Apr 30

IMF Chief Calls for Mortgage Principle Forgiveness in U.S.

International Monetary Fund Chief Christine Legarde has added her voice to the growing chorus of economists not bought and and paid for by the banking sector in calling for the United States to begin to reduce the principal on underwater mortgages purchased during the fraudulent run-up in housing prices between 2002 and 2008. She recommends doing so in order to stimulate growth across the globe, but doing so would also significantly impact the economy at home.

She called upon Fannie Mae and Freddie Mac, both of which are overseen by the Federal Housing Finance Agency, to reduce the principal owed on homes, whether the homeowner is in arrears on payments or simply underwater and current in their obligations. Unfortunately, FHFA boss Edward DeMarco has steadfastly maintained that he will not support policies that allow for widespread mortgage write-downs. Mr. DeMarco was to make a decision by April 30, 2012 whether or not he would move forward on a plan under Obama’s HAMP program to allow principal reductions on properties backed by Fannie Mae and Freddie Mac where the mortgage holder is seriously delinquent. Unfortunately Mr. DeMarco recently announced that he would ignore the deadline, imposed by Congress, and continue to study the problem.

The HAMP program reductions that are under consideration by Mr. DeMarco would only affect about 10% of all underwater mortgages backed by Fannie Mae and Freddie Mac because homeowners who are underwater but continuing to make timely payments are not eligible for reductions. Mr. DeMarco has said in the past that he fears mass purposeful mortgage delinquencies if the program is permitted to move forward, a prospect that has not been supported by evidence. The likelihood of damaging ones credit rating and potentially losing a home in exchange for a principal reduction that may or may not come at all has not convinced any significant number of borrowers to stop making their mortgage payments.

The Obama administration has been reported as putting pressure on Mr. DeMarco to make a decision allowing the contemplated principal reductions to move forward, but I am dubious as to how extraordinary the insistence has truly been from the White House. The administration has offered a deluge of failed and ill-conceived fixes to the mortgage mess since 2008, none of which truly aimed at forcing the banks and Fannie Mae and Freddie Mac to allow principal write-downs of underwater properties. A wisely constructed plan by the FHFA and the administration could easily limit any reductions to those homes actually purchased during the fraudulent run-up in home prices, and those homes who value exceeds that of the original mortgage, excluding refinancing undertaken to make additional unnecessary purchases. Configuring a program to address this problem and stimulate the economy would not be a herculean task.

It is wholly objectionable that the already incommensurate principal reductions proposed by Congress and the President are being insubordinately rejected. However, it should come as no surprise to anyone given the administration’s posture concerning this problem from the very beginning. Setting aside the earlier mentioned waterfall of half-assed programs previously concocted, the furthest the President has been willing to travel down the write-down road has been to propose federally assisted and voluntary refinancing of a small number of homes under lower interest rates. Not a single legitimate attempt has been made to reduce the principal of homes currently in repayment and dramatically underwater. Offering a homeowner the ability to pay twice the value of a home under a lower interest rate is no program at all. It is an insult to each American who had their tax dollars spent drowning large banks and mortgage institutions in liquidity in order to ensure their solvency.

So, Mr. DeMarco, no one is surprised by your decision. Further, only a fool should be surprised by the administration’s lack of movement on this issue. You’re a homeowner, not a bank, and as such, you don’t matter. The most logical course of action is to walk away from any home that is seriously underwater, because help is not coming.

Christine Legarde was right to call upon the American government to offer significant principal reductions to underwater homeowners. She is right because it will boost the American economy, setting free cash to be spent consuming goods and services and alleviating business and personal uncertainty. She is right because it will boost the world economy. She is right because it represents remuneration for the fraud perpetrated upon the people. She is right, quite simply, because it is the moral thing to do.

Apr 06

HARP Continues to Flounder

new report by Cora Currier over at ProPublica chronicles the massive practical shortcomings of the Democratic administration’s Home Affordable Refinance Program, or HARP, and why it continues to fail to offer underwater homeowners  any real relief. The program has also fizzled in offering meaningful rate reductions to those stuck with high percentage rates or adjustable ARM mortgages.

Large banks, although permitted to do so, are not offering those holding loans with competing banks refinancing under HARP because the banks view these outside loans as carrying more risk, which of course is only marginally accurate. This leaves the homeowner in the precarious position of being captive to whatever rate the bank currently servicing the mortgage offers. However, even with this fractional increase in risk, the administration is doing nothing to cajole the banks into offering customers more competitive rates and accepting outside business in return for saving them from the brink of disaster in 2009-2012.  Because the banks are refusing to compete with one another, customers are often left with higher long term mortgage rates than they would have otherwise qualified for under HARP or in the marketplace.

The reason for all of this, as it has always been, is that these programs fail to address the basic problems in the housing market. Unfortunately, the profound apprehension and outright fear on the part of the administration to forcefully attack the large banks continues to result in these half-assed band-aids and workarounds to address the housing market dilemma. The proof is in the pudding. The administration can not on its best day ever administer a program under which homeowners are stuck refinancing more than the home is worth. Leaving aside how awful the notion is of forcing homeowners to ultimately pay an inflated amount based squarely on the fraud of the banks and mortgage originators for a moment, the banks will not even cooperate in this scheme of forcing homeowners to lock in lower rates to pay them back money that they would not otherwise owe.

The bottom line is that this problem will persist for much longer and continue to create a drag on the overall economy until either the Republican or Democratic party, or both, stand up and force the banks to write-down millions of fraudulently inflated mortgages to fair value. To this point neither party seems willing to offer even an iota of evidence that Wall Street and the banks have not simply been given a blank check with nothing significant expected in return for their very lives.

I should also mention that I do in fact believe that President Obama understands this problem, and is well aware of the shortcomings of each of the programs offered as a remedy. I would even confess that it is extraordinarily likely that he honestly would love to force the banking sector to refinance and write-down the mortgage mess that it created. However, while the United Auto Workers and General Motors and Chrysler have had to accept onerous loan terms and drastic reductions in wages and benefits in return for the government’s assistance, the banks have suffered no similar consequences notwithstanding their far greater responsibility in the overall disaster. Why this has been the case has been fodder for much speculation. I sincerely hope that the American people do not have to wait for President’s Obama’s inevitable memoirs for an answer.

Mar 23

Allowing Fraud is in the Public Interest

A new study by mortgage behemoths Freddie Mac and Fannie Mae has ruffled powerful feather, from banking executives to the man in charge of administering the agencies after a takeover by the government during the mortgage crisis. Fannie and Freddie now control nearly 80% of all outstanding mortgages in the United States. The question: whether to reduce the amount of money beleaguered homeowners owe on their mortgages. I discussed this issue in a prior column some weeks ago.

Fannie and Freddie concluded that principal loan forgiveness would not only help people keep their homes, it would also save Freddie and Fannie money. Additionally, because the taxpayers have already provided Fannie and Freddie with over $150 billion in financing, it would also save the taxpayers money.

Unfortunately, several important figures remain hamstrung by the misguided notion that allowing principal reduction of underwater mortgages encourages wrongful and irresponsible behavior. Several economics professors as well as independent economists continue to cling to the idea that home buyers will allow their homes to go into default simply to take advantage of a principal reduction program, notwithstanding o evidence to support their position. More importantly, the now confirmed jackass, Edward DeMarco, who heads up the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie continues to refuse to allow principal reductions as a means to even in the face of this new data that proves he is unquestionably wrong.

While new subsidies provided to Fannie and Freddie by the Obama administration allow for the federal government to pick up nearly 50% of any losses sustained through principal write downs, FHFA continues to cite ridiculous concerns such as changes to the computer system at Fannie and Freddie as reasons for its stubbornness.

The position of the FHFA as well as those charged with providing impartial economic advice to it is terribly disappointing. It is also repugnant to the ideas of fair play, and even sound business practices. This episode is simply more evidence that the Bush and Obama administrations’ purposeful cuddly relationship with the banks and insurance companies whose fraud caused the housing crisis and subsequent recession continues to prevent any real progress on this matter. The refusal to break up Citi will prove to be Obama’s Tora Bora with regard to the great recession. Its refusal to make any showing of force against the banking sector has made it nearly impossible since to extract what is due the American people in return for the illegal and irresponsible behavior which has cause so much pain, suffering, and death.