Gee, what a surprise.
Curious Carl
Treasury Makes Shocking Admission: Program for Struggling Homeowners Just a
Ploy to Enrich Big Banks
By Zach Carter, AlterNet
Posted on August 25, 2010, Printed on August 26, 2010
http://www.alternet.org/story/147955/
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 $200,000 on a house that is worth
$150,000, 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.
Zach Carter is AlterNet's economics editor. He is a fellow at Campaign for
America's Future, writes a weekly blog on the economy for the Media
Consortium and is a frequent contributor to The Nation magazine.
C 2010 Independent Media Institute. All rights reserved.
View this story online at: http://www.alternet.org/story/147955/
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