There's a lot we don't know about the deal between Sen. Mike Lee, Tea Party Republican of Utah, and America's largest bank. But we already know something's very, very wrong:
Why is it that most Americans can't get a principal reduction from Chase or any other bank, but JPMorgan Chase was so very flexible with a sitting member of the United States Senate? The hypocrisy from Sen. Lee and JPMorgan Chase CEO Jamie Dimon overfloweth. But does the Case of the Senator's Short Sale rise to the level of full-blown corruption?
Mr. Dimon and Sen. Lee need to answer some questions. But first, this story needs some background.
When Jamie Met Mike
It's not a pretty picture: In one corner is a Senator who wants to strike down Federal child labor laws (although he did allow that child labor was ""reprehensible"). More to the point in this case, Sen. Lee also cosponsored a bill that offered residency in the United States to any non-citizen who buys a home with cash.
In the other corner is the bank whose CEO said that the best way to relieve the crushing burden of debt on homeowners is by seizing their homes. "Giving debt relief to people that really need it," said Dimon, "that's what foreclosure is."
That comment is Dickensian in its insensitivity -- and Dimon' clearly knows the difference between foreclosure and real debt relief. It certainly didn't foreclose on the Senator from Utah.
The story of the short sale on Sen. Mike Lee's home broke broke shortly not long after the world learned that JPM lost billions of dollars through trading that might have been illegal, and about which it certainly misled investors.
Why, they were practically made for one another.
Here in the Real World
This was also the week we learned from Zillow, one of the nation's leading real estate data companies, that there are far more underwater homeowners than previously thought. Zillow collated all the information on home loans, including second mortgages, in order to develop this larger and more accurate number.
The new estimated amount of negative equity -- money owed to the banks for non-existent home value -- is $1.2 trillion.
Zillow found that nearly 16 million homeowners, representing roughly a third of all homes with a mortgage, were "underwater" (meaning they owe more than the home is now worth). That's about 50 percent more than had been previously believed. Many of these homeowners are desperate for principal reduction, which would allow them to get back on their feet.
Banks can reduce the amount owed to reflect the current value of the house, which would lower monthly payments for many struggling homeowners. Another option is the "short sale," in which the bank lets them sell the house for its current value and walk away. That would allow many of them to relocate in search of work.
But the banks, along with their allies in Washington DC, have been fighting principal reduction and resisting any attempts to increase the number of short sales. They remain out of reach for most struggling homeowners.
But Mike Lee didn't have that problem. Lee was elected to the Senate after buying his luxury home in Alpine, Utah at the height of the real estate boom. JPMorgan Chase agreed to a short sale, and it sold for nearly $400,000 less than the price Lee paid for it four years ago.
Sen. Lee says that he made a down payment on the home, although he hasn't said how much was involved. But if he paid 15 percent down and put it $150,000, for example, then the Senator from Utah was just allowed to walk away from a quarter of a million dollars in debt obligations to JPMorgan Chase.
Let's see: A troubled bank gives a sitting member of the United States Senate an advantageous deal worth hundreds of thousands of dollars? You'd think a story like that would get a little more attention than it has so far.
The Right's Outrageous Hypocrisy
We haven't seen this much hypocrisy in the real estate world since the Mortgage Bankers Association walked away from loans on its own headquarters even as its CEO, John Courson, was lecturing Americans their "legal obligation" and the terrible "message they would send" by walking away from their mortgages.
Then he did a short sale on the MBA's headquarters. It sold for a reported $41 million, just three years after the MBA -- those captains of real estate -- paid $74 million for it.
The MBA calls itself "the voice of the mortgage banking industry."
The hypocrisy may be even greater in this case. Sen. Mike Lee is a member in good standing of the Tea Party, a movement which began on the floor of Chicago Mercantile Exchange as a protest against the idea that the government might help underwater homeowners, even though many of the angry traders had enriched themselves thanks to government bailouts.
When their ringleader mentioned households struggling with negative equity, these first members of the Tea Party broke into a chant: "Losers! Losers! Losers!"
Mike Lee's Outrageous Hypocrisy
Which gets us to Mike Lee. Lee accepted a handout from JPMorgan Chase after voting to end unemployment for jobless Americans.
How big a hypocrite is Mike Lee? His website (which, curiously enough, went down as we wrote these words) says he believes "the federal government's out-of-control spending has evolved into a major threat to our economic prosperity and job creation" and that he came to Washington to, among other things, "properly manage our finances". Lee's website also scolds Congress because, he says, it "cannot live within its means."
As Ed McMahon used to say, "Write your own joke."
Needless to say, Lee also advocates drastic cuts to Social Security and Medicare while pushing lower taxes for the wealthy -- and plumping for exactly the same kind of deregulation which let bankers to run amok and wreck the economy in 2008 by doing things like ... well, like what JPMorgan Chase just did in London.
"Give Me Your Wired, Your Wealthy, Your Upper Classes Yearning to Buy Cheap"
Lee has also co-sponsored a bill with Chuck Schumer, the Democratic senator from
Wall Street New York, that would grant U.S. residency to foreigners who purchase a home worth at least $500,000 -- as long as they paid cash.
The Lee/Schumer bill would be a big boon to U.S. banks -- banks, in fact, like JPMorgan Chase. If it passes, the Statue of Liberty may need to be reshaped so that Lady Liberty is holding a book of real estate listings in her right hand while wearing a hat that reads "Million Dollar Sellers' Club."
Mike Lee's bill would also have propped up the luxury home market, offering a big financial boost to people who are struggling to hold to the equity they've put into high-end homes, people like... well, like Mike Lee.
Jamie Dimon's Outrageous Hypocrisy
Then there's Jamie Dimon, who spoke for his fellow bankers during negotiations that led up to the very cushy $25 billion settlement that let banks like his off the hook for widespread lawbreaking in their foreclosure fraud crime wave.
"Yeah," Dimon said of principal reductions for homeowners like Sen. Lee, "that's off the table."
Dimon's been resisting global solutions to the negative equity problems for years. He said in 2010 that he preferred to make decisions about homeowners on a "loan by loan" basis.
The Rich Are Different -- They Have More Mortgage Relief
"The rich are different," wrote F. Scott Fitzgerald, and (in a quote often misattributed to Ernest Hemingway) literary critic Mary Colum observed that " the only difference between the rich and other people is that the rich have more money."
And they apparently find it a lot easier to walk away from their underwater homes.There's been a dramatic increase in short sales lately, and the evidence suggests that most of the deals have been going to luxury homeowners. Among other things, this trend toward high-end short sales the lie to the popular idea that bankers and their allies don't want to "reward the underserving," since hedge fund traders who overestimated next year's bonus are clearly less deserving than working families who purchased a modest home for themselves.
Nevertheless, that's where most of the debt relief seems to be going: to the wealthy, and not to the middle class.
Guess that's what happens when loan officers working for Dimon and other Wall Street CEOs handle these matters on a "loan by loan" basis.
While this "loan by loan" approach lacks morality, there's some financial logic to it. Banks typically have a lot more money at risk in an underwater luxury home than they do in more modest houses. A short sale provides them with a way to clear things up, recoup what they can, and get their books in a little more order than before. That's why JPMorgan Chase has been offering selected borrowers up to $35,000 to accept short sales. You can bet they're not offering that deal to middle class families.
There are other reasons to offer short sales to the wealthy: JPM, like all big banks, is pursuing very-high-end banking clients more aggressively than ever. That's where the profits are. So why alienate a high-value client when they may offer you the opportunity to recoup losses elsewhere?
("Sorry to interrupt, Mr. Dimon, but it's London calling.")
Corruption Or Not: The Questions
Both the bank and the Senator need to answer some questions about this deal. Here's what the public deserves to know:
Could the writedown on the home's value be considered an in-kind gift to a sitting Senator?
If so, then we have a very real scandal on our hands. But we don't know enough to answer that question yet.
What are JPMorgan Chase's procedures for deciding who receives mortgage relief and who doesn't?
Dimon may prefer to handle these matters on a "loan by loan" basis, but there must be guidelines that bank officers can follow. And presumably they've been written down somewhere. Were they followed in Mike Lee's case?
Who was involved in the decision to offer this deal to Mike Lee?
Offering mortgage relief to a sitting Senator is, to borrow a phrase, "a big elfin' deal." A mid-level bank officer isn't likely to handle a case like this without taking it up the chain of command. So who made the final decision on Mike Lee's mortgage?
It wouldn't be unheard of if a a sensitive matter like this one was escalated to all the way to the company's most senior executive - especially if that executive has eliminated any checks on his power, much less any independent input from shareholders, by serving as both the Chair(man) of the Board and the CEO.
In this, as in so many of JPM's scandals, the question must be asked: What did Jamie know, and when did he know it?
Is Mike Lee a "Friend of Jamie"?
Which raises a related question: Is there is a formal or informal list of people for whom JPM employees are directed to give preferential treatment?
Everybody remembers the scandal that surrounded Sen. Chris Dodd when it was learned that his mortgage was given favorable treatment by Countrywide -- even though the Senator apparently knew nothing about it at the time. The world soon learned then that Countrywide had a VIP program called "Friends of Angelo," named for CEO Angelo Mozilo, and those who were on the list got special treatment.
Is there a "Friends of Jamie" list at JPMorgan Chase -- and is Mike Lee's name on it?
Were there any discussions between the bank's executives and the Senator regarding the foreign home buyer's bill or any other legislation that affected Wall Street?
Until this question is answered the issue of a possible quid pro quo will hang over both the Senator and JPMorgan Chase.
Seriously, guys -- this doesn't look good.
Was MERS used to evade state taxes and recording requirements on Sen. Lee's home?
JPMorgan Chase funded, and was an active participant, in the "MERS" program which was used, among other things, to bypass local taxes and legal requirements for recording titles.
As we wrote when we reviewed hundreds of internal MERS documents, MERS was instrumental in allowing banks to bundle and sell mortgage-backed securities in a way that led directly to the financial crisis of 2008. It also helped bankers artificially inflate real estate prices, encourage homeowners to take out loans at bubble prices, and then leave them holding the note (as underwater homeowners) after the collapse of national real estate values that they had artificially pumped up.
"Today's Wall Street Corruption Fun Fact": MERS was operated by the Mortgage Bankers Association -- the same group of real estate geniuses who lost $30 million on a single building in three years, then gave a little lecture on morality to the homeowners they'd been so instrumental in shafting.
I was also asked some very reasonable questions by a policy advocacy group. Here they are, with my answers:
If this happened to the average American, would they be able to walk away from the mortgage as well?
If by "average American" you mean "most homeowners," then the answer is: No. Although short sales are on the rise, most underwater homeowners have not been given the option of going through a short sale. Mike Lee was. The question is, why?
Will Mike Lee's credit rating be adversely affected?
This is a very important question. The credit rating industry serves banks, not consumers, and it operates at their beck and call.
The answer to this question depends on how JPM handled the paperwork. Many (and probably most) homeowners involved in a short sale take a hit to their credit rating. If Lee did not, it smacks of special treatment.
Given the fact that it was JPMorgan who financed the loss, does that mean, indirectly through the bailout, that the taxpayers paid for Lee's mortgage write-off?
That gets tricky -- but in a moral sense you could certainly say that.
Short Selling Democracy
There's no question that this deal is hypocritical and ugly, and that it reflects much of what's still broken about both our politics and Wall Street. The rich still get better treatment than everyone else, and Wall Street is still granted the privilege of deciding whether or not to act fairly on a "loan by loan" basis.
But is it a scandal? Until these answers are answered we can't know for sure.
it's time for JPMorgan Chase and Sen. Mike Lee to clean about this deal. If they did nothing wrong, they have nothing to hide. Either way the public's entitled to know.
Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America's Future and the host of The Breakdown, broadcast Saturdays nights from 7-9 pm on WeAct Radio, AM 1480 in Washington DC.
Follow Richard (RJ) Eskow on Twitter: www.twitter.com/rjeskow