There is a huge reality gap between the happy talk about green shoots, banks passing stress tests, the rise in unemployment slowing -- and what's happening out in the real economy, especially if you take a close look at banking and housing, ground zero of the economic crisis. Credit remains tight for all but the most blue-chip borrowers. Despite the Fed's policy of keeping short term interest rates at just above zero, average rates on conventional 30-year mortgages, now above 5.5 percent, have jumped nearly a full point since April.
Last Wednesday, the FDIC quietly folded a program that was the centerpiece of Treasury Secretary Tim Geithner's effort to get toxic assets off the books of banks.
The program, whose details were unveiled in late March after six awkward weeks of delay while the administration worked out the details, included special incentives for what Geithner delicately termed "legacy assets." These are the junk securities on banks' balance sheets, mostly backed by sub-prime loans, for which ordinary buyers cannot be found.
The Treasury drafted the Federal Reserve to provide special loans, and the FDIC to run a pilot program to attract speculators to bid on the securities. All told, the government was prepared to put up 94 percent of the capital if private investors would put up 6 percent. Government would guarantee most of the losses, and split the gains 50-50.
The plan took Geithner full circle to something like the original strategy attempted by his predecessor, Treasury Secretary Hank Paulson, when Paulson came to Congress last September asking for $700 billion to buy up toxic assets from banks. But after Paulson got Congress to approve the money, he concluded that he couldn't make the original plan work. Instead, the Treasury pumped several hundred billions into the banks directly. The toxic assets stayed on the banks' books.
Now, Geithner's do-over seems to have collapsed, too. There are a couple of reasons why.
First, the government has bent the accounting rules to allow the banks to carry nearly worthless securities on their books at their nominal full value. The Wall Street Journal ran a terrific investigative piece June 3 on how the banking lobby and legislators of both parties pressured the Financial Accounting Standards Board (FASB) to suspend its rules requiring assets to be carried on banks' books at their current market value.
With this change, banks had no incentive to sell these deeply depressed securities at anything like their actual market value. So if a speculator, armed with Fed funding and a government guarantee against losses was prepared to take a speculative flyer in a bond by bidding, say, 30 cents on the dollar, the bank was not prepared to sell at less than 90. Hence, no deal.
Second, some hedge funds and private equity companies sniffed around these deals and concluded that they weren't worth the bad publicity or government scrutiny if the deals resulted in big windfall profits (the only kind that hedge funds pursue).
Cooking the books to inflate the value of depressed securities also explains how zombie banks like Citigroup could pass the government's "stress tests" with flying colors. Citigroup, which has depended on $45 billion in straight government cash and hundreds of billions more in guarantees, was found by the stress-testers from the Fed and the Treasury to need only $5 billion more to be adequately capitalized. This is, of course, preposterous if you value the junk on its books accurately.
So the banking sector, despite the pretty picture painted by the stress-tests and the banks' recent success in selling stock to investors reassured by the government's too-big-to-fail actions, remains weak. As a result, banks are hesitant to lend. And this weakness keeps dragging down the rest of the economy.
The flipside of weak banks is a depressed housing sector. Just as the administration chose bailout over government takeover of failed banks, the administration opted for an entirely voluntary effort to induce banks to refinance sub-prime and other mortgages that homeowners could not afford. The program, announced by President Obama February 18, aims to help at-risk homeowners keep their homes.
But the terms of the plan exclude the most hard-hit homeowners. Today, one homeowner in four owns a house worth less than the mortgage on it. However, you can qualify for a refinancing only if the home's value is within five percent of the value of the loan. In other words, if you have a $300,000 mortgage on a house valued at $250,000, forget about help. And you are also excluded from help if you are behind in your payments - the situation of most people who need help.
Worst of all, the program depends entirely on the voluntary cooperation of banks. The administration will spend up to $75 billion on inducements to banks to vary the terms of loans. But at this writing, well under 100,000 loans have been modified, out of the several million at risk of foreclosure. As a consequence, people continue losing their homes, depressing the value of other homes. The Times recently reported on a woman who heard about the administration, approached her lender, Countrywide (one of the worst sub-prime offenders and now part of Bank of America) and asked for a refinancing. The bank offered a new loan that would save the woman all of $79 a month, and in return the bank wanted $18,000 up front.
Basically, the banks seem to be viewing refinancings as new profit opportunities. The one stick in a plan full of carrots was a provision empowering bankruptcy judges, as a last resort, to vary the terms of a mortgage. The banking lobby went all out to kill this provision. In the end, twelve Senate Democrats voted against it, and the administration made no political effort to save it.
Rep. Alan Grayson of Orlando, one of the hardest-hit parts of the country in terms of foreclosures, tells the story of a woman with a $300,000 mortgage on a house now worth perhaps $60,000. She could afford the payments on a $60,000 mortgage. But the bank would rather foreclose, bear the expenses of carrying the house which will be at risk of vandalism and deterioration until is it is sold. The bank would actually be better off writing down the mortgage to $60,000 and allowing the woman to stay in the house. But few banks see it that way. In similar circumstances in the 1930s, the Roosevelt Administration created the Home Owners Loan Corporation, and the government refinanced mortgages directly. But the Obama administration prefers to work through the private sector, and the private sector is averse to refinancings in most circumstances.
Another progressive Member of Congress, Rep. Marcy Kaptur of Toledo, tells of cascading foreclosures in her district, where banks are selling foreclosed homes at a few cents on the dollar to syndicates of speculators, some from the very sub-prime lenders who caused the collapse. Rather than sell to local government or local non-profits, which want to keep people on their homes, the banks want to get a few bucks onto their balance sheets fast. The situation cries out for more effective national leadership, and the government's failure to provide that leadership means that the downward spiral in housing will continue.
The weakness of the mortgage relief program and of the banks' balance sheets have one big thing in common--an administration that is far too deferential to the big banks. For the crisis to be solved soon, rather than lingering on and on, we need direct government refinancing of mortgages, and direct government restructuring of zombie banks.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His recent book is "Obama's Challenge."
Something they might consider is to not allow these vultures from the same companies who brought about the problem, the opportunity to re-buy these houses, pennies on the dollar.
Plus; Have you noticed all these ads on late-nite TV hawking their ability to get you mortgage re-writes? The unscrupulous thing about these ads are that they pose as news reports, with the advertisement disclaimer tucked up in the corner in small print. This is the kind of crap we have to deal with when it wasn't done the right way in the first place.
Nah, never happen. They're too fond of breathing.
People who tell us what we want to hear get repeated, reelected and revered. Those who tell us what we need to hear get ignored, run out of office and castigated. It's human nature and one of the obstacles to successfully managing a democracy; obstacles that are worth overcoming because the alternatives to democracy are much less likely to produce any objective thinkers.
The main reason a few of us listen to these people today is that we know the system is in deep trouble and that those who told us what we wanted to hear appear to be mistaken. These guys may also be mistaken, but at least they're trying to look at things objectively even when it makes them vulnerable. For my money, President Obama shares these admirable attributes; he too may be wrong, but he is attempting to do what is necessary while appealing to our more rational natures to participate; the sweet talkers suggested that we continue shopping at the mall and leave the managment to them.
Even so, many of us cling to the old, failed beliefs saying that we simply didn't hang in with them long enough.
Returning to life as usual is a seductive alternative which keeps us hostile to whistleblowers of any sort.
we can all be winners, or we help each other.
the truth is,
wall street makes money off of main street.
when one wins, the other loses.
no way around it.
simple as that.
1. Denial (including ridicule of the messengers) There's no problem, I don't have to change.
2. Anger and blame. There's a problem.... THEY caused it and they have to change, not me
3. Bargaining. Can I just change a little bit and return to life as usual... pay for a bailout perhaps?
4. Depression. Have to change, but how do I let go of the system of beliefs that must change and the friends who share them? What do I do then? It all seems so hopeless.
5. Acceptance. OK I let go of the old and am making the best of my life one day at a time.
He has failed millions of Americans and will fail millions more to come...!
This will prove to be his Hurricane Katrina..but by a magnitude of 1,000...!
As for the earlier suggestion of just walking away and renting, I still have equity in the house, but we are having trouble getting full-time employment. Walking away is like paying the bank, at this point. Now, if housing prices drop another 20% here, then it is break-even for me. Still, it costs money to move, money I don't have.
Looks like the banks get a free pass to suck the last drop of blood out of this country, before they flit away to greener pastures...
If at the same time they are stealing all of We The People's money, that also makes them criminally evil ... where are the perp walks?
Having been a fitness consultant, motivator, athlete Mesan, artist & problem solver, I now find there's no one that can or will help solve my problems. This started in 1994 when I came back home to be with my mom & start my new dream business. I was flat on my back from having to see an HMO doctor that gave me meds that almost killed me, then denied I had any side effects. The beginning of the end of my life as I know iit,& a death sentence for my Mother.
So many people have died around me & I escaped it so many times I am overwhelmed. I don't even have anyone left to talk to Once they get you down they kick you. I feel like I'm watching depopulation so many people are hitting bottom because they can't find anyone to trust anywhere. doctors, lawyers, dentists & even friends no longer seem to be able to fight the negativety that's grasped America.
Doctors have decided to stop practicing medicine and become pushers for the drug industry.
Certainly Congress could get off their buns and put these folks out of business. A law requiring refund of the fee to the client within six months if they don't perform would be a good start.
If Citi, or BoA were a community bank, or a smaller regional bank,... they would have found themselves in recievership months (or longer) ago.
And yet - the 'little' people at the bottom of the financial food chain are the ones that have to jump through flaming hoops to get help.
Read that again. The banks are willing to take pennies on the dollar from the people who caused the problem in the first place.
Can anyone not see that this is a racketeering scam, plain and simple? That the plan always was to get folks in over their heads, crash the economy, and make trillions more from bailouts, foreclosure resales, and new fees on every home sold again? And that is an criminal conspiracy between the banks to move these properties back and forth to make massive profits while the rest of the country suffers in this Depression.
Wells Fargo is currently under investigation for originating sub prime loans to the poor and people of color who actually qualified for standard loans, knowing full well that when they pulled the plug millions of homes would be back in their hands.
If it were just for the money, that would be bad enough. But what we are really victims of is a form of Social Engineering, a reallocation of assets to the top 1% in concert with the devastation of the working and middle class, a destruction of their dream of being part of the ownership society. In short, class warfare.
Whenever you start to see appreciations moving above 5-6% one should know better.
http://measureofamerica.org
http://raulxgarcia.com/americanroulette.htm
We got comps and info from the bank showing that THEY claim our house is worth more than $100,000 less than our mortgage ( so they won't allow us to refinance, even though we have never missed a payment) and protested the upcoming tax increase. My fiance and I both had to take the afternoon off work to go downtown to the county building, pay $20 for parking, etc. We were told that since the county and state assess property values using 3 years worth, their assessment would not ever match the market value- which I get in principle. We were also told, that in the NEXT 3 years, even though our property value has dropped dramatically, our assessment value for the taxes would NOT go down correspondingly, but at best, might stay the same as it would be after the increase.
WTF?? We are good citizens- pay our bills, pay our mortgage, pay our taxes. WE didn't do anything wrong and are getting screwed at both ends- by both the state and the banks ( our mortgage was held by Countrywide and is now owned by BOA) We can make interest payments, we can't do more than that. What are we supposed to do?!?
frontline had a whole program about MBNA and other loan-sharking scammers four or five years ago, during the peak of financial scamming.
i advise everyone i know against BoA and the likes.
I hear there's a civil suit against one of these "lenders" that MAY turn into a Justice Dept prosecution, but that seems unlikely to me.
Very important OP-ED from the NYT yesterday ( it's long, but you can do it)
The Economy Is Still at the Brink
http://www.nytimes.com/2009/06/07/opinion/07cohanWEB.html
It seems the whole sheebang that was the criminality of the Bush years is going to be swept under the rug to appease the "interests" who now have all our $$$$$$$$$$.
It's all very puzzling to me as this WILL happen again and again and again. That's why we MUST fight for universal health care...it's the only fight left that the "interests" haven't already won