Reprieve for Banks, Foreclosure for Homeowners

by Lewis Seiler & Dan Hamburg
April 27, 2010

Its first attempt at foreclosure relief—dubbed Making Home Affordable— having proven a dismal failure, the Obama administration recently implemented a new program called the Housing Finance Agency (HFA) Hardest Hit Fund. According to Bloomberg News, the new program "[gives] bankers a reprieve."^[1]

Is this some kind of joke? Another reprieve for bankers? The total spent so far on mortgage relief is $75 billion. Meanwhile, Neil Barofsky, the inspector general charged with overseeing the Troubled Asset Relief Program (TARP), estimates that the total cost of the Wall Street bailouts could eventually reach $23.7 trillion!^[2]

Foreclosures are at a record high. According to RealtyTrac, filings topped 367,000 last month, the highest monthly total since the reporting began. Nearly 260,000 homes and other properties were repossessed in the first quarter of the fiscal year. That's an all-time record and a 35 percent jump from the previous year. 10,000 homes are going into foreclosure daily.^[3]

The Congressional Oversight Panel headed by Harvard professor Elizabeth Warren announced last week that the Obama program has helped just one borrower for every ten that have lost their homes. According to Warren, "The Treasury Department's response is lagging behind the pace of the crisis… [its] programs will not reach the overwhelming majority of homeowners in trouble." Permanent loan modifications have been made for fewer than 200,000 borrowers nationwide, leaving a growing backlog of distressed borrowers awaiting help.^[4]

Another article on the Bloomberg site contains a breathtaking Deutsche Bank prediction that the number of ‘underwater' loans in the US may rise to 48 percent or 25 million homes by 2011!

On February 19, President Obama announced the first HFA Hardest Hit Fund with $1.5 billion in funding for "innovative measures to help families" in five states with home price declines greater than 20 percent. On March 29, the president announced the second HFA Hardest Hit Fund with $600 million in funding for five states in which the unemployment rate exceeded 12 percent in 2009.^[5]

Unexplained on the Housing and Urban Development (HUD) website is the rationale for changing strategies over a mere 40 days—from targeting states in which the price of the real estate has slumped to states where unemployment has soared.

Regardless, it's revealing that at the same time the administration is committing paltry sums to foreclosure relief for homeowners, it announced spending $200 billion in taxpayer funds to soak up preferred stock in both Fannie Mae and Freddie Mac, twice what was previously pledged.^[6]

Of course, both Fannie and Freddie are stockholder-owned corporations whose principal raison d'être is not rescuing drowning homeowners.

Where will dispossessed homeowners and their families go to get a roof over their heads? Will multiple families be forced to cram into apartments or converted motels? Will they go to shelters? Live in their cars or on the streets? And what will be the consequences of such massive dislocation? Could expectation of civil unrest resulting from economic calamity be a reason that for "the first time an active unit of the US military has been given a domestic assignment"?^[7] In a nation that already has by far the highest incarceration rates in the world, a new prison opens every week. How many of our soon-to-homeless fellow citizens will wind up inhabiting these cells?

Over the past year, even casual observers have witnessed an unmistakable pattern in this administration's approach to our national economic malaise—pennies for the poor and largesse for the wealthy. This pattern holds with respect to the debate on "cramdown" legislation. (A cramdown is a court-ordered reduction of the secured balance due on a home mortgage loan, granted to a homeowner who has filed for personal bankruptcy.^[7]) Seven of the nine largest national banks, including JPMorgan Chase and Wells Fargo, oppose the legislation,^[8] calling cramdown "a dangerous concept."^[9] Only Citigroup and Bank of America, both of which have taken billions in handouts and "backstops" through the TARP, have maintained public silence.

Well, leave it to a bunch of pin-striped banksters to recognize a "dangerous concept" when they see one. Aren't these the same guys who recently brought the world economy to its knees with their financial legerdemain?

It's doubtful that the meager Obamite sprinklings of help to beleaguered homeowners will do much good. Eligibility requirements are strict. In order to participate, a homeowner cannot have missed more than three payments. The homeowner must be receiving without a job and receiving unemployment benefits. The home in question must be worth 115% less than the value of the mortgage. The homeowner must also have a credit score above 500.^[11]

Soon after the meltdown in the fall of 2008, former Fed chairman and Obama advisor Paul Volcker had a better idea for keeping people in their homes rather being thrown out on the streets. He pushed for the creation of a government entity mimicking the Resolution Trust Corporation of the late 1980s and early 1990s. According to Volcker, "this new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes…"^[12]

A northern California realtor recently told us that banks are looking much more favorably on foreclosures than on "short sales." This indicates that banks are actually more interested in taking people's property than they are in any kind of "work outs" that might save a homeowner from bankruptcy. The realtor we spoke with didn't know why this was the case but ventured an educated guess that it's simply more profitable for the banks to take and hold property at this time.

Maybe this is what Bloomberg.com's Elizabeth Hester meant in writing that the Obama foreclosure relief program is really "a reprieve for bankers" rather than for homeowners.

The prevailing logic of our politics seems to be "what's good for bankers is good for America". With a quarter of American homeowners underwater, and a government too stingy or too cozy with industry to seriously address the problem, the stability of both the banking system and the social fabric of the country are threatened.

Addendum: What would happen if people across the country sent their notices of foreclosure to Washington, DC as a reminder of just how serious this crisis has become? We recommend sending notices to President Obama with an accompanying letter. Sample letters: HTML or PDF.

[1] Elizabeth Hester, "Obama's $75 Billion Foreclosure Plan Spells Relief for Bankers", Bloomberg.com, April 19, 2010.
[2] Matt Taibbi, "Obama's Big Sellout", Rolling Stone, December 10, 2010.
[3] Amy Goodman, Democracy Now, April 15, 2010.
[4] Renae Merle & Dina ElBoghdady, "Obama readies steps to fight foreclosures, particularly for unemployed", Washington Post, March 26, 2010.
[5]Administration Announces Second Round of Assistance for Hardest-Hit Housing Markets, makinghousingaffordable.gov, March 29. 2010.
[6] Hester, op. cit.
[7] Gina Cavallaro, "Brigade homeland tours start October 1", Army Times, Sept. 30, 2008
[8] http://en.wikipedia.org/wiki/cramdown
[9] Hester, op. cit.
[10]
[1] Makinghousingaffordable.gov, op. cit.
[12] Paul A. Volcker, Nicholas A. Brady, and Eugene A. Ludwig, "Resurrect the Resolution Trust Corp.", Wall Street Journal, Sept. 17, 2010.