By pocket-vetoing the bill that sailed through Congress to expedite mortgage foreclosures, President Obama may have begun a chain reaction that will blow up Treasury Secretary Tim Geithner's confidence game with the banks. Let me explain.
In early 2009, Obama and his top economic aides faced a fateful choice: either do an honest accounting of the nation's big insolvent banks, like Citigroup; or keep propping them up and collude with the banks in camouflaging just how bad things were -- and still are.
They opted for camouflage. Geithner and the Federal Reserve devised a "stress test" exercise that avoided an honest accounting of the junk on the banks' balance sheets; instead they used economic models based on very rosy assumptions about how bad the recession would be. Citi and the others were pronounced basically healthy.
This move avoided the kind of reckoning that would break up (and clean up) the big banks. Instead, the camouflage policy allowed the big banks to very slowly rebuild their balance sheets with speculative profit centers, relying first on TARP money and then on zero interest rate advances from the Federal Reserve.
But there was a huge downside for the economy. The banks reverted to the same kind of speculative plays that crashed the system; they also continued gouging consumers. And thanks to the Federal Reserve, the banks could make very easy money borrowing from the Fed at almost zero interest rates and investing the money in government guaranteed Treasury securities.
By 2010, the banks were again making large profits and paying huge bonuses -- as if the financial collapse had never occurred. What they did not, however, do was make very many loans to small and medium sized businesses or hard pressed consumers.
Meanwhile, regional and community banks, which do make loans to business, have been hard hit by the collapse in commercial real estate prices, and have tightened terms for ordinary business borrowers. So all but the largest businesses, which can access the bond market directly, are starved for credit.
Thanks to Geithner's permissive accounting standards, the big banks have also been allowed to carry on their books at full value securities based on underwater mortgage loans -- securities that are really worth between 30 and 70 cents on the dollar. If the banks had to honestly account for their depressed market value, the banks' balance sheets would look even worse.
This is an exact repetition of what befell Japan in the 1990s -- a lost decade of economic growth caused by a financial collapse and the collusion of the government with the banks to pretend that all was rosy. Indeed, the US economy today is in far worse shape than Japan was, because all during that period Japan continued to be a major export power while the US today runs a huge trade deficit.
But Obama's veto of the foreclosure-streamlining bill calls the question on Geithner. We are now learning that a lot of the securities were not properly documented, which makes them worth even less.
If the foreclosure machinery is suddenly gummed up because the President has ruled out a quick fix that favors bankers, the banks may be forced to recognize what the junk on their balance sheets is really worth (not much). And the whole game of pretending that all is fine with the banks is in jeopardy.
The fact is that a vast number of mortgages that we turned into mortgage backed securities are legally flawed. This calls into further question the value of massive portfolios held by banks -- and forces some kind of reckoning.
For aficionados who want more detail, Mike Konczal has provided a very useful idiots' guide to the next great unraveling.
Obama's veto also pulls the rug out from under the pretense that the Administration's mortgage relief program is working. For nearly two years, the Treasury and the Department of Housing and Urban Development have sponsored a mortgage modification program known as HAMP (Home Affordable Modification Program).
This program is voluntary to the banks, who get a few thousand dollars in incentive payments from the government in exchange for reducing monthly payments. But the relief is usually shallow and something like half of borrowers who do get modifications go back into default. Fewer than 500,000 have gotten modifications out of several million at risk of foreclosure.
Most of the underwater homeowners, now almost one in three, are not speculators or people who took out sub-prime loans. They are simply ordinary Americans whose houses are suddenly worth less than the mortgages on them, because of the general collapse in housing prices.
The lame HAMP program, the joint creation of Treasury and HUD, is another part of Geithner's grand design to disguise just how bad things are at the big banks and prevent an honest accounting or a serious reckoning.
Meanwhile, housing prices are declining again, despite record low mortgage interest rates (available only to blue chip borrowers), which creates another serious drag on the economy. And the housing market won't return to normal until the mortgage mess is resolved.
But the belated recognition that millions of mortgages are inadequately documented could be a blessing in disguise. It could force the administration to come up with stronger medicine both to clean up the banks and to help distressed homeowners.
The Dodd-Frank Act (PDF) gives the Treasury the tools to do an honest accounting of the big banks, and shut down or break up zombie banks that are insolvent -- so that successor banks can get on with the business of lending. With a serious strategy for both the banks and the mortgage mess, we could remove two of the main drags on the economy.
White House political chief David Axelrod, speaking on CBS's Face the Nation Sunday, tried to back-pedal from the significance of Obama's action. (Heaven forbid that three weeks before a crucial election Obama should sound like he is siding with consumers against bankers.) Meanwhile, the indispensable Rep. Alan Grayson of Florida called for a national moratorium on foreclosures.
Of the three prime architects of Obama's inadequate economic program, two have now moved on -- economic policy czar Larry Summers and budget chief Peter Orszag. It's time to for Geithner to join them, so that Obama can get real about the banking and mortgage crisis.
The president's veto of the foreclosure bill shows that his Obama's own instincts are better than his advisors'. It's a start. But if Obama temporizes now, he faces a slow unraveling of the flimsy financial house that Geithner built, and an even weaker economy.
Robert Kuttner is co-editor of The American Prospect
http://www.prospect.org/and a senior fellow at Demos. His latest book is A Presidency in Peril.
That's "change" how?
The very sad thing is, there's no real leadership solution on the horizon, only more of the same ...
http://www.mortgagestimulusplan.com/
The paperwork problems on mortgages have next to nothing to do with this. President Obama is vetoing this for political reasons. He wants to look tough on banks when in fact, he is not.
Now the biggest Ponzi scheme ever has gotten SOOO big that it can no longer be swept under the rug; the financial advisers (economic policy czar Larry Summers and budget chief Peter Orszag) are starting to bail out like rats off a sinking ship! Look Timmy has joined them too (I'm speculating).
But we must wait until after the elections to see whether we are going to survive or are we going to sink like the Titanic? Stay tuned, same crap time, same crap channel..........
"The president's veto of the foreclosure bill shows that his Obama's own instincts are better than his advisors'. It's a start." Agreed.
Too bad because a wave of energy would have been generated by a more rapidly improving economy and his administration could have accomplished a lot more with less acrimony.
Please Mr. President, show us you will act ....replace Geitner with Paul Krugman....quick!
As pointed out, the US economy is in more trouble than 90s Japan, in the sense of massive debts and deficits especially from a trade point of view. Seems to me like Obama's regime is making an attempt to resolve this, beginning with an honest audit of what banks are really up to. Will the financial sector reforms eventually reach the privileged and seemingly untouchable Wall Street? That coupled with this veto might prove quite a blow to Geithner, a product (and beneficiary) of WS.
And if you were the only person in town buying a house, that would likely work out fine. Unfortunately, you're not, and banks don't have unlimited funds in the safe. They can't even ask the Federal government to loan them sufficient physical funds (like coins and dollar bills) to handle the actual dollar volume of their loans, and just sit back and collect over the next 30 years. If they did, everything would come to a very quick standstill.
But to correct one thing, your debt isn't sold as debt. It's sold as money. The assumption is that you will pay off your debt, and thus these bundled mortgages packed into various securities represent potential collateralized profit. In the past, with most mortgages being sound and property values stable, this worked out fine.
But with high risk loans, and the potential profits from credit derivatives being so huge, investment bankers don't seem to have been able to contain themselves. When you can make big money on winning or losing, who cares?
In effect, the interest on your debt is "new money", aka profit, and as such is a salable commodity.
http://www.officialforeclosurehelp.com/
Who is representing the working man????
Should I stop paying the mortgage until I get this resolved? Can anyone foreclose on me? Who would that be. My home is not listed in MERS. I can no longer make payments as my builder husband has been out of work since the housing crash. No one can afford to hire him and he's been working for a third of what he used to make, at a job that is not his profession.
My suggestion would be to contact your member of Congress and request his or her assistance. It might not do any good, but at least it will be a reminder to your representative that their constituents need to be heard. Good luck.
I have a quibble with this. Title insurance is there, not to be "responsible" for your title, but instead to pay off debts incurred due to title problems. They don't handle your title, though they may become the responsible party to sort things out should problems occur.
Title companies are responsible for checking for any title problems prior to a sale, and your insurance for such problems ends there. They are not, however, responsible for the subsequent exchanges/sale of your title by the mortgage holder.