The Bush-Obama strategy of throwing trillions at the banks to solve the mortgage crisis has been a failure. The banks welcome public money to remove toxic assets from their books, insured by we-the-taxpayers, as well as the hundreds of billions in direct handouts, but they've hardly returned the favor. They've used these funds to pay mega-salaries and prop up stock values, choices that obviously benefit them. They needed public support; no one wanted the system to collapse. But how much? We're now witnessing their return to profitability and have to wonder what sort of public-private partnership we've inherited.
Have the too-big-to-fail corporations, beneficiaries of the virtual absence of an anti-trust policy over the past three decades, held us hostage?
We learned a few months ago that China's productivity rate over the past year was 8%. The reason, according to The News Hour, is that their banks have been lending. Just like here, China's banks received bailouts. But unlike here, they were contingent on lending to consumers and businesses.
Now, if direct and fairer lending to consumers and businesses had been the goal, wouldn't the banks be reaping profits and increasing their reserves in an improved and healthier economy? Nobel winners like Paul Krugman and Joseph Stiglitz, among others, have been claiming for nearly a year that if we'd vigorously confronted problems in the housing market in the first place, the bailouts wouldn't be necessary. After all, these problems, as most everyone agrees, are at the root of the crisis.
The problem is that the banks also gain from an unhealthy economy. While housing drags down the "recovery," Citi's and Goldman's paper inflates with taxpayer wealth and many continue to suffer. And those with the liquidity to take advantage of "free" markets are cueing up at the home auctions faster than the health insurance companies can rescind policies. They're hoping that we are nowhere near the bottom yet. The housing market of course was hardly free on the way up, pumped by a very friendly deregulatory climate for speculation that allowed predatory lenders to gouge buyers; and it's hardly free on the way down as policies repress prices through restrictive lending. If we've learned anything about the current crisis it's that ups and downs have become as normal as the presence of the homeless. Stability requires shocks, to paraphrase Naomi Klein's "shock doctrine."
Unfortunately we have nothing to absorb the shocks during these corrective phases when a lot of bad and abnormal stuff happens. Some have to bear the brunt of induced shocks and wait it out because this approach mostly benefits those in power. As Naomi Klein shows, it is during the down phases when inequality increases and many fortunes are made. And recent data bear this out. The already wide gap between haves and have-nots has widened in the past year. And non-whites have been especially affected since they've bore the brunt of the housing collapse through absorbing a disproportionate share of predatory loans.
Bailing out big banks has hardly contributed to a climate conducive to free markets and competition. On the contrary, it has allowed institutions already too big to fail to gobble up other banks, leading to even less free market concentrations that especially hurt small business. There's a staggering number of small banks failing each week, as we learn from the FDIC, and many of these are being gobbled up by the already-too-big! Where is the regulation we were promised under the mantra of "change?"
This is the biggest problem we face in all industries across the economic spectrum: fewer and fewer corporate owners controlling more and more production. It's the global gobbling-up game. Such has been the prolonged fetish of the free market myth that what happens as a result of concentration is ignored; we continue to celebrate a "competitive" world that excludes more and more while underwriting oligopoly.
According to Robert Freeman, global companies spent $75 billion in 1973 to gobble each other up and block competition, soaring to $550 billion by 1993, and $2.4 trillion by 1999. It continues to increase today, giving them the power to artificially raise prices and reduce wages. The larger effect is an extraordinary transfer of wealth and income from Obama's consuming middle class to the already too-big and over-concentrated.
"In 2007, the top 1% of the US population owned 60% of all business assets. Meanwhile, the bottom 50% of the population owned a mere 2.5% of such assets. The bottom 40% owned nothing. US income distribution has become more unequal than at any time since 1928, just before the Great Depression. In the ten years between 1996 and 2006 two thirds of all the growth in the entire US economy went to the top 1% of income earners."
But the attention, thanks to big media, is all about the Fed and the level of interest rates, not issues of market power. Manipulating the money supply through the purchase of securities and altering the borrowing rate to banks, the Fed's tools of the trade, unfortunately treats ups and downs as normal while doing little if anything about the power of huge banks with more market control to gouge borrowers.
Fed Chair Bernanke was actually out in the field a few months ago selling the Fed at a "town hall meeting" in Kansas City. The agenda was remarkably streamlined. The discussion never deviated from the Fed line of independence from politics, while Bernanke endorsed exactly what the filter-down sages in the partisan-dependent branches always do: no-strings-attached transfers to those in the know who've been able to ever so mysteriously marry the state to capitalism and call it the free-market system. He apologized for the pain many have to bear on main street, but urged us to be patient. We must accept the fact that in economics lags are inevitable!
Politics and money policy are already married. The dependency is hidden behind the fog of numbers on the nightly business news. We just need a different union!
The Obama "programs" for victims of the housing crash are products of a bad marriage. So few loans have been modified, or good refinancing accomplished, that Obama recently summoned the CEOs of the major banks to the White House to explain why more progress hasn't been made. B of A, for example, has only modified 4% of qualified loans! This despite getting considerable public money, and showing significant profits in the last quarter. Aside from a public expression of displeasure at this "progress," it is unclear what the White House is going to do about it. Obama's response suggests that he's open to alternative unions. But can he be? He just reappointed Bernanke because he saved the system from collapse!
Obama must know why so few modifications have been made. The banks are blaming the victims. They make it very difficult to qualify since they believe many applicants will be in worse shape later and that therefore it will be a useless exercise.
One of the responses to this dilemma in places like California, where "upside-down" homeowners make up a huge number of applicants, and where the effective unemployment rate is well into the teens, is for banks to grant temporary modifications and wait it out. These "modified" homeowners are then monitored for a few months to see if they're worthy of a permanent modification. Many unfortunately don't survive this test period.
One of the problems here is that in recent months foreclosures have ratcheted up as unemployment benefits run out and jobs are cut, particularly in the government sector with the state's huge budget shortfall. And foreclosures mean a further decline in property taxes which breeds further shortfalls and more job losses. So more and more of these "losers" are falling out of the process. And the more there are the more hesitant processors are to finalize modifications, believing the system's weaknesses will just continue.
An active program to stabilize housing a year ago would have prevented all of this. Now, what passes for an active program is aimed at merely cleaning up the mess from a lack of effective action. Gone is the memory of what was at stake when this crisis occurred. Like with the Iraq war in 2003. In the run up there was a "debate" about its legality and validity, but once the occupation occurred the discussion turned to technical matters and fundamental issues were lost. Similarly, a debate about the need to bypass the banks and shape a policy that counters their self-interested moves has been lost.
The media's managed "debate" has made us amnesiacs. But not only have we forgotten what's at stake. There's been a shift in how the issue is defined. At the outset there was some acknowledgment that this was no normal market correction, that it was caused by specific policies that are no longer credible, the failed ones of the Bush administration indebted to the Reagan legacy, etc. Recall Obama's speeches that pitch the middle class, especially in the run-up to the election last Fall. People shouldn't be the victims of these policies. It was not their fault. We need to regulate the banks. We need to stabilize home values because that's the basis of the middle class's wealth, and what allows consumers to keep spending as well. The loss of equity in property makes it difficult for consumers to borrow or refinance, which has a direct effect on spending, which has an effect on employment as demand for products slackens and employers must resort to layoffs.
These comments about the system are right on, the basic commonsense of Econ 101. But it's the bad apples now, not the rotten system, that we're being told have sent everything into free-fall. And we're back to the abstractions of the Bush years: there's no free lunch (for those who don't qualify for bailouts!); those who couldn't afford to buy that house, shouldn't have, etc. The policies of the past year or so have trashed the credit reports and driven the values down, not to mention disappeared retirement and blocked access to borrowing. But the response to this situation is customized. The time period between the onset of the crisis and now barely exists. Your situation is your situation and you must bear the burden of the events of your own making!
Brokers have been especially victimized in recent months. They're popular targets. When the housing market was booming, banks had a cozy relationship with them. They looked the other way on limited documentation because the high rates of interest they got in return made their days quite profitable. And since values kept going up many of these applicants could refinance quite soon anyway, correcting the near-sightedness.
They offered real help to the borrowers who were either first time homeowners, or perhaps not as credit worthy as the rules demanded. And the boom in home ownership was a good thing for many who needed some bending of the rules to get access to the American Dream. The brokers fulfilled a central plank in this dream: competition! While the banks made it difficult to borrow and often offered rates that were too high, the pool of brokers helped to provide choice and in many cases lower rates. Sure, they got points for this. But on balance a first-time borrower could make out better even if they didn't have many options.
Since the implosion it's been a different story. Brokers have been demonized for approving past loans that people could never afford, thus precipitating the crisis. But the culprit was predator loans, especially the sub-prime variety, authorized by greedy banks like Countrywide that speculated with marginal borrowers (Countrywide was recently gobbled up by B of A in its scramble to eliminate competition!).
Sara Bjazevich is a loan consultant at Gates Funding in San Pedro, CA, a subdivision of Los Angeles. She's been in the industry for several years, helping many from this area get a piece of the American Dream. A mere glance at the news these days, or at ads on TV or the internet, suggests there's a lot of good deals out there for victims of the downturn: historically low rates for home buying and refinancing, mere fees-to-lawyers away from getting that mortgage modified, and government programs everywhere to 'help' people.
So I asked her to offer some insight into what's happening.
Her experience with loan modifications is not very promising. She's never seen one completed! They drag on and on and finally the applicants give up in frustration. Their income has to be so high that they nearly don't need one! And these "modifications" are often only "forbearance" schemes that add back payments to the principal with little or no improvement in terms or rates.
Rates are definitely lower now for home buyers, according to Sara. But there are really no special deals, and the banks are constantly changing the rates. It's often an hour-by-hour thing. And even when the low rates appear to be "locked in," meaning guaranteed, the banks can cancel the process even for applicants with very high FICO scores. And every file has become a hassle because the banks seem to be intentionally slowing the process down, refusing to make quick decisions, according to Carla Califano, Sara's assistant. This has led to the need for re-approvals and reappraisals, and a new process that leaves applicants further frustrated and forced to bear more expense.
Refinancing has become very difficult, even for those with equity, because regulations regarding loan-to-value (LTV) have been tightened at a time when this "value" is shrinking rapidly. Applicants looking into the Obama Home Affordable Program will be allowed a max CLTV -- combined loan to value -- of 125%, but this past loan must be secured by either Fannie Mae or Freddie Mac.
One of the very disturbing trends she's noticed is the disappearance of more and more wholesale lenders that once offered competition for borrowers. Sara remembers dealing with over 50 of these lenders, most of whom now have been gobbled up by the big banks or forced out of business. Suntrust, Flagstar, Reunion, Stearns Lending, Sierra Pacific and a few others are the only ones left. And, adding insult to injury, the big banks are refusing to deal with them one-on-one. Of those still standing, like Chase and Citi, only Wells Fargo and B of A (which stopped wholesaling last year but has recently returned) will deal directly with them. She feels their ultimate goal is to eliminate the brokers; that in the not-too-distant future they will no longer be part of the picture. Proposed state legislation would permit doing credit checks on realtors and loan officers!
A crucial area that shows the extent of the big banks' control of the process is appraisals. Critics of the sub-prime lending fiasco fix on the appraisals of property during the expansion as the problem, saying that many of them were done fast and loosely, consistent with the inflationary tempo of the times, and this allowed homeowners to withdraw cash from their property that was not supported by factual wealth. But since this was pumping the consumer economy, and returning many pennies back to the lenders, many made out like bandits. So it makes some sense that with the plummeting values there must be some sobering revisions to how property is valued.
The problem, Sara claims, is that now values are being understated and distorted! And this is directly related to the dominance of the process by the big banks. The culprit is the federally-inspired Home Valuation Code of Conduct (HVCC), created through legislation implemented May 1st of this year. This was supposedly all about standardizing appraisals, getting rid of the quirky unfairness, so that reliability and stability could finally be restored to the system.
Sound good so far? Well, one of the unfortunate results of this legislation is to give the big banks more control. Title companies and banks, and we're talking about the few remaining big ones, are now allowed to own their own Appraisal Management Companies (AMCs). This encourages a virtual monopoly of the appraisal assignments and thus the ability of the big banks to influence the valuations. The independent appraisers, those locally based who have a stake in giving clients the truth and who best understand the relevant facts of their investments, are dropping like flies. The appraisers who work for the AMCs are doing the bidding of the big banks that have a vested interest in the outcome of the appraisals!
Which is to say they have clout, according to Sara, in getting the numbers to justify their restrained lending. They do what they want to deliver their version of reality. These appraisers work out of central command and apply global formulas that usually diverge from the local circumstances. And they have the power to request repeat appraisals, becoming more common, and pass on the fees to boot! Another disturbing trend, she claims, is that they are making clients pay for more and more of the process...
If we don't restore some trust in the system soon, and above all get an anti-trust policy (didn't Barney Frank suggest a while ago we needed one!), then the American Dream might very well flip into a nightmare.