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Treasury Makes Shocking Admission: Program for Struggling Homeowners Just a Ploy to Enrich Big Banks - Magda Hassan - 26-08-2010
Treasury Makes Shocking Admission: Program for Struggling Homeowners Just a Ploy to Enrich Big Banks
The Treasury Dept.'s mortgage relief program isn't just failing, it's actively funneling money from homeowners to bankers, and Treasury likes it that way.
August 25, 2010 |
The Treasury Department's plan to help struggling homeowners has been failing miserably for months. The program is poorly designed, has been poorly implemented and only a tiny percentage of borrowers eligible for help have actually received any meaningful assistance. The initiative lowers monthly payments for borrowers, but fails to reduce their overall debt burden, often increasing that burden, funneling money to banks that borrowers could have saved by simply renting a different home. But according to recent startling admissions from top Treasury officials, the mortgage plan was actually not really about helping borrowers at all. Instead, it was simply one element of a broader effort to pump money into big banks and shield them from losses on bad loans. That's right: Treasury openly admitted that its only serious program purporting to help ordinary citizens was actually a cynical move to help Wall Street megabanks.
Treasury Secretary Timothy Geithner has long made it clear his financial repair plan was based on allowing large banks to "earn" their way back to health. By creating conditions where banks could make easy profits, Getithner and top officials at the Federal Reserve hoped to limit the amount of money taxpayers would have to directly inject into the banks. This was never the best strategy for fixing the financial sector, but it wasn't outright predation, either. But now the Treasury Department is making explicit that it was—and remains—willing to let those so-called "earnings" come directly at the expense of people hit hardest by the recession: struggling borrowers trying to stay in their homes.
This account comes secondhand from a cadre of bloggers who were invited to speak on "deep background" with a handful of Treasury officials—meaning that bloggers would get to speak frankly with top-level folks, but not quote them directly, or attribute views to specific people. But the accounts are all generally distressing, particularly this one from economics whiz Steve Waldman:
The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with "the system," "the economy," and "ordinary Americans."
Mike Konczal confirms Waldman's observation, and Felix Salmon also says the program has done little more than delay foreclosures, as does Shahien Nasiripour.Here's how Geithner's Home Affordability Modification Program (HAMP) works, or rather, doesn't work. Troubled borrowers can apply to their banks for relief on monthly mortgage payments. Banks who agree to participate in HAMP also agree to do a bunch of things to reduce the monthly payments for borrowers, from lowering interest rates to extending the term of the loan. This is good for the bank, because they get to keep accepting payments from borrowers without taking a big loss on the loan.
But the deal is not so good for homeowners. Banks don't actually have to reduce how much borrowers actually owe them—only how much they have to pay out every month. For borrowers who owe tens of thousands of dollars more than their home is worth, the deal just means that they'll be pissing away their money to the bank more slowly than they were before. If a homeowner spends $3,000 a month on her mortgage, HAMP might help her get that payment down to $2,500. But if she still owes $50,000 more than her house is worth, the plan hasn't actually helped her. Even if the borrower gets through HAMP's three-month trial period, the plan has done nothing but convince her to funnel another $7,500 to a bank that doesn't deserve it.
Most borrowers go into the program expecting real relief. After the trial period, most realize that it doesn't actually help them, and end up walking away from the mortgage anyway. These borrowers would have been much better off simply finding a new place to rent without going through the HAMP rigamarole. This example is a good case, one where the bank doesn't jack up the borrower's long-term debt burden in exchange for lowering monthly payments
But the benefit to banks goes much deeper. On any given mortgage, it's almost always in a bank's best interest to cut a deal with borrowers. Losses from foreclosure are very high, and if a bank agrees to reduce a borrower's debt burden, it will take an upfront hit, but one much lower than what it would ultimately take from foreclosure.
That logic changes dramatically when millions of loans are defaulting at once. Under those circumstances, bank balance sheets are so fragile they literally cannot afford to absorb lots of losses all at once. But if those foreclosures unravel slowly, over time, the bank can still stay afloat, even if it has to bear greater costs further down the line. As former Deutsche Bank executive Raj Date told me all the way back in July 2009:
If management is only seeking to maximize value for their existing shareholders, it's possible that maybe they're doing the right thing. If you're able to let things bleed out slowly over time but still generate some earnings, if it bleeds slow enough, it doesn't matter how long it takes, because you never have to issue more stock and dilute your shareholders. You could make an argument from the point of view of any bank management team that not taking a day-one hit is actually a smart idea.
Date, it should be emphasized, does not condone this strategy. He now heads the Cambridge Winter Center for Financial Institutions Policy, and is a staunch advocate of financial reform.If, say, Wells Fargo had taken a $20 billion hit on its mortgage book in February 2009, it very well could have failed. But losing a few billion dollars here and there over the course of three or four years means that Wells Fargo can stay in business and keep paying out bonuses, even if it ultimately sees losses of $25 or $30 billion on its bad loans.
So HAMP is doing a great job if all you care about is the solvency of Wall Street banks. But if borrowers know from the get-go they're not going to get a decent deal, they have no incentive to keep paying their mortgage. Instead of tapping out their savings and hitting up relatives for help with monthly payments, borrowers could have saved their money, walked away from the mortgage and found more sensible rental housing. The administration's plan has effectively helped funnel more money to Wall Street at the expense of homeowners. And now the Treasury Department is going around and telling bloggers this is actually a positive feature of the program, since it meant that big banks didn't go out of business.
There were always other options for dealing with the banks and preventing foreclosures. Putting big, faltering banks into receivership—also known as "nationalization"—has been a powerful policy tool used by every administration from Franklin Delano Roosevelt to Ronald Reagan. When the government takes over a bank, it forces it to take those big losses upfront, wiping out shareholders in the process. Investors lose a lot of money (and they should, since they made a lousy investment), but the bank is cleaned up quickly and can start lending again. No silly games with borrowers, and no funky accounting gimmicks.
Most of the blame for the refusal to nationalize failing Wall Street titans lies with the Bush administration, although Obama had the opportunity to make a move early in his tenure, and Obama's Treasury Secretary, Geithner, was a major bailout decision-maker on the Bush team as president of the New York Fed.
But Bush cannot be blamed for the HAMP nightmare, and plenty of other options were available for coping with foreclosure when Obama took office. One of the best solutions was just endorsed by the Cleveland Federal Reserve, in the face of prolonged and fervent opposition from the bank lobby. Unlike every other form of consumer debt, mortgages are immune from renegotiation in bankruptcy. If you file for bankruptcy, a judge literally cannot reduce how much you owe on your mortgage. The only way out of the debt is foreclosure, giving banks tremendous power in negotiations with borrowers.
This exemption is arbitrary and unfair, but the bank lobby contends it keeps mortgage rates lower. It's just not true, as a new paper by Cleveland Fed economists Thomas J. Fitzpatrick IV and James B. Thomson makes clear. Family farms were exempted from bankruptcy until 1986, and bankers bloviated about the same imminent risk of unaffordable farm loans when Congress considered ending that status to prevent farm foreclosures.
When Congress did repeal the exemption, farm loans didn't get any more expensive, and bankruptcy filings didn't even increase very much. Instead, a flood of farmers entered into negotiations with banks to have their debt burden reduced. Banks took losses, but foreclosures were avoided. Society was better off, even if bank investors had to take a hit.
But instead, Treasury is actively encouraging troubled homeowners to subsidize giant banks. What's worse, as Mike Konczal notes, they're hoping to expand the program significantly.
There is a flip-side to the current HAMP nightmare, one that borrowers faced with mortgage problems should attend to closely and discuss with financial planners. In many cases, banks don't actually want to foreclose quickly, because doing so entails taking losses right away, and most of them would rather drag those losses out over time. The accounting rules are so loose that banks can actually book phantom "income" on monthly payments that borrowers do not actually make. Some borrowers have been able to benefit from this situation by simply refusing to pay their mortgages. Since banks often want to delay repossessing the house in order to benefit from tricky accounting, borrowers can live rent-free in their homes for a year or more before the bank finally has to lower the hatchet. Of course, you won't hear Treasury encouraging people to stop paying their mortgages. If too many people just stop paying, then banks are out a lot of money fast, sparking big, quick losses for banks -- the exact situation HAMP is trying to avoid.
Borrowers who choose not to pay their mortgages don't even have to feel guilty about it. Refusing to pay is actually modestly good for the economy, since instead of wasting their money on bank payments, borrowers have more cash to spend at other businesses, creating demand and encouraging job growth. By contrast, top-level Treasury officials who have enriched bankers on the backs of troubled borrowers should be looking for other lines of work.
http://www.alternet.org/story/147955/treasury_makes_shocking_admission%3A_program_for_struggling_homeowners_just_a_ploy_to_enrich_big_banks?page=entire
Treasury Makes Shocking Admission: Program for Struggling Homeowners Just a Ploy to Enrich Big Banks - Keith Millea - 27-08-2010
Published on Thursday, August 26, 2010 by CommonDreams.org Chase Bank and Obama's "Make Home Affordable" Scam
by Ted Rall
SOMEWHERE IN AFGHANISTAN--It isn't surprising, what with the world falling apart and all, that the world scarcely noticed that I lost my job as an editor in April 2009. Why should it? I was one of millions of Americans who lost their job that month.
But it mattered to me.
It wasn't all bad. No more early morning commutes. And no more Lisa. Lisa was my boss. My mean boss. My mean and crazy boss. In the long run, I stand to save thousands of dollars on therapy.
In the meantime, however, one visit with HR cost more than half my annual income. (My ex-employer, the Scripps media conglomerate, offered just four weeks severance pay--if I agreed not to work as a journalist for the rest of my life. Needless to say, I refused.) Just like that, I was broke.
The bills, of course, kept coming. Including my home mortgage. Unlike many people, I was conservative. When I bought, in 2004, I put down more than 50 percent of the purchase price. Refusing an adjustable-rate mortgage, I took out a vanilla 30-year fixed-rate mortgage from Chase Home Finance LLC.
My monthly nut, a combined payment of $2200 for the loan plus local property tax, didn't seem so bad in '04. But property taxes went up. Now I'm shelling out over $2700--on half the income. I'm still making my payments on time, but only by borrowing from a home equity line of credit.
I'm not in foreclosure. But it's easy to see how, if this keeps up, I will be. The credit line isn't limitless. The more I borrow, the higher my payments on that. My cash flow is a disaster.
So I asked Chase for help.
Responding to political pressure to cut distressed homeowners a break, the big banks who destroyed global capitalism in 2008--including Chase--agreed to the Obama Administration's request to create a program to assist distressed homeowners. The result was "Make Home Affordable." (Nice name.)
From Chase's website: "No matter what your individual situation is, you may have options. Whether your want to stay in your home or sell it, we may be able to help."
Key word: "May." Translation: "May" = "Won't."
As I can now attest from personal experience, "Make Home Affordable" is a scam. MHA is cited by bank ads as evidence that they get it, that their "greed is good" days are over, that we don't need to nationalize the sons of bitches and ship them off to reeducation labor camps.
In reality, it exists solely to give banks like Chase political cover. They deliberately give homeowners the runaround, dragging out the process so they can foreclose. As of the end of 2009, only four percent of applicants received any help. By June 2010 the vast majority of that "lucky" four percent had lost their homes anyway--because the amount of relief they got was too small.
I was a banker in the '80s. I often travel to the former USSR, where sloppy paperwork gives the police the right to rob you blind. So I know how to navigate bureaucracy. I'm careful. Thorough. When, among other things--many, many other things--Chase asked me for copies of my bank statements, I knew to send the blank pages too.
I explained my situation to an officer at my local Chase branch. "As someone who recently lost a job and thus a substantial portion of your income," she said, "you clearly qualify for Make Home Affordable. But you have to keep making your payments on time. Don't fall behind or you'll be disqualified."
Chase Home Finance's lists qualifications for MHA; I easily fulfilled them. I was excited. To make sure I didn't become the ten millionth American to lose his house since 2008, Chase would work to reduce my monthly payment. First, they would lengthen the repayment period. If that wasn't enough help, they'd cut my interest rate. They might even reduce the principal.
I carefully filled out the forms. I copied all the financial records they demanded. I mailed them off to a brand-new loan center in Colorado that, Chase promised, had been set up to expedite the processing of HFA applications. The package was more than 100 pages thick.
That was in January.
About a month later, Chase sent me a letter asking for the same exact documents I had already sent them. I was perplexed. The application was in the same package as the supporting papers. How could they know I wanted to apply for HFA, yet not have that stuff? They also asked for another bank statement--for the month that had passed between their receipt of my application and the date of their letter.
They did it over and over. They'd confirm receipt of an item, then demand it again. They asked for one particular month's bank record three times--after telling me that they'd gotten it twice.
Want a good laugh? Try navigating Chase's phone tree. It's at (866) 550-5705.
I called in March. Happy day! After submitting 318 pages of records, most of them redundant, my application was finally complete. An Actual Living Human would be in touch shortly to tell me whether I'd been approved and, if so, how much of a break I'd get. I also got a letter. Application complete! Application complete! What were all those pissed-off Chase Home Finance customers on the Internet whining about? All you had to do was be thorough. And persistent.
Alas, April brought more melancholia. Another letter: my application still wasn't complete again. Why hadn't I sent in the same documents I'd already sent in four times and had confirmed three times? And what about the bank statement that arrived between March and April?
I sent in the stuff along with a pissy cover note threatening to contact my Congressman if they didn't shape up.
So what happened? Democracy works! One week later, on May 18th, I received a rejection letter. The Reason: I had not suffered any loss of income.
"If it is determined that you are not eligible for a Home Affordable Modification," their website assures, "we'll evaluate you for other workout options to keep you in your home or advise you of other foreclosure alternatives." Never heard from them.
As a former banker, I wondered: How could they say that I hadn't taken a hit? Then it came to me. Chase only asks for records that show income: W-2s, pay stubs, income statements, bank statements. They don't look at your debt: credit cards, home equity lines of credit, other mortgages. Like most people whose income drops, my debts went up as I struggled to pay my bills. Indeed, I offered to send that stuff. They refused it!
At this time I would like to express my unvarnished admiration for the ruthless cynicism that led the executives at Chase Home Finance to conceive of a fake lending branch entirely dedicated to increasing foreclosures, improving their public image, and driving distressed homeowners crazy.
"The foreclosure-prevention program has had minimal impact," says John Taylor, chief executive of the National Community Reinvestment Coalition. "It's sad that they didn't put the same amount of resources into helping families avoid foreclosure as they did helping banks."
I would also like to volunteer for the firing squad if and when these scumbags get what they deserve.
Copyright 2010 Ted Rall, Distributed by Universal Uclick/Ted Rall
Ted Rall is in Afghanistan to cover the war and research a book. He is the author of "The Anti-American Manifesto," which will be published in September by Seven Stories Press. His website is tedrall.com.
http://www.commondreams.org/view/2010/08/26-0