“It’s hard to imagine a less-deserving group of victims: people who gambled during the housing bubble by purchasing homes with borrowed money that they knew or should have known they couldn’t afford, but who are now able to stay in the homes they should have never bought because of what amounts to paperwork errors on the part of the nation’s big banks.”

 

That’s how Fox Business reporter, Charles Gasparino opened his column that appeared in the New York Post back on February 10, 2012.  Titled, “A Deadbeat Bailout,” he was writing in response to the settlement agreement between 49 state attorneys general and the five largest banks that had just been announced.

“But that’s essentially what went down, thanks to the Obama administration’s latest re-election gimmick — the nationwide mortgage-foreclosure settlement.”

Now, I’ll bet you think I’m going to tear this guy apart for being such an insensitive idiot, right?  Well, you’re wrong.  In fact, I’ve decided that “the Gasp” is absolutely right on target with his analysis of the situation.

It’s clear what happened here…

Millions of middle and working class people, and some richer folks too, all decided at the same time that their lives were not exciting enough.  They longed for the days when they were losing their retirement savings through investments in profitless dot-coms attempting to monetize eyeballs, and whose stocks were regularly pumped up by analysts paid for their favorable opinions.  Yes, those were some good times.

So, they all got together and decided they would take up gambling in a much bigger way than ever before… they’d literally bet their farms.  They started gambling with their entire net worth AND the homes in which they lived, and perhaps because they were relatively new to the whole gambling thing… or maybe because they were once again following the lead of Wall Street’s investment bankers… they lost their shirts and their farm houses.

Today, as a result, there are literally millions of these irresponsible failed gamblers aimlessly wandering around the country looking for justice… very much like Kwai Chang Caine in the 1970s television show, Kung Fu…

Young Caine: Is it good to seek the past, Master?  Does it not rob the present?

Master: Only banks may rob the present.  You must try to rob the banks.

Caine: But we are merely deadbeats, what about a bailout?

Master: For that you must seek out the one they call “Obama.”

Caine: But was it not Obama who bailed out the banks?

Master: Yes, he did my son… along with the second Bush.  But, have you not heard of “the election?”

Caine: No, Master, I have not. 

Master: Well, when you can snatch the election from Obama’s hand, then you will receive the bailout.

 

Okay, Charlie… work with me here… you’re fluttering all over the place like Woodstock, that little yellow bird that hangs out with Snoopy in a Charlie Brown cartoon.  And it’s not very becoming for a journalist of your stature.

Let’s start with your initial premise… it’s the “Obama administration’s latest re-election gimmick.”  No question about it… you nailed that one.   And the whole thing about how the administration “would like us to believe that the nation’s largest banks are finally paying for their bad behavior during the housing bubble and its aftermath, etc. etc.”  Bingo… you nailed that part too.

After that, however, you started getting your facts all mixed up.  For one thing, the banks still haven’t signed any final settlement agreement, and you have to know that.  For another, the banks aren’t paying out $26 billion to anyone, under any set of circumstances.  I think cash out the door is about $5 billion, and if it reaches that amount net, I’ll pick up a cake and celebrate.

Here’s how it appears to break down… of the $5 billion, there’s $4.25 billion that goes to the states with the $750 million balance going to the federal government for whatever and who cares.  Now, from the $4.25 billion you have to subtract the $1.5 billion that’s going to the deadbeats who lost homes in faulty and fraudulent foreclosures between 2009-2011.

And I’m with you on this “robo-signing” nonsense… I mean, the only reason they call it “forgery” is because someone forged someone’s signature… what’s the big deal about that?  I mean, if I had a nickel for every time I forged an affidavit… I mean, grow up.  And don’t even get me started on the whole ‘standing’ thing.  Just because I can’t prove I own a house means I can’t evict the deadbeat living there?  That’s just stupid.

Anyway, the deal is supposed to pay out $1,500 – $2,000 per deadbeat, and I realize that you and Dick Bove are concerned because you know these people are deadbeats, but apparently the Obama administration and the AGs do too, so calm down.

First of all, you have to realize that five or six million have lost homes to foreclosure during the last four years.  But, the settlement only applies to about a million or a million and a half of the “victims.”  To cover everyone equally they’ll only be getting $1,500-$2,000 each, which really isn’t bad for fraudulently foreclosing on a home.  If you think about that way, it’s kind of a deal.  I don’t know about you, but I’d be willing to throw in two grand of my own money to watch Diana Olick get tossed out in the street… just to have some fun on a Sunday.

And even if we assume that you’re right and the “fraud” being talked about only amounted to insignificant dalliances with meaningless paperwork, I think that message is sure to be heard loud and clear when, as compensation for losing a home, someone picks up a check that’s two grand shy of the downpayment required to lease a new Hyundai.  Just think about it… when it comes to “victim compensation,” few things say “insignificance” better than half the downstroke on a leased Hyundai.  I guess you could spit in the person’s face at the same time, but that would require hand delivering the checks and who wants to go to that sort of trouble.

I’m not sure how to handle the five percent issue though.  You said that, “95 percent of the victims weren’t victims at all,” but that means that five percent were?  Well, that’s kind of a bummer, right?  They got tossed out of homes, but really shouldn’t have?  That sort of sucks, wouldn’t you say?  I mean, okay… I guess on Wall Street it’s also sort of hysterical… like, I hate it when that happens. I guess it’s not that big a deal though, I mean in 10 or 15 years they’ll be right back where they were, mortgaged to the hilt in some spring-loaded, snapping turtle of a loan.  And hey… stuff happens, right?

I have no idea how they’ll divide the remaining $2.75 billion among the 49 states, if divided evenly it’s about $56 million each.  Not that they’ll do it that way, but it’s worth noting that in California, that amount would cover one year of incarceration costs for a little over one-half of one percent of the state’s prison population.

My prediction is that states will end up taking whatever they get and putting it towards the currently incalculable and certainly undisclosed budget deficits coming in 2013 and 2014.  One or two states have already said they’d be doing that, and you’ll no doubt be happy to hear that Ohio is going to use much of their share to demolish foreclosed homes.

I know you’re concerned about what we teach this generation of homeowners, because as you said, “If there are no consequences to risk, why not just roll the dice again and again?”  Well, I can’t think of anything that’s more effective at teaching ex-homeowners a valuable lesson… I mean, if you get thrown out of your home… just so the bank can tear it down… well, if you didn’t know it already, you know you’re a deadbeat for sure after that.

But, either way… whether the money goes to state budget deficits, or pays to tear down homes… or even if they end up sliding a grand or two into the pockets of some number of ex-homeowners, I really don’t think it’s anything to get all worked up over.  I mean, yes… technically it’s still a bailout, but as bailouts go, it’s fairly meager.  Besides, I don’t think we have to worry that the recipients of the two thousand dollar checks are going to stash their windfalls in Cayman National or anything, so it’ll just bolster the demand deposits at the major U.S. banks where it can be eaten away by fees and 29 percent interest payments.  Worst case, they’ll spend it on an iPad, use it for the down payment on a new car, or maybe repay a student loan, so Wall Street types really should relax.

Most importantly, the people that are being refinanced that are underwater aren’t the “victimized” deadbeats; you got this whole part wrong.  The people that are being refinanced are current on their payments… they’re underwater, yes… but they’re current.  Refinancing them is the right thing to do… if you’re the bank or maybe the government.  For those homeowners, however, it’s pretty much the equivalent of handcuffing them to the bedframe and setting the house ablaze on your way out.

And, although I know that they’re talking about refinancing, but lets just wait and see what happens when a homeowner is presented with a refi in the amount of … $400,000… and the place across the street just sold for $178,000.  You’d have to get me drunk before I’d sign that loan, and my guess is others won’t rush to sign theirs either.  And that assumes that the banks are actually going to be offering 200% LTV refis, because there’s certainly no indication of that happening to-date.

The rest of the money, something like $17 billion or slightly more, is supposed to go to foreclosure prevention, and that includes principal reductions.  And, I’m happy to be able to say that within a week or two of the settlement having been announced, I received and confirmed reports that Bank of America has already started offering its borrowers loan modifications that include some very significant principal reductions.  In fact, one lawyer I know that helps homeowners through the loan modification process just told me that of the last 5-6 modifications that he saw come from BofA, ALL included principal reductions to current market value.

(And, by the way… Ocwen, although not a part of the AG settlement, has been granting principal reductions under its “Shared Appreciation Modification,” or SAM program for some time now.  It’s not part of a bailout for deadbeats, however, it’s because they have people who can do math.)

But once again, Bank of America as large as they may be, is not America’s $10 trillion residential mortgage market, and since neither Freddie, Fannie or FHA are participating in the principal reduction part of the plan, I’d say we’re in very little danger of doing anything terribly beneficial for deadbeats on a widespread basis.  Besides, even if the government and the bankers, for the first time ever, actually fell into something productive in this regard, $17 billion in principal reductions, or $40 billion for that matter, which is the other number being tossed around for whatever reason, would be like removing sand from the beach with a teaspoon, when viewed in the context of $1 trillion in underwater loans.

So when Big Dick Bove says: “What this settlement did was to help 1 million people who were deadbeats,” it’s not really the case.  Okay, sure… maybe a few deadbeats are technically getting a tiny bit of help, but I’m confident that we’ll be pulling the rug out from under them before anything would rise to the level of actual help.  Let Dick know… I’m sure he’ll be relieved to hear it.

Also, I’m wondering something… when you say that, “foreclosures are a necessary ingredient to the housing market’s recovery,” how many do you figure we’re going to need in order to really “recover?” 

I only ask because we’ve had something like 6-8 million so far, Amherst Securities says about 11 million are coming.  Do you think 20 million foreclosures, roughly one out of four mortgages in this country, will that be enough to get my equity back and put us on easy street once again?  If not, maybe we should start lobbying the Obama administration to extend that HAMP loan modification thing, because that sure was effective at generating foreclosures.  Although, maybe FHA will be able to pick-up any slack.  They’re numbers certainly look promising, if the last couple of years are any sort of gauge.

Let me know… I’m anxious to hear your thoughts.

Mandelman out.