decades.

The foreclosure crisis is only making the picture bleaker each year, as spending drops, so do sales tax receipts, and as property values fall, so do property tax receipts.

So, we cut services available to those near the bottom of the economic ladder, and raise taxes on those at the top.  Together, although budget deficits are closed, the impact causes more harm to the economy, thus making recovery that much further away.

The situation is dire for many, if not most states.  It isn’t a hypothetical scenario, or a potential one… it’s our very certain reality in the years just ahead.  This is where everyone starts to feel the pain, and in the most extreme situations… it’s Greece.

One last thing…

The National Journal story I’ve quoted throughout this article, wrapped up with the following statement from former FDIC Chief Sheila Bair… (Warning: You may want to bite down on a pencil before reading what Sheila has to say.  The first time I read it, I bit my tongue and couldn’t eat salsa for almost a week.)

“I think the president really wanted to do something aggressive and meaningful here, and I just think Larry and Tim were not as committed to it,” the FDIC’s Bair said. “It was not a priority for them. They were focused on the big financial institutions. I think they just wanted to get a program and a press release out to make the president happy.”

If that doesn’t say it to you… I’m not sure what else would.

We need to let our elected officials know that we will no longer tolerate pointless inaction caused by inane debates over such things as “moral hazard,” and the selective preservation of the sanctity of contracts.

If the federal government can handle the unbelievable amounts of moral hazard they’ve created with TBTF, they can certainly handle someone getting help under less than ideal circumstances SIX YEARS into the bungling of the crisis.

And as far as the sanctity of contracts goes, if they can deal with pretending the maturity dates on commercial mortgages haven’t arrived when they have, surely they can recover from making some new rules under such extreme circumstances.  After all, they figured out how to have Japanese-Americans hauled off to internment camps in Utah during WWII.

We need to let them know that we hold them responsible for what’s transpired, because we do listen to what the President of the United States says to the American people… in fact, we were under the impression that once elected it’s to be considered more than a campaign speech.

Decisions made by Larry Summers have been disastrous for this nation… that much is abundantly clear.  Tim Geithner’s been no peach either.  Together their folly has cost our country incalculable amounts of money, but further, they have caused people to take their own lives.  Geithner must resign.  Summers should be banned from the economics profession for life.  Both should be sentenced to three years selling shoes at JCPenny.  Repeat after me: “Would you like to see that in a pump or a loafer.”

I don’t want to get funny about this… I mean every word of what I’ve said here.  While we are begging for crumbs off of Linda Green’s table, stomping our feet because Wells Fargo won’t change, it is our government that has created this mess… our government who said they’d done something to solve it… and our government who has obviously failed.

So, fix it… damn it.  We won’t tolerate anything less.  We want accountability, and if we are not listened to, we will have your seat in public office.

And maybe we can’t get all of them… but we can get some of them.  And I’m thinking maybe that’s enough.

Mandelman out.