Summer Rerun: Treasury Doth Speak With Forked Tongue (Housing Bailout Edition)

This post first appeared on February 22, 2008

Man, not only does the Administration tell whoppers, but it is completely shameless about them. The latest sighting comes from Reuters:

Treasury Undersecretary Robert Steel told the Reuters Housing Summit it is proper for homeownership to hold a special status….

“If I default on my credit card debt, no one here knows and it has no affect on your credit card debt. If I am your next-door neighbor and I get foreclosed and thrown out, and the grass goes to heck and the home is boarded up … that affects you,” he said at the Reuters Summit in New York and Washington.

With that in mind, Steel said, the Treasury Department is working to develop programs that aid borrowers who are facing foreclosure, but a government bailout of the housing sector is not now needed.

Let’s deal with the minor misrepresentation before dealing with the larger one. Do the people in the Treasury live in the real world? Rising defaults on credit cards ARE affecting other credit card borrowers. The issuers are cutting back on credit lines and raising their interest charges and fees even higher. The effect of abandoned houses on a neighborhood is obvious, but Steel is disingenuous to pretend that rising credit card defaults don’t impose costs on other borrowers. The industry is pulling out all stops to both contain risks and increase revenues.

And while losing your access to credit cards isn’t as awful or visible as losing your home, it isn’t as invisible as Steel suggests. I certainly notice when people pay only in cash. I figure they either have credit issues or are trying not to leave a paper trail (in New York, one reason might be that they are claiming residence in a lower-tax state).

Now to the bigger issue. A Treasury representative has the gall to get up and say the Treasury doesn’t do bailouts when the idea floated by the Office of Thrift Supervision has all the earmarks of being one. As reported in the New York Times (which repeated the canard that the Administration “oppose[s] any taxpayer bailout”):

A more modest plan is being developed by John M. Reich, director of the Office of Thrift Supervision, the agency that regulates savings and loan companies. His plan, still in rough form, would create a voluntary system under which mortgage lenders would reduce debt and monthly payments to reflect the diminished sales value of a home.

It would take the remainder of the mortgage as a “negative amortization certificate,” a lien that the investor could recoup if the house were later sold for its original mortgage value or higher.

In an interview, Mr. Reich said he hoped that most of the old mortgages would be replaced by cheaper mortgages insured through the F.H.A.

Let’s parse this. The plan is to take mortgages now in the hands of private investors (remember a lot of this paper is in securitized vehicles; there will need to be a substitution of assets; that alone is problematic, but let’s assume the Fed will sprinkle fairy dust so this can happen) and substitute is with a new fixed rate mortgage probably from the FHA plus a “negative amortization certificate”. (Note that the Washington Post story on this plan was more definitive, that the FHA would provide the mortgage).

Intuitively, I don’t see how this will fly if the FHA doesn’t also guarantee the certificate too, and that was Tanta’s first reaction (I’m sure well see her usual robust analysis soon enough):

Apparently, only the FHA mortgage would be a lien against the property, with the certificate being an obligation of FHA? It certainly surprises me that the OTS feels confident it can work out the legal kinks with that quickly enough to make a difference.

Now I may be making the mistake of assuming this plan is earnest. It may be a deeply cynical effort to muddy the waters, with the real intent of simply stymieing the proposal to allow judges to modify mortgages in bankruptcy (as we discussed in an earlier post, the idea isn’t as heinous as its critics make it sound). Given the difficulties with asset substitution in securitized deals, this could take a long time to see the light of day (if ever), which may be the whole point.

But if the powers that be seriously intend to move ahead with it, the presentation treats the public as too dumb to understand that the government is indeed stepping in and assuming considerable financial risk, which will lead to hard costs. The “this is not a bailout” really means “we don’t don’t have to ask Congress to authorize a disbursement.” The idea that increasing FHA mortgages to weak borrowers isn’t a liability that will result in losses down the road is absurd. The FHA didn’t qualify these borrowers initially (remember, the reason the FHA lost share to subprime is that they have good procedures as far as borrower screening is concerned). For this program to have any impact, the FHA almost certainly will have to relax its lending criteria considerably. And even if a fixed rate obligation reduces the homeowner’s payment stress, the presence of the negative equity certificate will lower his incentive to keep the home. The market will have to appreciate considerably for him to show any gain.

There are good odds that homeowners may go through the hassle of getting the new financing and conclude in a year or two if their housing market doesn’t improve, that they are better off giving up on the house (remember, research is now concluding that falling housing prices play a far bigger role in defaults than previously recognized).

So we’ll see a transfer of losses. Instead of investors taking foreclosure-related losses now, we’ll see the FHA taking foreclosure-related losses later. But that isn’t a bailout because the Bush Administration is sticking its successors with it.

As Joseph Goebbels said,

The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly – it must confine itself to a few points and repeat them over and over.

So expect to see every homeowner rescue program assigned the preferred tag line “private sector solution” no matter how much in the end winds up coming from the public purse.

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  1. TonyForesta

    These shared frustrations and concerns are born out of the mangling and twisting of language and the perception management, information domination, propaganda and disinformation operations, effectively information warfare prosecuted on the American citizenry by the predatorclass and fascist Amerika.
    We witness the most obscene abuses under the dragons wings of bushgov, where tyranny and wanton profiteering was majikally shapeshifted into liberation and quaint notions of freedom.
    Bush the idiot, a man whose business history is strewn with numerous failures and bankruptcies, who dodged his service in the National Guard and never faced combat, – a perpetual looser, a cheerleader, – a man dependent on incessant rescues, bailouts, curious finance, coverups, cloakings, and other sundry machinations by his daddy and his daddies predatorclass cabals, a brutish man who could not put four words together unless Karl Rove wrote something for him, a man whose administration either FAILED catastrophically, or was in someway complicit in the horrors of 9/11 – was majikally shapeshifted, transformed, into a manofbussinessacumen, and a righteous christianwarrior who talks to god, and was sanctioned by thealmighty to fight evildoers.
    John Kerry who actually did fight heroically, in actual combat, was simultaneously swiftboated by a disinformation operation funded by elements of the very same wingnut cabals exposed in Mayer and Rich’s articles.
    Only an idiot would buy into this shit, this steaming reeking, rotten, pile of putrid lies. Yet, sadly, there are evidently many idiots in Amerika; still convinced Saddam was involved with 9/11, that there was WMD in Iraq, that Glen Beck cares about working Americans, or anything other than Glen Beck, who stupidly countermine their own best interests by falsely believing government is bad when it advances and protects the peoples best interests, and good when government funnels 14 Trillion taxpayer dollars into the offshore accounts of the predatorclass finance oligarchs (who are responsible for ushering the entire globe to the brink of economic collapse) and government is good when sending thousands of our young women and men on neverendingwars to fight evildoers in faroff lands so predatorclass oil and energy oligarchs can maraud and profiteer from those faroff lands resources, – and of course the idiots, the somnambulants in redneck Amerika are convinced that government is good when funneling hundreds of billions of taxpayer dollars to the military, private military, intelligence, and private intelligence industrial complexes.
    Amerika is going to get what we deserve

  2. A.S.

    You say….I certainly notice when people pay only in cash. I figure they either have credit issues or are trying not to leave a paper trail……..

    Please give people “a little credit”, no pun intended!
    Some may simply prefer to pay for their purchases in cash for no other reason than to do things the “old fashioned way”. To which more may return as time goes on. Or they may be from a country where cc’s are not the norm for daily purchases. If you have spent time in Europe, and I believe you have, you will know what I mean.

  3. Captain Willard

    A home is not just a “hard asset” against which one can hope to put a negative amortization lien. As Yves correctly points out, the presence of such a lien changes the owner’s incentives.

    But even further than this, the negative lien disincents the owner to maintain the house and perform any capital improvements. The government will end up owning a bunch of wrecked housing stock.

  4. Moopheus

    Really, what’s wrong with not wanting to leave a paper trail if it is not to my benefit to do so? It is usually more for someone else’s benefit–some corporate marketer, most likely. Do you really think it’s a good thing for all of our purchases to be trackable by someone? It’s really none of their damn business what I spend my money on. It’s just another aspect of our growing surveillance society. Your assumptions show that you’re already buying into the paranoia (just as I am, in reverse!).

    1. Yves Smith Post author

      I said people who ONLY use cash. As in all the time. You need to observe someone over time. Putting down cash for a drink or a dinner wouldn’t trigger that reaction And the person I knew who did that did turn out to be playing big time tax games.

      1. Moopheus

        I guess if you were observing me, that’s mostly what you’d see. I try to use cash whenever I can. At restaurants, stores, for groceries, wherever. I paid for a new $1400 bicycle in cash. It’s a sad state of affairs that “normal” means plastic. Do the card issuers really deserve to get a cut of every transaction we make? No.

        1. Yves Smith Post author

          We do have a difference in point of view. The big reason to use plastic, IMHO, is chargebacks. If there is a problem with the transaction, you have a ton more leverage. Right now, I am dealing with an Alice in Wonderland situation with a new doctor, where my insurer (and the network in which she is a member)n both insist she overcharged me by nearly 2x (as in this is a violation of her contract with the network) and she is supposed to refund me. I am getting a complete run around from her office, repeated and changing lies from her staff (no joke, her office manager is claiming she got instructions from the network manager which are in fact contrary to the network manager’s policies, claims she got a letter when the network manager says they don’t send letters for this sort of thing and have no record of any letter…). I’d have no recourse if I had paid in cash, it’s trivial with on a credit card with both the insurer and the network backing me.

          Second is annual summaries, and uploading transaction details for bookkeeping and tax reporting.

          1. Moopheus

            Well, if it works for you, fine. But don’t be judgmental if others don’t want to use them. Personally, I will still regard the card issuers as essentially parasites on society.

  5. Pat Donnelly

    The USA issued all these false securities, designed to fail. Those individuals who designed them got their firms to bet against them. FRAUD!

    So now the taxpayer is buying in those bad debts. The securities may be made good but the sovereign debt will be enormous.

    Allowing a kleptocracy has consequences.

  6. don

    This all fades alongside the biggest Treasury lie of all – China is not a currency manipulator – its accumulation of $2.5 trillion in foreign reserves is the result of ? what, exactly?

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