Memo to Ezra Klein: Doing Something Stupid Isn’t Smart

The Administration appears to be gearing up to try to Do Something on the housing and general economy front. Readers have no doubt wised up to the fact that Doing Something, Obama Administration version, generally consists (at best) of largely cosmetic measures accompanied by lots of handwaving. The latest sightings include yet another effort to push the 50 state attorney general settlement over the line by the phony deadline of Labor Day and more chatter among by members of the Democratic hackocracy in favor of an expanded Fannie/Freddie refi program as a way to fix the housing market. That idea appears to be moving front burner, since Baghdad Bob Ezra Klein has decided to weigh in.

Adam Levitin did such an effective takedown that it obviated the need for yours truly to say anything. On August 25, Levitin, in “Financing Malarkey,” said:

It looks like the Obama Administration is about to endorse some version of the Hubbard-Mayer plan of letting everyone (or at least everyone with an agency mortgage) refinance at today’s low rates, regardless of whether they are delinquent or underwater… I fail to see how such a plan will accomplish much.

The ability to refinance depends heavily on whether a homeowner is current and has equity. Consider, then, the impact on the 4 categories of homeowners under this rubric:

(1) Borrowers who are current and have equity. Refinancing is always possibly for anyone who is current and has sufficient equity in their home. That’s a lot of existing borrowers for whom a new refi program does nothing.

(2) Borrowers who are current but lack equity. There is also a large pool of borrowers who are current, but have insufficient equity or negative equity for a refinancing. A new refi program probably doesn’t do much for them either. It doesn’t take very much equity to do a FHA refinancing, but putting that aside, the Home Affordable Refinancing Program (HARP) allows for negative equity refinancings. There haven’t been a lot of them, however, and I think that bodes poorly for any new program. The closing costs for refinancings can be a major obstacle for households without a lot of extra cash sitting around and with uncertainty as to whether they’ll stay in an underwater house long enough for the lower rates to make the refinancing worthwhile.

(3) Borrowers who are delinquent, but have equity. These borrowers can already get out of the house via a sale. In any case, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent. Lower monthly mortgage payments aren’t going to do a thing to change their delinquency or the pending foreclosure.

(4) Borrowers who are delinquent and lack equity. As with delinquent borrowers who have equity, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent. Lower monthly mortgage payments aren’t going to do a thing to change their delinquency or the pending foreclosure.

So in the end, it’s really not clear who this would help.

Chris Matthews objected in comments to Levitin’s post, which led to a second response by Levitin, which was that he still thought the proposal was lame, in that it didn’t do a very good job either as economic stimulus or as a sop to the housing market (although one can imagine that this is what the Administration is left with in the stimulus category, having signed up so enthusiastically for deficit reduction at a time when that is guaranteed to increase deflationary pressures).

And there is a rather large fly in the ointment, as Klein himself has acknowledged, that any bank that does a refi would expose itself to any rep and warranty liability on the original mortgage. That would seem to make the program a non-starter.

So get this: you have a program that even if it works, won’t accomplish much, and is unlikely to even be taken up by the banks! So that would seem to make it not worthy of support, right? No, predictably, Baghdad Bob will find a reason to support any bad idea as long as it is this Administration’s bad idea:

But it’s worth a try. It’s been endorsed chief economist Mark Zandi of Moody’s Analytics, the National Consumer Law Center, the National Association of Mortgage Brokers, the California Association of Realtors, the California Association of Mortgage Professionals, and William Gross, managing director and co-chief investment officer of fund manager Pimco. And if it doesn’t work, it’s pretty much a no-harm, no-foul sort of deal, as it’s not going to cost the government money if banks don’t refinance mortgages.

Earth to base: implementing weak and ineffective polices DOES have a cost, which is that it takes political capital and keeps a bad status quo intact. Remedies of this sort then lead to “well we need to see how this works” arguments that then delay more effective measures from being implemented Even worse, they also serve to feed the false perception that nothing will work. Notice how the stimulus program at the beginning of the Obama administration, which pretty much every reputable economist said was too small to do much, is now being used to argue that stimulus doesn’t work? Yet another at best not-very-effective housing market remedy will serve to cement beliefs that government intervention won’t work, when that is the only possible route out of a massive private market failure.

So yes, there are plenty of reasons not to act for the mere sake of acting. But that logic doesn’t register with the defenders of this Administration, it seems.

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  1. Ima Simpleton

    I think the only solution to current banking crisis is this

    a: The real estate and directly related paper.
    All mortgage is pooled into one giant entity, taken from stupid banks. Then the entire pool is divided up geographically into approximately same value. Maybe some 14 or 20 regions. Then these region either auction off, along with its immediate papers. Or taken into government book temporarily.

    The main goal. retain value, prevent neighborhood deterioration. etc. Maybe some home improvement investment, some being sold immediately etc. Since the region is now small, and being sold to entity who has real financial interest, It should work. Government may even put some money if they hired people in this real estate financial reconstruction.

    b:The shadow banking. (The CDO, hedge, strange math, worthless paper, basically, all those huge interbank scam)

    Make inventory, and most can be disposed as simple scam with no effect on real economy. (these banks are lending money on each other anyway)

    c:break out TBTF banks. And throw criminals bankster to jail. (just get them out of the system. Believe you me, they will keep paying lobbyists, corrupting the system and begging for more free money, etc) Just throw them all out.

    D: remove Bernanke. Create proper new Basel agreement regarding bank rating, bank valuation method. And large scale cross border currency trade.

    In the meantime, No banksters are allowed to speculate on commodity unless they have actual production interest.

    There isn’t enough money in the world to pay for all those derivatives and hedge. Those are fake wealth. Simple numerology pretending to be “innovation”.

    1. bobby b

      – I think the only solution to current banking crisis is this:

      Stay the heck out of it. Completely. It will resolve itself, and allowing it to resolve itself is the only way that it will truly resolve. Any involvement by gummint invariably just leaves us dealing with yet another imbalance somewhere down the road. Yes, allowing it to resolve itself will cause pain for some. Let’s promise now to be on the lookout for that pain, and to help those individuals get through their pain as we think appropriate at that time. If we promise to do that, and then do it, then we lessen some of our present perceived need to make an interfering system-redesigning blanket-fix that merely kludges us out to the next leak in the dike.

      – Isn’t O’s “refinance” scheme mostly just a non-binding promise by government and bank workers to “be nice”? I mean, it’s completely toothless, mostly useless, and all it could hope to accomplish would be to make underwater homeowners believe that someone somewhere likes them. (“Look! The President says they should help us get out of our Troubles! What a Saint!”) It won’t affect the course of a single foreclosure, but we’ll all smile just a little bit more as we trudge on down the road.

      – “Bankster” is, like, the new bad word, right? Please tell me, specifically if you can, what is wrong with this narrative:

      For a period of time, banks made home loans based on the perceived risks and qualifications of their applicant borrowers. Good risks got good rates; poor risks got more expensive rates; and baaaad risks got no loans. Then, the liberal arms of government gave us CRA, and empowered people like ACORN to organize protests and boycotts of banks whose portfolios were too numbers-oriented and insufficiently “justice-oriented.” Further, government started taking this “justice-orientation” into account when considering banks’ requests for permission to do things banks wanted to do, such as expand. In other words, government coerced banks into making improvident loans, because government wanted poor people to magically become not-poor.

      To take some of the sharp edge off of it, government implicitly promised, through Bernie Mac and Furball Ray, to take the truly bad stuff off of the banks’ hands. But they didn’t take it all, and so the banks, looking at all of this marginal paper that We The People had forced them to write that they would not have taken had they had the complete discretion to choose, shuffled it up and passed it around the industry. They played a giant game of musical chairs, and now the music has stopped, and there’s a bunch of banks – who KNEW what game they were all playing, but who bet the farm that the music wouldn’t stop – who are frantically looking around for a chair, but they’re all full.

      So, why are we upset that the banks tried to share out amongst everyone the bad paper that we forced them to accept so that we could have a free social welfare program? Don’t we usually accept the belief that social costs should be distributed, and not just imposed on a few unlucky ones? Are we just PO’ed that the banks didn’t shuddup and pay the bill for us? Whether you’re a liberal or a conservative, our government did this in our name, and we all accepted what it did to our home values, happily. Shouldn’t WE be paying the bill now?

      1. Greg Colvin

        It’s “government” not “gummint.” And your narrative is no better than your English. Basically, some banking institutions made fraudulent loans on purpose, to fulfill a demand for high-yield securities, also fraudulent, and then extorted our government to bail them out when it all blew up. CRA and ACORN had nothing to do with it. You can start to educate yourself here, if you want:

        Did the CRA cause the mortgage market meltdown?

        Two Federal Reserve economists examine whether available data support critics’ claims that the Community Reinvestment Act spawned the subprime mortgage crisis.

        Neil Bhutta – Economist
        Glenn B. Canner – Economist

        Published March 1, 2009

        As the current financial crisis has unfolded, an argument that the Community Reinvestment Act (CRA) is at its root has gained a foothold. This argument draws on the fact that the CRA encourages commercial banks and savings institutions (collectively known as banking institutions) to help meet the credit needs of lower-income borrowers and borrowers in lower-income neighborhoods. Critics of the CRA contend that the law pushed banking institutions to undertake high-risk mortgage lending.

        This article discusses key features of the CRA and presents results from our analysis of several data sources regarding the volume and performance of CRA-related mortgage lending. On balance, the evidence runs counter to the contention that the CRA lies at the root of the current mortgage crisis…

        1. bobby b

          No, really, it’s spelled the way I typed it. I suspect that you and I have two entirely different concepts in mind when we use those two similar words.

          As to your proffered help with my education, thanks, but I’ve read Bhutta’s paper more than once – the first reading left me practically speechless in admiration of the sheer nerve of a Fed economist swooping in to defend CRA with nary a worry about whether his readers might know anything about the program and its history, or even whether they had the ability to look up anything about it anywhere – he was THAT casual about, you know, truth, and correct factual recitation, and honest reporting – all of those outmoded concepts that he must figure are for the suckers to worry about.

          It took me until about the third reading to calm myself. This document was a blatantly dishonest and untruthful attempt to whitewash what had happened, so that blame could be neatly packaged up and shipped to the to-be-selected banks.

          I’ll not try to fisk the report myself – spelling issues, ya’ know – I’ll just point you to the Investor’s Business Daily editorial that responded to that report.

          I was sort of confused by your oh-so-serious response to “gummint” (you might want to read more), and couldn’t tell if you really didn’t know what happened with ACORN and CRA, or if you were just the typical liberal shill with your “nothing to see here, folks, move on” routine, but when I read this part of your response, the shillness became apparent;

          “Basically, some banking institutions made fraudulent loans on purpose, to fulfill a demand for high-yield securities, also fraudulent, and then extorted our government to bail them out when it all blew up. CRA and ACORN had nothing to do with it.” There was this fraudulent demand for fraudulent high-yield securities so banks made crappy loans and everybody got rich until it all blew up, right? That makes no sense at all.

          1. za

            Good thing Britain, Ireland, et al. didn’t have the CRA or GSEs or they might’ve experienced a housing bubble, too. They really dodged a bullet on that one!

          2. LucyLulu

            WaMu notwithstanding (whose insolvency and need for resolution is considered debatable), the worst offenders of the subprime lending that has led to the mortgage market blow-up were not the banks subject to CRA. They were mortgage brokers such as New Century, Ameriquest, and of course, our infamous Countrywide that may yet take down Bank of America.

            What other criminal activity do you propose we should allow to resolve itself? Should we open the doors to all our prisons as well, since you apparently believe our laws protecting citizens/consumers no longer require enforcement?
            Trillions of dollars of losses and bankruptcies have been booked, not only to homeowners but investors and CDS sellers of these MBS, due to intentionally fraudulent misrepresentations by lenders and ratings agencies. The markets will NOT resolve until confidence can be restored that the markets are not rigged. No, I have not suffered foreclosure. However I’ve pulled my money out of the US markets and I know many others who are taking possession of precious metals and have sent money abroad as well. And you think the economy will resolve itself? I’m sure there will be a resolution but not one that is good for this country, only the criminals who reap the profits from their crimes. Yes, to anybody who is informed, ‘bankster’ is an applicable term. I suggest you start by reading some of the pleadings in the numerous suits filed by CDS sellers against these ‘banksters’ for evidence of widespread criminal activity.

          3. Ransome

            Never mentioned is the system of rewards that paid the highest commissions on the riskiest loans returning the highest interest rates. Anyone that could fog a mirror was encouraged to take out a loan and a HELOC if you qualified. There was no stone unturned. Home lending had never been based on commission, originators went crazy. People with questionable credit were very attractive because they were given the worst loans paying the highest commissions. If you think CRA targeted sub-prime borrowers, it just isn’t so. A friend quit her $100,000 research job to originate loans to those speaking Spanish. There was big money to be made. I had three different lenders calling me every night to do a re-fi.

          4. DrInsula

            Ok, Booby, Please answer the following: 1) explain in 2000 words or less how the CRA caused banks to forclose on properties they did not own, on homeowners who did not even have a mortgage; 2) please explain why there are email conversations obtained from the originators of subprime showing that they believed that their MBSs were ‘toxic waste,’ ‘crap,’ etc; what does this say about your denial that the banks put together these derivatives simply for profit, knowing that they were crap? 3) Please explain how the CRA is supposed to have caused 2), in your crackhead universe.

        2. Eric

          CRA was not a significant cause of the housing credit bubble. But CRA did function in much the way bobby b described it: banks were under very direct pressure to do business with quite poor credit risks. And ACORN and similar groups were absolutely part of the equation. CRA was first pushed as a response to the disparity of credit approval rates among races. But curiously, those who mentioned that the data on default rates of approved credits seriously undermined the narrative of widespread racial discrimination were mostly ignored, except when they were accused of racism. CRA did not cause the housing credit bubble but that does not mean it was a well-thought out or benign piece of legislation. It was not.

      2. Linus Huber

        Well, to evaluate credit risks (ability of the borrower to pay interest plus pay back the loan over a reasonable period of time) is the primary function of a bank and no regulation can take away that duty. I would be a little sorry for the banks IF the managers and who ever was in a position to be able to, enriched themselves outrageously while failing on that basic task of banking.
        There is no excuse for those that abused the system in order to line their pockets. They need to be brought to justice and the longer we wait to get back the rule of law in its spirit the worse the situation will become.

      3. JTFaraday

        “Let’s promise now to be on the lookout for that pain, and to help those individuals get through their pain as we think appropriate at that time. If we promise to do that, and then do it”

        The problem with that theory is that too many people up and down the economic strata and across the ideological spectrum systematically push blame down the hierarchy onto those with the least socio-economic power. Thus, it follows, why help those who are guilty? No, we will screw them thrice.

        You yourself do it when you posit that Acorn is singularly responsible for this crisis born out of mortgage and securities fraud. Nowhere did Acorn– or even Barney Frank– posit no-doc loans as an acceptable business practice. No, that came from “market demand” from the financial sector that then proceeded, in turn, to use Acorn and the CRA as a convenient whipping boy– which it probably intended to do all along.

        (I do agree, however, that all Congresspersons ought to have been suspicious of any legislation that the singularly meddlesome Robert Rubin did not physically throw his body on to block. Clearly, this is a man with a plan).

        The conclusion, then, is not to “stay the heck out of it” but to start prosecuting for fraud. All the thousands of white collar entitleds in the RE and financial industries who made a killing by abandoning their business ethics for rational participation in organized crime will now keep all the entitled out of work law school grads in the money.

        With law grads suing their alma maters for peddling fraudulent useless degrees, the law schools will back this jobs program 100%:

        Let the era of New Keynesian big gummint commence. From the ground up we will build it, using the material we have.

    2. No Know

      “All mortgage is pooled into one giant entity, taken from stupid banks. Then the entire pool is divided up geographically into approximately same value.”

      Brilliant! Then all you need is to “ring-fence” the pools (for everyone’s safety) and we’re home free.

  2. CB

    Consider the (by now) very real possibility that proposing something for appearances sake that won’t actually work is the plan. In fact, it could be described as the administration’s modus operandi generally. All show, no go. And lots of speechifying. Does anyone listen to this man anymore?

    1. solo

      @CB. I agree with your observation: Proposing ineffective policy is quite effective in “feeding the false perception that nothing will work,” in the article’s words, inculcating passivity in an already marginalized electorate. (The psychologists call this “learned helplessness,” a common adjunct to successful irrational authority.) The choice in 2012 would then boil down to Obama’s reformist lies and the GOP’s lunatic truths–a win-win for corporate America, and a contest that the Obama crowd think they can finesse if the GOP’s candidate is so palpably insane as to be portrayed as “out of the mainstream” by the corporate media. (Yes, the level of civic intelligence is so low in this country that about half of the voting age population will “listen” to the idiocy that will pass for electoral discourse in the 2012 exercise in crowd control. The other half doesn’t vote.) I would only add that the article enumerates a twin point of ineffective policies, namely, a course that “keeps a bad status quo intact.” –That, I submit, has been the governing concept of the Obama Administration–as it is of the GOP–from the start. Ralph Nader has been saying much the same for years with his concept of political “duopoly.” Old-style leftists said it even better with their concept “class allegiance,” which ties the whole charade into the economic structure.

      1. CB

        Obama’s entire history is accommodating power, status quo with a little decorative stitching around the edges. It defines him. He spent eight years in the Illinois leg and his record, such as it is, is public. As are his allies and inner circle, Chicago machine to the core. Nobody gets to national office clean, but some people have actual accomplishments besides getting elected. I call him Windy City.

    2. Mattski

      That about nails it. Increasingly frantic feats of legerdemain, now to 11/6/12.

      That core group of liberals who still have homes and jobs will again become convinced that Mr. Obama cares, and turn up at the polls. A terrified Black populace–and many angry, also terrified people like me–will turn out in a possibly vain attempt to defeat Mr. Perry. Should he win, our narcissistic current president will feel ratified in the deepest core of his being.

      The most prominent underlying evils–neoliberalism, and capitalism itself–will continue for the most part unidentified as such. (What’s much of Latin America got on us, now and going forward? The masses have mobilized against neoliberalism, learned to call it by its right name.)

    3. LucyLulu

      Yep. And the GOP will continue with their propaganda of tax cuts and certainty being the panacea to stimulate jobs and recovery, as if it is a new and untried solution guaranteed to work. I can’t figure out if their base is dumb enough to believe it…….. or the party leaders are dumb enough to think their base will buy it.

      Election 2012 — Bad and Worse, you choose.

  3. Jack Straw

    Ah, more loan fees. Splendid. Let’s put all these mortgage originators back to work!

    Time to start looking at one of those 7 series again.

  4. CMike

    >>>>>Chris Matthews objected in comments to Levitin’s post, which led to a second response by Levitin,…<<<<>>>>Who would this program help? Me. My neighbor two floors down. I’ve been trying to refinance my mortgage for over two years now. If my servicer simply lowered my interest rate, I would save $400 a month, and I have a relatively low 7% interest rate. We talk about these mortgage holders as if they’ll cease to exist after they foreclose. Where do they go? They become renters.

    >>>There was a story in the money section of ABC News, ‘Solving Foreclosure Crisis, a Rental at a Time’ by Steve Osunsami. He cites an instance where a homeowner went from a $1,100 a month mortgage payment to a rental payment of $850 a month after an investor bought his property and rented it back to him. They didn’t give the specifics, but to get to $1,100 a month, let’s pretend his loan was for around $165,000 at 7%. Now, if the bank had refinanced his loan at current rates, around 4.4%, guess how much his mortgage payment would have been? $860. How much is he renting for? $850. What does he get out of this situation? No guarantee that his rent will not increase, no mortgage interest deduction, no home ownership after 30 years, and no hope of recouping the money he already put into the property (and many many were not the 0% deadbeats down we all hear about, myself among them). So in the end, he’s worse off. It doesn’t make any sense.

    >>>Why should the government help people stay in their homes? Because there are not enough people to fill the homes once they’re abandoned.<<<<<

    1. CMike

      Whoops, I fouled things up with my tags which eliminated my comment and just posted the two passages I was quoting.

      I meant to say that should read “Professor Chris Mayer” as the name of the commenter to whom Adam Levitin responded in his second post, not someone with the jarring name of Chris Matthews. And I went on to say that I found the comment in the first thread by another Chris M., about whom the program would help, an interesting one.

  5. Lucky the Lucid Pomegranate

    Three options as I see it will turn it all around. Bitter pills for policy makers and their true constituents, but necessary medicine I believe:

    1) Jobs. Start with water treatment plants and repairing the broken shipbuilding industry in the US (not to steal the crown from SK or anything, but shipbuilding reaches into so many industries, its hard to think of a more stimulating approach at a time when the Navy’s shipbuilding program is in such disarray)

    2. Writedowns. Writedowns. Oh yes, and writedowns.

    3. End the asset reflation games (extend & pretend) like this garbage that Ezra fell to his knees for. It has to stop. Global wage arbitrage isn’t going away, and what point putting americans to work if they can’t afford their assets without yet more programs.

    I don’t expect any of this to happen. I expect instead for Dr. Obama’s assistants to diagnose the problem as that my wallet is too fat and thus causes me to sit croooked, at a time when logic tells me to stay flush in case of calamity. (Sorry MMT, I love you but people have motives)

    1. chris

      Damn good thing football is back so that the only option for avoiding the talking dickless buffoons on MSNBC or Fox is not the Weather Channel.

  6. Alice

    Wow, we must all go along with the illusion that the loans were securitized and there are no chain of title issues. I am trying to write an intelligent post but words escape me.

    1. Susan the other

      Hello Alice! No. Your words did not fail you. This is more evidence of government by 3 monkeys. If we all agree this resolves the mess then, voila, the mess is resolved! Levitin’s “Malarkey” is making us answer your question and implying that the real reason for this latest con job is bank liability for both chain of title and PSA compliance. Obama never answers anything. He just gives speeches. Hackocracy is a great term for our “government.”

      And if any bank fails to sign up (please Mr. Obama don’t throw is in the briar patch!) to do refinancings for any borrower, it would be liable for the two (above) elephants in the room. Because the refinancing paperwork will include language that eliminates bank liability for chain of title issues which in turn will be used to imply, Obama style, that they reallly did comply with the PSA.

      Ackerman thinks that mortgage “forgiveness” is on the way for both banks and borrowers – both equally culpable. I think the banks have a much larger debt, both morally and monetarily, than the hapless borrowers. This whole solution was probably concocted by Buffett and Obama when Buffett agreed to bail out BAC. Let’s call it Bufffett’s insurance policy.

      Here’s is the thing: the economy (Buffett knows this) will not recover without people. So if these clowns fail again with this ploy, it will be worse for “them” than it is for “us.” Simply because we’ve already lost everything. And they are still trying to fake it.

  7. Lord Blankfein

    Weren’t these fine folks part of the housing bubble? As in key participants? Realtors, ratings agencies none of these people is in danger of losing their homes or in danger of financial ruin, and they’ve proven they largely don’t give a shit unless the fallout from the housing market carnage threatens their futures. That’s what this whole thing is about, protect the wealthy, allow the wealthy to continue to make all of the important decisions. Shouldn’t they all go fuck themselves or get real jobs? Let’s seize their homes instead. You know, rent ’em out :

    “It’s been endorsed chief economist Mark Zandi of Moody’s Analytics, the National Consumer Law Center, the National Association of Mortgage Brokers, the California Association of Realtors, the California Association of Mortgage Professionals, and William Gross, managing director and co-chief investment officer of fund manager Pimco.”

    1. chris

      I used to think Zandy had a clue but not anymore. He seems to have lost sense of rationality. Mathews had no clue to start with…
      I think we are seeing what happens when we set up a system in which the best and brightest want nothing to do with government unless they can use it to their advantage.

      I am amazed at the stupidity in government today ….including the current administration.

  8. fcc

    One cannot help but regard Ezra as David Brooks in training. Pity , as if the world needs another hesaidshesaid pundit.

  9. wunsacon

    I caught a glance at a random Yahoo URL about a “Pouring Faucets” optical illusion. The caption says “Because of distortion caused by the grey bars, this still image has a strobing effect that makes it appear as if the water is flowing.”

    I think this housing program works the same way.

  10. Paul Tioxon

    Or they could set up universal refi program, based on FHA Streamline Refi, and just issue new paper work resetting note terms interest rate to 10 year Treasuries plus 50bps. Don’t devil me with the details, I am a big concept kind of policy guy and I pay taxes so HUD bureaucrats work out the operational process. None of the notes are registered properly so my idea is just as good as their lala land MERS.

  11. k.b.

    I grow increasingly frustrated each time I read an article — like Mr. Levitin’s — stating the following:

    “(2) Borrowers who are current but lack equity. There is also a large pool of borrowers who are current, but have insufficient equity or negative equity for a refinancing. A new refi program probably doesn’t do much for them either. It doesn’t take very much equity to do a FHA refinancing, but putting that aside, the Home Affordable Refinancing Program (HARP) allows for negative equity refinancings. There haven’t been a lot of them, however, and I think that bodes poorly for any new program. The closing costs for refinancings can be a major obstacle for households without a lot of extra cash sitting around and with uncertainty as to whether they’ll stay in an underwater house long enough for the lower rates to make the refinancing worthwhile.”

    The reason why programs like HARP/HAMP don’t work is because they do not fix the problem. The modifications offered are short-term. In some cases banks are literally tricking customers into thinking the loan is modified then filing for foreclosure anyway. Payments for a “successful” HAMP mod are a few hundred dollars off.

    Most people who desperately need to *at least* refinance — for homes they work hard for and deserve — cannot afford the massive down payment required for a refi. And yes, the required down payments ARE massive, and will only grow in size as these banks realize the amount of capital they’re going to need. Anyone who can afford $40,000 down on a $300,000 mortgage hasn’t been hit by the economy train… yet.

    If the Obama Administration can offer some sort of principal reduction to homeowners with Freddie- or Fannie-backed loans, he will win reelection. So, sadly, it will take a GOP member to “come up with the idea” if we are to move forward and prevent this maelstrom from swallowing regions whole.

    1. Yves Smith Post author

      Did you read the proposal? There is NO principal reduction contemplated. This is lowering interest rates, period.

      This blog is a big proponent of deep principal mods. Anything else will help only a very few and will forestal the sort of action needed. It’s another variant of extend and pretend, but it throw a few crumbs to the peasants.

      1. CB

        So you’re proposing, in essence, that the loans be reduced to the marked to market value of the properties? Including payments already made.

        1. Yves Smith Post author

          In foreclosures, losses on prime loans have been running at 50%, on subprime, 75%. And these, mind you, are on the foreclosures that are actually getting done.

          Tom Adams has estimated that merely correcting the document flow to fix robosinging is $20,000 to $40,000 per loan. So increase the loss severities by another 10% to 20% on a typical $200,000 mortgage. Oh, and that’s before you allow for the fact that more borrowers are fighting foreclosures, which will further increase costs.

          And that’s before you get to the damage to perfectly innocent neighbors when foreclosed homes sit vacant. At best, they depress values of nearby homes, at worst, squatters or drug dealers move in.

          So tell me again why you don’t like deep principal mods? With economics like this, principal mods of 30-40% to viable borrowers are a no brainer. The one who loses, of course is the servicer, who has to find a way to recover his principal and interest advances and foregoes all the extra fees he earns in a foreclosure

        2. Mel

          Pretty much. A traditional foreclosure/resale will amount to a writedown in this market — with the “invisible hand” setting the final value, and a lot of misery in the process.

      2. TulsaTime

        Principal mods in this case, or debt writedowns in general, that is the only way to ‘fix’ what is wrong. The entire system is insolvent, and all the government wants to look at is how to find the Resume function.

        There is no audience for real repair, because the public rejects the premise that anything beside a short-term snag is wrong. We’re number one, it’s just not possible. Repeat the depression and war cycle and try again.

      3. propertius

        It doesn’t have to “forestall” very long to accomplish its real intended purpose – just until November 9th. After that, we can go back to “devil take the hindmost”.

        It’s not as though TPTB really care about hoi polloi, after all.

      4. No Know

        But the beauty of this is that with ZIRP, interest rate reductions do not have to translate into principal reductions for the banks. That is the hidden beauty of the proposal, Grasshopper!

    2. TGS

      There is no principal reduction in this proposal. It’s a glorified HAMP mod for people who haven’t defaulted yet on agency paper. Sure, there may be a $300/mo payment reduction. However, these borrowers are still one of 16 million over-encumbered glorified renters who may very likely enter the short sale pipeline in 2014-2016 if the economy continues to sputter.

      At some point, the FASB mark-to-myth veil has to be removed from MBS and these loans must be written down to mid-1990s levels, or in line with the eventual housing bottom. The bubble has come and gone. Time to rid ourselves of this debt overhang.

      Unfortunately Obama doesn’t have the “choot-spah” to nationalize or RTC the mortgage market. Instead, he resorts to the “lipstick on a pig” method, like the house flippers of yesteryear. What a waste of time and energy.

      1. Yves Smith Post author

        And we know how well HAMP worked. Lots of people told to default to qualify for the program, got trail mods, weren’t told they’d be hit with massive late fees if they didn’t qualify for a permanent mod.

        Some of the bugs have supposedly been fixed, but I trust no representations made by servicers.

        1. diddy wa diddy

          It seems to me the main thing wrong with HAMP was the dishonesty. It was dishonestly designed, presented and implemented. If it had been simply said straight out, ‘if you have equity, you cannot qualify,’ then the whole thing might have had potential. But even then, the implementation by the banks was egegious.

          Of course principle reductions are the best solution. Because it may not sense to make payments on a house that is worth less than you owe. (Then again, maybe it does, if the payments are less than what you could rent the property for). The downside of principle reductions, is it’s hard to see how it helps people with equity. So it won’t be seen as fair. I keep wondering what Mr Beard’s whole plan is.

          But BIG interest rate reductions would still help a lot of people.

          The trouble is, there is nothing saying that it wouldn’t be another false nightmare implementation, that I could see. HAMP was hell on earth. God knows what the real point was, if there was one.

          1. TGS

            We already have a principal reduction program in the FHA Hope For Homeowner loan (H4H), which was enacted in the August 2008 Housing and Economic Recovery Act, and was given a volume cap of $300 billion.

            H4H saw 467 applications in Fiscal Year 2010, and issued 60 loans. In FY 2009 – 949 applications and 1 loan issued. 61 loans X $200,000 avg loan size = $12,200,000. Most of these are done by scratch and dent investors cashing out after having purchased the loan in 08-09 at $0.25/$1.00. Real haircuts are rare in H4H land.

            Like H4H, HAMP, and Fannie’s existing 105LTV refi program, the u/w guidelines will probably be so bizarre that only 5% of eligible borrowers will actually receive a new loan. Not to mention the existing servicer determining who gets approved and who gets denied, and you know they don’t want to let future default fees slip away.

  12. banger

    Actually, I think the placebo effect is valid in public policy. Symbolic acts and ritual chanting can make a difference–I’m serious here it can work. But, if nothing else, the MSM, will like the fact someone is Doing Something and start cheerleading for a couple of three news-cycles and maybe a few more people will go shopping. You think?

  13. nick

    Everybody on the mainstream media is the same blabber mouthed spreader of ideological propaganda, from ezra klein, to chris matthews, to glenn beck, to bill o reily, and reverend al sharpton. And its a good point to evaluate the people who endorse this thing. Every credit rating agencies opinion doesn’t matter anymore, due to the fact that they’re either never accurate, and probably getting paid. William Gross? he’s probably still receiving payments from derivatives packages.

  14. Hugh

    Kleptocracy is a system. Obama is titular leader of its political arm. Journos like Klein cheerlead its cons. The one thing we should take as given is that nothing Obama or any of our current political class does is meant to help ordinary Americans or to fix anything. Democratic kleptocrats vie with Republican kleptocrats as who will control Congress or the White House but we ordinary Americans are going to get looted either way. Klein is just part of the noise machine, the distraction of class war, to get us to think that the looting is not looting and that policies are something other than a cover for more and more looting.

    1. Capo Regime


      Well said!

      As Yves points out the only viable alternative is a principal mod. All else is noise and ultimately tinkering so that the scam is continually perpetrated on the regular folks. Nothing will be done to shift the balance of regular folks versus the money class–only tinkering to enable the screwing to continue.

    2. BobS

      Not all Kleins are equal. Imagine the good that Naomi could do if it was her occupying the expensive media real estate at the Washington Post that Ezra does. Okay, now imagine pigs flying…

  15. Mark P.

    Yves –

    Thanks for continuing to be a voice that speaks up about the essential idiocy of most of these Obama administration efforts to pretend that the mortgage-industrial complex as was can be resurrected.

    It may be lonely, frustrating work. But as one by one people get educated, brick by brick the edifice rises: when enough individuals understand the systemic fraud that was created — and it may take a decade — the real work of trying to construct a replacement socioeconomic system can begin in earnest.

    1. different clue

      I came up with a version of that saying once.

      “Stupidity is the best all-around cover a saboteur ever had.”

  16. Cathryn Mataga

    The only real fix for housing prices is to fix the jobs situation, and the only fix the the jobs situation is competitiveness, and for competitiveness we’re better off with cheaper housing anyway, because then people with lower wages can afford homes. Obama, save the people, not the real estate.

    1. armchair

      There is nothing that strikes greater fear into the Fed and
      Wall Street than wage increases. Without wage increases there will be no recovery under the current system, which was built on the fallacy of ever increasing property prices. There may be one possible exception. We could make a super-class so wealthy that they are able to buy all of the excess property, and we could have all property held by a few holding companies with a nation of renters. If the current system continues, that is what I think the future will look like.

  17. RueTheDay

    We’re in for some tough times ahead.

    It looks like the “jobs program” that Obama has been waiting to announce will consist largely of 1) a one year extension of the 2% payroll tax cut, 2) an “infrastructure bank” that simply means an accounting change to depreciate capital expenditures over multiple years, and 3) a business tax credit of around $5000 per new hire.

    1 is just the extension of an existing tax cut, so will have no net new impact. 2 is a good idea (essentially separating the federal government’s capital budget from its operating budget) but will have no impact unless accompanied by new capital spending, and will likely be dismissed by GOP know-nothings as an accounting gimmick. 3 will benefit a very small number of companies that would have hired anyway, but will not drive any significant new hiring.

    We’re at a point where additional fiscal stimulus is politically impossible, the Fed has come pretty close to the end of what it can do with monetary policy, and no one can even agree on the half-measures being proposed.

    I fully expect a new recession to start late this year or early next year. And it will be starting from a baseline of 9%+ unemployment, low inflation, and a weak banking system. It’s going to get ugly.

    1. capo Regime

      Rue the day,

      On point but disagree on one part. Its not going to get ugly–its already very ugly. It will get uglier. Unempoyment is really 16 to 20% and real income has dropped over 13% since 2008. Uglier, uglier for it has been ugly for some time.

  18. Dan Duncan

    Straight from the BBC’s “Yes, Prime Minister”. The Politician’s Syllogism:

    We must do something
    This is something
    Therefore, we must do this.

  19. capo Regime

    Its hard to articulate but there is something about Ezra Klein that grates. He and others like him make the WAPO the ultimate propganda rag. Friend of mine said he is a coherent version of Ana Marie Cox, continuous sprouting of conventional party line with “personality” sprinkled on top.

  20. Capo Regime

    When I think of this administration I think of Camus..

    “Albert Camus spoke a terrible truth. “I know something worse than hate: abstract love.” In the name of abstract love, in the name of God and Country, in the name of saving the youth from the drug, in the name of the proletariat, in the name of abstractions, our politicians and war policy makers have committed the most atrocious crimes on human beings, who are not abstractions, who are bones and flesh. That is what our country is living and suffering today: in the name of an abstract goodness, we are suffering the opposite: the horror of war and violence, of innocents dead, disappeared, and mutilated.”

    For the U.S–innocents foreclosed, unemployed, impoverished and diabetic?

  21. Brian B

    –which pretty much every reputable economist said was too small to do much–

    Yves sounds like Pauline Kael who claimed to have a hard time understanding how Nixon won since she only knew one person who voted for him.
    Memo to Yves; not only did innumerable “reputable” economists say that the stimulus wouldn’t work regardless of its size, a great many people are beginning to wonder just how it is economists whose policies never work and who always use the same lame excuse that it’s never their bad policy, only that their bad policy would have worked if we’d only had twice as much of it, can be described as “reputable”.

  22. BondsOfSteel

    Did anyone else hear Harold Ford Jr on Meet the Press (Aug 21) argue that “Wall Street and Main Street are the same”.

    This stuck me odd since this was the second time I’ve heard a Dem or Dem oporative use the phrase in a week. I think it was a trial baloon.

    Any new plan will be the same as the last plan, trying to help out Main Steet by stuffing more tax dollars in the pockets of Wall Steet.

  23. JTFaraday

    “Memo to Ezra Klein: Doing Something Stupid Isn’t Smart”

    Oh boy.

    This one is going to be PARTICULARLY hard for little Ezra to get. He does/says stupid stuff all the time, and he still thinks HE’S smart…

  24. Ron

    Most of this is targeted towards high end coastal properties hugely upside down, mostly in Calif!! RE use as collateral
    as a means to spike credit creation has reached its end of life and is set to return to its prior use as housing.

  25. Connor

    I fall in the #2 category of homeowner and this could help me a great deal. I don’t qualify for HARP (too deep underwater, not by pulling money out of my house but by buying my first house at the wrong time) and have an ARM that I’m terrified of resetting higher so I’ve been packing money away for the last 3 years just so I can refinance to a fixed rate. If this program goes through I’ll feel a lot better about spending money on day to day things.

  26. Mark

    A simple solution to housing would be to subsidize loans for buying foreclosures with the caveat being the buyer would have to put 50 percent down.

    (yes, a tax cut for the rich)

    The cost of the free lunch would be a liquidation of other assets such as stocks and bonds which will hurt the real economy.

    But, it would at least stem a deluge of foreclosure proceedings, which the banks don’t have enough personal to deal with, once the coming greater depression ensues.

  27. Pokey

    When there was first a general awareness of the crisis in the housing market there was a push to eliminate the restriction that prohibits adjustment of a single-family mortgage in a chapter 13 bankruptcy proceeding. The bankers, even in their weakened condition at that time, were strong enough to defeat the simple proposition.

    I’ve read the argument that there is a long term benefit in deflating home values, and there may be some truth in it, but I am not convinced.

    Consumers should be permitted to adjust the amount of the mortgage to the value of the property. This is only being realistic. This is the precise definition of a secured claim in bankruptcy. The cost of adjustment is relatively small compared to the cost of foreclosure and liquidating the REO, and allowing hard-pressed homeowners to retain their homes protects the value of other residential properties in the vicinity.

    There is a lot of money to be made in the foreclosure process by those engaged in it. If there is some kind of refinance program, there will be a great deal of money to be made and fees. The burden of this expense will fall on taxpayers.

    Many people have suffered needlessly, and unfortunately, they will continue to do so.

  28. Ransome

    The government should pay off all mortgage balances and re-issue 0.5% mortgages for the balance. No one loses their principal. Homeowners get reduced payments, at much lower payback amounts. Tax revenue increases because there is little mortgage interest to deduct. The government is repaid over time. People will be motivated to pay because of the terms. Some haircuts might be necessary. We don’t want more foreclosures on the market.

  29. Vinz Klortho

    Rent the DVD “house of Cards” and watch it. Without No-Doc loans, none of this would have happened.

    Any solution consisting of more than 3 (2 is preferable, 1 is best) steps to solve the problem should be ignored.


  30. Vinz Klortho

    At some point in everyman’s life, it’s time to raise the black flag and start slitting throats.

    That time is near, if not now.

    Vinz Klortho

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