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GOP Blocks Financial Reform As Millions Lose Homes

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The GOP launched its assault on financial reform last week with bogus populist rhetoric about trying to stop taxpayer bailouts, all borrowed from Frank Luntz's strategy memo with the same talking points.. Of course, the mild, loophole-laden legislation doesn't use taxpayer money, but a tax on the financial industry, to close down financial institutions that are dangerously large and about to fail. Republicans claim they now have the votes to defeat it, but the Democrats are counting on populist outrage against Wall Street at creating enough momentum for passage.

It's the fine print of the bill that the financial industry is seeking to undermine that will determine if we have a real change in oversight of Wall Street or just a fig-leaf of "reform" that won't prevent another disaster.

Still, as Heather Booth, the director of the 200-group Americans for Financial Reform, says, "Calling a bill that will rein in the big banks and hold Wall Street accountable a 'bailout' bill is a page right from the dishonest and untrustworthy playbook of Wall Street and opponents of reform. If these vocal Senators truly want to end 'too big to fail', why don't they support breaking up the banks? If they truly oppose bailouts, why don't they support tougher rules to rein in the risky shadow banks [and derivative-trading] like AIG? If they truly want to prevent another financial crisis, why do they keep huddling with bank lobbyists behind closed doors? We know who they really represent - the big banks who are spending $1 million per member of Congress to kill reform."

Yet even though Democrats, progressives and even Sen. Mitch McConnell's hometown paper are attacking McConnell and the GOP, that doesn't mean that the financial reform measure under consideration will do anything directly to help the millions of Americans who have already lost or on track to lose their homes due to a deregulated, predatory financial industry that wrecked the economy. It's also not at all clear that Democrats, who have always been incapable of challenging fear-based smear campaigns from the Swift-Boating of John Kerry to the "death panels" charge aimed at health care reform, will be able to do a better job this time around challenging GOP talking points. They're just counting, as usual, on well-reasoned rebuttals and a supposedly supportive mainstream media to do their job for them in challenging lies, while running ads that still don't go for the jugular against the GOP and their corporate allies.

Indeed, the same big banks being aided by Republicans in resisting reform are also snubbing -- even after trillions in bailouts and guarantees-- virtually all of the weak federal efforts to "encourage" them to lower the amount owed by homeowners. So let's recap: after looting the federal treasury to help pay for their excesses that brought on the crisis, the banks and Wall Street firms are enlisting Republicans and some Democrats to kill financial reform while also ignoring federal mortgage relief programs and stiffing homeowners whose inability to meet mortgage payments are due in large part to those same firms' reckless acts.

At Congressional hearings on Tuesday, as The New York Times reported:

In a rebuff to the Obama administration, two big banks on Tuesday drew a line in the sand on cutting the mortgage balances of beleaguered homeowners, saying that the tool would be applied sparingly.

The idea of reducing loan principals last month became a centerpiece of the administration's efforts to help seven million households threatened with foreclosure. But an official at one of the banks, David Lowman of JPMorgan Chase, said principal reduction could reward households for consuming more than they could afford, might punish future homeowners by raising the cost of borrowing and in any case was simply unworkable.

"We are concerned about large-scale broad-based principal reduction programs," Mr. Lowman, the bank's chief executive for home lending, testified during a hearing of the House Financial Services committee.

With that attitude, it's not surprising that federal efforts so far have been such a flop. And there's little sign that the Treasury department will do more to force the banks to write-down mortgage payments owed, as opposed to "gently" encouraging them to participate with a few thousand dollars in incentives per mortgage that are chump change to banks and their outsourced, profit-hungry mortgage servicing companies.

And as Elizabeth Warren pointed out on the Rachel Maddow show, the original TARP bailout program was supposed to help the economy, including homeowners, not just banks:

We are now 15 months after Treasury has announced its program and tried to get it up and running. And...167,000 families have gotten into some kind of modification...But just to put that in some context, every single month, 200,000 families are posted for foreclosure. That's where we stand right now. 167,000 over 15 months have received assistance under this program. And every month, 200,000 families are posted for foreclosure.

Warren's Congressional oversight panel on TARP issued a grim report on the government's failures so far, and even new White House efforts to fix the Home Affordable Modification Program (HAMP) could even worsen the prospects for the jobless.

The oversight panel reported (via the the Economist Populist blog): "In 2009, 2.8 million homeowners received a foreclosure notice, and nearly one in four homeowners with a mortgage currently has negative equity." Indeed, 75% of people enrolled in the floundering program still owe more than their homes are worth.

As the new Congressional oversight report said:

HAMP typically does not reduce the total principal balance of a mortgage, meaning that a borrower who was underwater before receiving a HAMP modification will likely remain underwater afterward. Many borrowers will eventually re-default and face foreclosure.

On top of all that, supposed reforms proposed by the Obama administration that aim to make it easier for people to sell their homes or reduce their payments don't seem likely to have much impact. In March, as the Los Angeles Times reported:

In a renewed bid to stave off foreclosures, the Obama administration will propose measures Friday to give some jobless homeowners a three-month break on payments and give lenders more incentives to reduce the principal on delinquent loans.

The new measures come on top of a series of steps administration officials announced Thursday to fortify their $75-billion effort to modify mortgages and reduce foreclosures. To date, those efforts have focused on giving lenders cash incentives to ease payments by extending the payout period for loans.

The initiative to give jobless homeowners a reprieve on payments and to entice lenders to cut the principal was disclosed to a knowledgeable industry official, who did not want to be quoted publicly in advance of the plan's unveiling.

"These program adjustments will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own," an Obama administration official said.

The new steps by the administration amount to an acknowledgment that the year-old program hasn't done enough. By the end of December, it had permanently lowered monthly payments for only about 170,000 borrowers out of the expected 3 million to 4 million it was aimed at covering through 2012.

How's that been working out?

One major problem is that in a little-noticed Kafkaesque twist under the new rules, the jobless can't count their unemployment benefits as income towards renegotiating their mortgages. As McClatchy newspapers reported this week:

Recent changes to the federal foreclosure-prevention program were billed as helping the unemployed, but in the long run, they actually make it harder for people without jobs to keep their homes.

When the new rules go into effect, unemployment benefits will no longer count as income for determining whether a person qualifies for a long-term reduction in their mortgage payments.
So for people with no income other than unemployment, there will be no loan modifications - the chief tool for preventing foreclosures.

"It's ridiculous how impractical the guidelines ... are," said Al Ripley, an attorney with the N.C. Justice Center. "They truly do not address the needs of unemployed people."

This program is the centerpiece of the $75 billion federal effort launched in February 2009 to stem foreclosures. President Barack Obama has said HAMP - the Home Affordable Modification Program - would help 3 million to 4 million people avoid foreclosure through 2012.

But low numbers of long-term modifications drive criticism that the U.S. Treasury program is flawed, and that lenders do a poor job of implementing it.

To be sure, the HAMP changes will provide short-term help for unemployed homeowners. Lenders and mortgage servicers will be required to give at least three months of lower mortgage payments for people receiving unemployment benefits. The temporary reduction could last as long as six months

What's actually happening to homeowners is that the foreclosure tsunami long warned about is already well underway. As the Economist Populist blog recounted the damage that neither the Treasury Department nor proposed financial reforms will do anything, in practice, to fix:

"RealtyTrac® ... today released its U.S. Foreclosure Market Report™ for Q1 2010, which shows that foreclosure filings -- default notices, scheduled auctions and bank repossessions -- were reported on 932,234 properties in the first quarter, a 7 percent increase from the previous quarter and a 16 percent increase from the first quarter of 2009. One in every 138 U.S. housing units received a foreclosure filing during the quarter."

Foreclosure filings were reported on 367,056 properties in March, an increase of nearly 19 percent from the previous month, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

California had the most foreclosures with 216,000, accounting for 23% of the nation's total. Florida was second with 153,500.

Nevada had the highest foreclosure rate for the 13th straight quarter at 1 in every 33 homes. Arizona was second with 1 in every 49 homes...

The disaster, in other words is already here, and Washington isn't responding. The result of us will pay the cost as jobless and foreclosures continue, and the value of neighborhood homes plunge as the wave of foreclosures continue. As Elizabeth Warren summed up Tuesday what this failure to prevent foreclosures has meant to the entire economy (hat tip to Democratic Underground ):

In a sense, what this program was is incentives put on the table to invite the financial institutions and the mortgage servicers to come to the table, please, to negotiate with the families who are facing foreclosure, and it is a program of limited scope and it is a gentle program.

And today, we heard from those large Wall Street banks. They went in to Congress to testify about where they stood on mortgage foreclosures, and they basically said: "Don't push us too hard, because we don't to cooperate.'

I mean, this is really a STUNNING response from large financial institutions. So, we just have a real disconnect here about what it is that TARP is supposed to be, or at least originally, was supposed to be about."

- snip -

WARREN: "This is about the group of people, who could actually pay, and pay a reasonable amount on these mortgages, and everyone would ultimately be better off. But it's also about the rest of us in the economy. You know, even if you are not one of the 1 in 4 homeowners with a mortgage who's underwater, the value of your home is dropping when mortgage foreclosures keep occurring. It presses everybody's values down. And that has echoes throughout the economy. A huge part of our economy is the construction industry, which has ground to a halt and has huge unemployment in it right now. It has devastating effects on communities. Ultimately, we are going to have a very difficult time restarting our economy if we continue a downward spiral on home values because of the downward pressure with mortgage foreclosures.

A year and half ago, we bailed out large financial institutions on the argument that, you know, like it or not, we are all in the same boat economically, and we need to save those guys, and we did it, and they are now back to profitability, spending bonuses.

But now we turn to the homeowners, the people who are also in real trouble and it's having a real effect on the rest of our economy, and the response seems to be 'well, we're not all in the same boat here...'

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This article originally appeared at the Working In These Times blog.