Book of the Month

destor23's picture

Obama's Big Chance

by destor23 1/11/2012 - 10:02 am   |

This week in The Daily, I wrote about the Federal Reserve's white paper urging Congress to act to make it easier to convert foreclosed homes into rental properties, in order to support the real estate markets.  I was happy to see the Fed come to this conclusion, four years too late.

Some of you will recall that Dean Baker of the Center for Economic Policy Research said this right from the outset -- he supported deed in lieu of foreclosure exchanges where the residents would enter into a long term rental agreement, with the opportunity to repurchase the home in better times.  That the Fed has finally come around to this is a huge victory for Baker, though it should not have taken this long.

The meat of the Fed's paper is this -- the government controls Fannie Mae and Freddie Mac and, through those entities, a lot of underwater mortgages.  The Fed has suggested that the government should be willing to absorb some short term losses for long term gains in the real estate market.  At the moment, Fannie and Freddie are being run specifically to reduce losses to the Treasury.  That means pushing for faster for faster sales of foreclosed properties.  That's the short path to recovery.  Renting out houses is a longer route and has some more risk.

The other thing that Fannie and Freddie can do is agree to take on more risk in order to get banks to loosen mortgage lending standards somewhat.  Yes, they were too lax 6 years ago.  But they are now too tight.  The Fed has finally realized that perfectly credit worthy people are being denied mortgages, right at the moment when rates are at their lowest.  Fannie and Freddie can play a role much like the Fed does in the larger economy, by acting as a backstop or lender of last resort.

And here's the thing... Fannie and Freddie are controlled by the executive branch, not Congress.  It seems to me that Obama has a lot of freedom for bold action here.  Cynically speaking, he might even be able to earn himself some on the fence votes by securing mortgages for people who want (and deserve) them.  That would have a positive effect on people overall perceptions of the economy and could only help his re-election chances.

Bernanke sent his White paper to Congress.  But I think it's darned good advice for the President, who has more power than usual to act in this situation.

 

But but There is no greater threat to the security and prosperity of the United States today than the out-of-control, secretive Federal Reserve.

As for those other evil guys you mention.

cheeky

 

by artappraiser 1/11/2012 - 12:06 pm

I'm still all for auditing the Fed, double A.  But that's so we'll know whether or not it's being used for maximum effect and for the public good.

by destor23 1/11/2012 - 1:27 pm (re: artappraiser)

It's been puzzling to me how this whole debacle ensued, the endless foreclosures and subsequent actions of the financial entities involved just doesn't make sense, especially good business sense.

I was in top management of a financial institution for years and one of my duties was to make the call on loans, including repossessing and foreclosing.  I seldom chose either, but, whenever possible to instead work within the appropriate perimeters so that we didn't lose money and the customers would be able to keep their properties. 

Foreclosures are almost always a lose/lose for all involved.  Therefore, it's just not making any sense to me that these tens of thousands foreclosures served any positive purpose for the lenders in any plausible manner.  

There is one explanation that makes sense, but it's to machiavellianiam for most to give any credence.

Yes, if Obama does have the power to move forward in manner you put forth, he needs to set this in motion ASAP.

Hope you post more on this as the process develops. 

Thanks.

by Aunt Sam 1/11/2012 - 7:24 pm

Well, now we know what caused this mess--we let Aunt Sam quit instead of giving her Hank Paulson's job!

Darn, I wish we hadn't done that.

ps Hi Aunt Sam. :^)

by erica20 1/11/2012 - 7:40 pm (re: Aunt Sam)

erica, too funny!

Some of the losses would be covered by their insurance carriers, but definitely not most,  So, what do you think was the impetus for all the foreclosures and ongoing losses (also in property values)?

by Aunt Sam 1/11/2012 - 9:31 pm (re: erica20)

Some of the losses would be covered by their insurance carriers, but definitely not most, 

 

I'm unclear about that--I  wonder whether they don't collect all their appropriate indemnification for missed principal and interest, etc, and also the fees for their wrongful foreclosure, even the duplications from having to go back and start again, etc.

I haven't a clue where in the insurance agreement between fan/fred and the bank the distribution of losses, (if any) is spelled out.

 

by jollyroger 1/11/2012 - 10:18 pm (re: Aunt Sam)

I know that it used to be (have no reason that it has changed) that 'bad faith' loans - loans that were provided without adhering to the criteria in place that delivers the 'rules' for loan approvals - the insurance of course would not cover the losses.  i.e. many loans were (not fixed rates) done knowing that when rates increased the borrower would most likely not be able to maintain payments.

There are many instances, usually to do with some form of malfeasance on behalf of the lender, when losses are not reimbursed.  It's just good practice to put these caveats in place.

by Aunt Sam 1/11/2012 - 10:28 pm (re: jollyroger)

Wow! That would cover (as I understand it) 90% of the loans that went south, but the numbers that are being thrown around (I think its like 4-500 billion for fan/fred thus far sound like any piece of shit mortgage is being indemnified.

I wonder if Fan/Fred are making a fuss over any of them?  Is that the gravamen of the claim for the right to  "put" the mortgages back to the bank?  I thought that was an action by the investing  pools against the originators and the trustees for the pooling and servicing agreements.

Have the actual insurance coverage issues been litigated under the standard you reference? 

by jollyroger 1/11/2012 - 10:40 pm (re: Aunt Sam)

I don't have the data for that, but.....

Claims on repossessed/foreclosed properties cannot be paid out until all the steps are complete.  With houses, these steps are:

The property must be cleaned, etc. put on market

The property sold.

The person(s) who held the original loan billed and/or sued for any deficiency balances, including any fees/costs, including legal, realtor, etc.

Only after all this do most insurers accept and process the claims.  They (are supposed to) do complete review of the original loan processes/documents and so on......

The majority of properties are still not sold.  (Hmmmm.)

by Aunt Sam 1/11/2012 - 10:57 pm (re: jollyroger)

I think you are, of course, correct, it can only be retrospective.  

Shit!  Does that mean that the 400 billion figure for fan fred is just for paper where the file is completely closed, including deficiency judgements?

Yikes!

I sure hope that half a trillion is what they decided to reserve the loss at, rather than the finally booked losses so far, which would lag real time by years.
by jollyroger 1/12/2012 - 12:14 am (re: Aunt Sam)

I would be very interested in seeing the factoring they utilized to arrive at that figure and to know specifics on the charge offs, et al.  Forgive me, but I have little faith in how they computed their 'figures'.  What's set aside in reserves and what/to who were fees paid are just a couple of my interests.

by Aunt Sam 1/12/2012 - 12:27 am (re: jollyroger)

When the bank owns the loan, you're right, Aunt Sam.  I guess there are a few factors at work here:

When Fannie or Freddie guarantees the loan, they're under government orders to push for as fast a resolution as possible.  The Fed is suggesting that perhaps Fannie and Freddie should take a longer view.

If the bank has sold the loan, or the loan has changed hands, the new owners might not care.  If they paid 50 cents on the dollar, they only have to recover half to make a profit.  The servicers, meanwhile, are paid based on speed.  The Fed study says that a lot of servicing agreements remove incentives for mortgage modifications.

Finally, a lot of banks would modify or refinance, if they were assured that Fannie and Freddie would back the new loans and not put them back to the banks if they go bad.  Yes, the banks want free returns, as always.  But, says the Fed, a lot of banks are so worried that Fannie and Freddie will put back bad loans to them, including refinancings, that they won't act at all.

All of which says to me that there's an awful lot to be said for a bank making a loan, owning it, and maintaining relationships with their borrowers.  That's great for society, anyway.  Not so much for bank shareholders, who prefer moral hazards for themselves but not for anyone else.

by destor23 1/11/2012 - 9:30 pm (re: Aunt Sam)

Sigh. It's hard to write or even think about this issue without being overcome by bitterness and a desire to sing "Send in the Clowns." (I suspect our friend Resistance feels the same way, but that's neither here nor there.")

Destor, may I quibble on the math? The Fed isn't four, but six years too late. It's now 2012. By 2006 the crisis was already going strong in the hardest-hit neighborhoods. Sometime well before the 2008 campaign, my guy (a prescient fella, not that it's ever done him much good) said something to the tune of "This whole country is going to hell if the banks and the government don't step in and write down some principal." He figured that without using principal write-downs to establish a floor for housing prices, housing prices could effectively become zero. (I favored leaving the "prices" where they were, but having the govt and banks share payments with homeowners until the bubble loans worked their way through the market, a variation on his idea.) Not many people cared when my guy's prediction came true in the troubled neighborhoods where all kinds of people got subprime loans, but they sure did care by 2008/9 or so, when sale prices all over the country went to some number that wasn't nearly enough more than zero to make people feel ok! 

Sometime in there (and I would have to go back through the TPM Cafe posts to get the dates right) Dean Baker came up with his "own to rent" concept, which I felt was a good idea with a name so perverse that it was destined to fail. If Dean had left "rent" out of the name and called it some kind of payment-sharing, keep families in their homes program, I believe it would have had a chance, but calling it a rental program killed it. The social contract doesn't include going from being a homeowner to a renter, ya know?

Anyhoo, if you could change your "four years too late" to "six years too late," I think it would be more accurate, and would also be more respectful to those poor people who just wanted to own a home (and also to a few landlords who incorrectly thought they could use teaser mortgages to amass a little wealth without working too hard at it.) Maybe these two groups of people weren't perfect, but they bought homes and rental properties in struggling neighborhoods and then lost them before they even fully understood what had happened. If the Fed (an actual group of experts, presumably) had bothered to understand what had happened, there's some slight possibility that they--and many of us--would be in a different spot today.

Again, sigh. A few days ago I considered sending someone a writing sample, and dredged up "All I want for Christmas is an appropriate response to the housing crisis." It was so depressing. Remember commenter "eds," who was utterly determined that homebuyers should be punished for their mistakes? And punished, and punished, and punished?

I guess what galls me about the fact that "own to rent" is finally getting some traction, is that so many people have already been displaced. It seems so wrong.

Am I just being all "glass half empty" about this?

by erica20 1/11/2012 - 9:44 pm

Yeah, you're right on the math.

And on the politics.  As I recall, my own reaction to Baker back at the Cafe was that a progressive solution would be to keep people in their homes and to help them gain equity through principal writedowns and mortgages modifications, not by turning them into renters.  I think Baker's reply was that he agreed, whenever possible, but that some people just couldn't afford it.  It's hard to say.  The "deed in lieu of foreclosure" solution does leave a lot to be desired, though it's better than what's happening now.

by destor23 1/11/2012 - 10:14 pm (re: erica20)

As we all know, when one loses - another wins. 

Thus begs the question, 'Who gained from this debacle?'  

Think about it.

by Aunt Sam 1/11/2012 - 9:50 pm

Who wins:

Banks/investment houses--who made big money selling, reselling, and doing derivatives on the backs of regular people who thought they were getting in on the new wave.

Foreign investors and big investors who saw their returns "saved" by the Paulson Tarp--at the expense of regular people who got sliced out of the deal.

Politicians--who managed to make it through the crisis without ever having to actually represent the people who voted them into office. 

Did I miss anybody?

by erica20 1/11/2012 - 10:27 pm (re: Aunt Sam)

Hmmmm.  You're kinda getting there.....the underlings are not the principals.

Consider bigger and long term rewards.  And what entity has the resources/power to manipulate all the parts?

by Aunt Sam 1/11/2012 - 10:33 pm (re: erica20)

The Supreme Court!

Oh, sorry. I got a little overescited there....:^D

by erica20 1/11/2012 - 11:14 pm (re: Aunt Sam)

Ok Aunt Sam, what are you driving at? Huge unreported losses? An attempt by the banks/fed to own all the houses? Giant public/private sellouts of the losses?

by erica20 1/12/2012 - 1:06 am (re: Aunt Sam)

Latest Comments

more