Quelle Surprise! HUD and Obama Whoppers About Mortgage Settlement, FHA Finances, Housing Market Remedies Coming Home to Roost

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We took a very dim view of some of the Administration’s less-than-credible claims about its much-touted backdoor bank bailout, which was more popularly known as the mortgage settlement. And a rash of news reports tonight have caught the Administration out in its deceptions. From a March post, Memo to Shaun Donovan: Your Nose is Getting So Long You Need to Get a Hacksaw:

I couldn’t let this bit of propaganda go without comment. From the settlement FAQ:

Q: Will investors in mortgage-backed securities ultimately pay for part of this settlement?

A: Participating banks own the vast majority of the mortgage loans that this settlement is expected to affect. The settlement could affect some investor-owned loans, depending on existing agreements servicers have with those investors.

When banks weigh which mortgage loans to modify as part of this settlement, they will do so based on first analyzing the costs and the benefits of minimizing their losses. If a loan modification, including principal reduction, is projected to cost the creditor or investor less than foreclosure, the creditor will earn more on that loan.

In other words, this settlement will not force investors to incur losses. That’s because any loan modification tied to this settlement will result in more of a financial return for an investor than a foreclosure would.

OK, readers: did you notice how the question in the headline is never answered properly? The answer is YES. Bet you’d never conclude that from the verbiage that follows. Instead it starts off on the utter irrelevance of “mortgage loans that this settlement is expected to affect.” We’re not talking about numbers of mortgages or the many ways they can be “affected,” which is certain to mean something more than just loan modifications.

This is nowhere near as hard as settlement propagandist in chief Shaun Donavan is trying to make it. The banks are getting a 45% credit for modifying mortgages they don’t own. They will do that all day in preference to modifying their own mortgages, except in those cases where they would have modified them anyhow.

And since the banks are held to a total dollar target, and can use mods of other people’s mortgages to meet this target, they are using other people’s money to pay off their misdeeds. There are no two ways about it.

Now HUD may actually live in a parallel universe where they “expect” that the banks will operate against their economic interest and prefer to modify bank owned mortgages. If Donovan and his staff are so dumb that they believe it, as opposed to running clearly phony expectations by the media, they aren’t qualified to run a dog pound, much the less a major Federal agency.

Fast forward to today, where Shahien Nasiripour of the Financial Times tells us:

Investors in US mortgage securities have been forced to absorb large writedowns in response to a deal between leading financial groups and government agencies over the “robosigning” scandal….

The banks – JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and Ally Financial – agreed to forgive billions of dollars worth of distressed borrowers’ mortgage principal in exchange for waivers from potential liability.

On Wednesday, BofA said that 60 per cent of the $4.75bn in first-lien mortgage principal it has thus far agreed to forgive would come from non-government guaranteed loans that were packaged into bonds and sold to investors.

Of JPMorgan’s $3bn in forgiven mortgage debt, slightly less than half has come from investors’ holdings, a person familiar with the matter said. The other three banks either declined to provide numbers or did not respond to requests for comment.

Earlier this year, some US senators worried that pension funds would have to absorb losses on their mortgage bond holdings as a result of a settlement meant to punish banks and aid troubled borrowers.

Obama administration officials tried to quell those concerns, first arguing that bond investors would not be forced to shoulder writedowns, then claiming that the “vast majority” of writedowns would occur on bank-owned loans.

“Many of us expected a settlement to hold servicers responsible for their misconduct; not a bank bailout settling with other people’s money,” the Association of Mortgage Investors said.

Now in case you just think this was HUD smoking something strong as of the time of the signing of the settlement, and cooler heads knew better but kept their mouths shut in the hopes no one would notice, think again. No less than the Great Deceiver himself was running the same line right before the election, less than four weeks ago (hat tip nathan):

We’ll just deal with the biggest whoppers (separately notice the emphasis on “responsible families”):

I never believed that the best way to deal with the housing market was to just sit back, do nothing, and simply wait for things to hit bottom….Instead, I’ve made helping those homeowners a priority.

Really? Priority relative to what? Redecorating Air Force One? That’s news to pretty much everyone, particularly “foam the runway” Geithner, who thought the only purpose of intervention was to spread out foreclosures over time, not stop them. Next up from Big Lie Central:

Since I took office, my Administration has taken action to help millions of families stay in their homes.

We teamed up with attorneys general in almost every state to investigate and crack down on the practices that caused this mess. And in the end, we secured a $25 billion settlement from the biggest banks – one of the biggest settlements in history – and used it to provide relief to families all across America.

As we’ve detailed, there were no investigations of origination fraud or chain of title issues. “Crack down” translates as “slap on the wrist.” And in many states, the settlement did not provide for borrower relief, it went to plug gaps in state budgets and to buy the silence of housing groups who’d otherwise call out this farce.

And then we have the main talking point of this short presentation:

And now I want every homeowner in America to have that chance. I just wish it didn’t require an act of Congress. But it does. So, back in February, I sent Congress a plan to give every responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at historically low rates. That’s the equivalent of a $3,000 tax cut.

It’s a plan that we know will work. It has the support of independent, nonpartisan economists and leaders across the housing industry. It’s a no-brainer that should have passed easily.

But Republicans in Congress banded together and kept this plan from even coming to a vote.

The chicken in every pot refi for every “responsible borrower” is flat out untrue (well, until you read the fine print and find out what “responsible homeowner” means). From BankingMyWay, which gave a layperson’s writeup of the objections to the Obama proposal when he first presented it, in the State of the Union address:

Overall, President Obama’s “January Surprise” would focus on underwater homeowners – a big problem in the U.S. today…

But passage of the Obama plan is hardly guaranteed. A growing consensus among Wall Street types is that the mortgage plan is “dead on arrival.”

But what if the consensus is wrong, and the plan makes it way to Congress? After all, $3,000 is $3,000 – and that represents a significant chunk of change to consumers and, presumably, to the U.S. economy. That seems to be what President Obama was going after last night.

“Responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief,” Obama said in his State of the Union address. “That’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates….”

Sounds great, but there’s theory and then there’s execution. And it’s the latter that might curb legislators’ enthusiasm for this idea. Here are three reasons why:

1. The plan is too broad. President Obama used the term “responsible homeowners,” which presumably means homeowners who are under water on their homes, but current on their mortgages. But will legislators support a plan to bail out homeowners who are current on their home payments, three years after the recession was officially declared to be over? Here’s the key issue: Whether you’re current on your home payments or not, it’s not the responsibility of taxpayers to bankroll a mortgage payment cut – even if you do owe more on your home than it’s worth. The White House will need to answer that question before approaching Congress with a detailed plan.

2. The FHA might not be up to the job. The Federal Housing Administration would be the refinancing vehicle of choice under the Obama plan, backing all of the refinancing of underwater mortgages. But the FHA only has about $17 billion in capital right now, and faces a capital shortfall of anywhere between $35 and $53 billion. Legislators – especially Republicans – may well wonder if another huge taxpayer-funded bailout is looming down the road if the FHA is to avoid insolvency.

3. There could be a backlash from homeowners not under water, but barely treading water. Again, the plans are sketchy, but so far the target appears to be focused strictly on underwater homeowners who have taken the biggest hit from falling property values. If that’s the line the White House draws in the sand, expect a backlash from consumers who may have home mortgage troubles of their own but don’t qualify for the $3,000 refinancing deal.

Now if you look at the quote from the SOTU, points 1 and 3 look like reasonable surmises. And perhaps most important, notice the claim that “Wall Street sources” said the plan would never see the light of day. This means the Administration almost certainly knew from the outset that this idea was dead in the water, but it would serve (as it did) as a useful talking point down the road.

And it turns out the concern voiced in point 2 about the FHA’s wasn’t Republican obstructionism. FHA loans, despite their low down payment rates, historically had low default rates. But that was before the crisis. After the crisis, the FHA became the refinancer of last resort, and many observers have anticipated its default levels would rise considerably.

As Nick Timiraos reports tonight in Housing Agency Close to Exhausting Reserves the Wall Street Journal:

The Federal Housing Administration is expected to report this week it could exhaust its reserves because of rising mortgage delinquencies, according to people familiar with the agency’s finances, a development that could result in the agency needing to draw on taxpayer funding for the first time in its 78-year history….

Though the agency guarantees fewer mortgages than either Fannie or Freddie, it now has more seriously delinquent loans than either of the mortgage-finance giants. Overall, the FHA insured nearly 739,000 loans that were 90 days or more past due or in foreclosure at the end of September, an increase of more than 100,000 loans from a year ago. That represents about 9.6% of its $1.08 trillion in mortgages guaranteed.

The FHA’s annual audit estimates how much money the agency would need to pay off all claims on projected losses, against how much it has in reserves. Last year, that buffer stood at $1.2 billion, representing around 0.12% of its loan guarantees. Federal law requires the agency to stay above a 2% level, which it breached three years ago…Because the FHA has what is known as “permanent and indefinite” budget authority, it wouldn’t need to ask Congress for funds; it would automatically receive money from the U.S. Treasury.

The article points out that for the last three years, the Administration has hotly denied that any shortfall could take place save under the most dire circumstances. So if Team Obama has made homeowners such a big priority and been so effective in fixing the housing market, why is the FHA likely to need a cash injection? Matt Stoller pointed out via e-mail that concerns about FHA lending date to 2008, as this article in Bloomberg chronicled:

The same people whose reckless practices triggered the global financial crisis are onto a similar scheme that could cost taxpayers tons more…

You read that correctly. Some of the same people who propelled us toward the housing market calamity are now seeking to profit by exploiting billions in federally insured mortgages. Washington, meanwhile, has vastly expanded the availability of such taxpayer-backed loans as part of the emergency campaign to rescue the country’s swooning economy.

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there’s a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what’s happening—or incapable of stopping it. They’re giving mortgage firms licenses to dole out 100%-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits, and even criminal convictions.

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more.

Let’s do a little math. The FHA has $1.2 billion of capital, which is 0.12% of its required level as of end of last year when it is required to have 2% of its $1.08 trillion in guarantees. So before allowing for losses, the FHA is already over $20 billion short.

And how bad might those losses be? We have 739,000 loans in foreclosure or seriously delinquent. These are all generous assumptions (as in favorable to the FHA): $100,000 average loan balance, 25% can be saved with a 40% principal mod, the rest are liquidated with 75% losses. That’s another $49 billion, or $69 billion in total.

So this isn’t quite a $100 billion problem, but it is easily on the wrong side of $50 billion. But Obama would rather have you not think about that and focus instead on the $3,000 pony those meanie Republicans won’t let you have for Christmas.

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    1. b.

      I’d like to retire the “Lesser”, and, with a nod to BAP’s Ford’s “more effective”, modestly propose that henceforth the Deceiver-In-Chief should be known as…

      … the “Better Evil”.

      1. ifthethunderdontgetya™³²®©

        I see no reason to change Glen Ford’s terminology. “The more effective evil” is a perfect fit.

        And let’s give credit to Pam Martens, also:

        The Wall Street plan for the Obama-bubble presidency is that of the cleanup crew for the housing bubble: sweep all the corruption and losses, would-be indictments, perp walks and prosecutions under the rug and get on with an unprecedented taxpayer bailout of Wall Street. (The corporate law firms have piled on to funding the plan because most were up to their eyeballs in writing prospectuses or providing legal opinions for what has turned out to be bogus AAA securities. Lawsuits naming the Wall Street firms will, no doubt, shortly begin adding the law firms that rendered the legal guidance to issue the securities.) Who better to sell this agenda to the millions of duped mortgage holders and foreclosed homeowners in minority communities across America than our first, beloved, black president of hope and change?

        Why do Wall Street and the corporate law firms think they will find a President Obama to be accommodating? As the Black Agenda Report notes, “Evidently, the giant insurance companies, the airlines, oil companies, Wall Street, military contractors and others had closely examined and vetted Barack Obama and found him pleasing.”


  1. Aaron

    Great post Yves!

    I was pondering on the FHA issue a few days ago as I received a builder soliciation advertising some of this no-money-down financing. Credit scores of 560-580 and up to 6% seller contribution. In other words, come buy our new home (inflated asset) and you don’t have to put a penny down!

    Builders in the Houston area are just beginning to ramp up construction a bit on some of these lower priced homes, although inventory is still extremely tight if you want anything nice. I suspect we’ll get some additional inventory in the pipeline just as the shale energy miracle unravels and the economy is stalling, allowing this new round of no-money-down home buyers to promptly begin swimming against the current.

  2. Joseph S.

    Hey, got him elected. Bet he was sweating a little until the very end, though. Hillary’s got four years to figure out how to talk it away.

    1. ScottS

      And just today Mittens has been reported to be dining on sour grapes.

      Mitt Romney: Obama win down to ‘gifts’ for minorities:

      What gifts, exactly? The gift of “free” health care. First of all, free isn’t free. Last I heard, you had to buy private health care or pay a fine. Second, how is forcing people to buy worthless health care a gift? Third, if Obama did pass free universal health care (which he didn’t), how would that be cheating as Mitt seems to imply? Republicans could do the same thing.

      What planet is this guy from? I know, I know, Richistan. And apparently the people from Richistan are thin-skinned, petty, self-deluding sore losers.

      1. Waking Up

        Mitt Romney lost the election. He isn’t even a member of Congress and doesn’t have the ability to directly make policies. This article is about specific policies of the Obama administration from the past, present, and now the future. Could we possibly focus on who is actually making the policies?

        1. ScottS

          Focus on who makes the policies? You mean, the rich? Last I heard, Mitt is quite rich.

          And by grousing about all the “freebies” the welfare queens are getting and how those come directly from Obama for political purposes, Mitt gives Obama the latitude he needs to sit on any policy favorable to the poor.

          You’ve heard of the ratchet effect, right?

          1. Waking Up

            While the rich are defining our policies and paying for the priveledge to “own” our politicians, ultimately, the politician still signs off on or in the case of Congress votes on bills. If 99% of us are not “rich”, then we should hold politicians responsible for their actions. But, we as a country don’t. We reelect politicians repeatedly which do not act in our best interests. In a country of over 300 million people, where was the demand for a representative of the people for President? Instead, we return to office the obviously corrupt corporate/banking loving Obama. And please don’t waste my time with Mitt was worse. Citizens should have DEMANDED a better candidate than either Obama or Romney if we are to continue using an electoral college system. Now we have four more years of lies from both the Democrats and Republicans with a complicit media. The big losers… “We the People…”

            As for the “rachet effect”, the reason why it is effective is because both politicians and the media are bought and paid for by the wealthy and the rhetoric reflects that. You can’t have a “democracy” without an engaged citizenry. What did we have in 2012… “Mitt is worse, no Obama is worse, no, Mitt is worse” ad nauseum. Did anyone demand answers about a Presidential “kill list” or whether banks should have carte blanche to act in whatever manner they want when many should have been sent to prison, among so many other issues. If we demanded and voted for politicians who represented the interests of the vast majority and actually followed through with their words, maybe we wouldn’t spend years wondering why policies rarely help citizens first.

          2. ScottS

            So your solution is to vote for different liars? Obama promised us he wasn’t George W. Bush and proved to be — if anything — more W than W.

            How do you hold him accountable? Vote him out of office so he can collect his pay day by picking up fat “public speaking” fees? The politicians blow whichever way the wind is blowing. Inequality is the problem, politicians simply flutter in the breeze.

  3. zygmuntFRAUDbernier

    I don’t suppose the US has Public inquiries such
    as the not-yet-completed Leveson Inquiry into
    alleged phone-hacking, etc.

    In Canada, following the Sponsorship Scandal there
    was the Gomery Inquiry in 2005, and I think it was
    worth it: to let the truth reveal itself through
    public hearings, and eventually the long Commission

    For the phone-hacking scandal, News of the World related,
    I believe closing submissions were last summer and
    there remains to be published the report or reports.

    The Telegraph (UK) had a piece on this; it makes for rather
    interesting reading:

  4. Susan the other

    Obama is aiding and abetting all the origination fraud, securitization fraud, servicing fraud, mod fraud, foreclosure fraud, and chain of title fraud. In fact, he and his DoJ are obstructing justice as aggressively as they can. Obama thinks offering 250.00 a month is going to appease anyone? This is a classic example of trying to solve complex problems with cheap and dirty solutions. He can’t be this stupid.

  5. Doug Terpstra

    Yves establishes a critical record of evidence against this regime, such that future historians will marvel over Obama’s perception management skills, which make Reagan look amateurish as he pulls off the great Shock Doctrine betrayal (and WWIII for Israel) with so little resistance. Surviving generations will study Obama’s sleight-of-mind and neural-linguistic hypnosis techniques in great detail, while speculating endlessly on the glaring malpractice and negligence of most presstitute journalists and pundits as the rule of law disappears. And finally, given the explosion of information technology, they will be especially stumped by the credulous naïveté of his blind authoritarian followers as well, who make the 1930s German population look piercingly judicious.

    All of this in hindsight will finally be seen as a necessary crisis in the next evolution of humanity. What an interesting time to be alive.

    1. psychohistorian

      That critical history thing that NC is…..haven’t you heard about this guy with the last name of Winston is going around changing history and stuff….says someone is telling him to do so…..

  6. DWoolley

    Secretary Donovan has repeatedly demonstrated the ability to misdirect and guide a message. I always found it interesting the key role he played in the robo signing settlement. He is not an attorney, yet he was negotiating legal settlements with the nations top law enforcement? I was expecting someone, Kamala Harris or Lisa Madigan, to ask “who is this guy and why is he here?” Tom Miller, Iowa AG, was Secretary Donovan’s Paul Broadwell, enough said.

    We can be thankful the Administration didn’t have the horsepower to push the Jobs Act through last summer. I believe their intention was to fund the renovation of the foreclosures, temporarily alleviating the unemployment in the hard hit construction trades, while getting the homes in tip top shape to package and sell to the investors like Blackrock. Which once completed would open the door for government subsidized rent, such as section 8 housing. None of these homes were to be made available to regular folks, unless regular folks had the need for a block of 3000 homes.

    Yes Secretary Donovan, you have done quiet enough for the American people.

    1. david j michel jr

      well said,you have restored my faith in this site ,now if you could just straiten out Brad Delong!

  7. robert

    Uh, Tim Geithner, former NY Fed head overseeing banks during the Madoff of the mortgage undustry, is Treasury Sctry. And you wonder why thre is a cover up?

  8. Old Hickory

    Forgive my ignorance (maybe I haven’t been reading as closely as I should), but if I get one of the points the right response would be to have the banks take the hit themselves. True? Which they will not be forced to do since it would suck up the foam from the runway. This would be as likely to happen as instituting 15-20% capital requirements on the TBTFs. Am I right?

  9. Carol Sterritt

    I like what Doug Tempstra is saying, but your mention of “Winston” is spot on as well.

    Lately, I often reflect on how well suited the German People of the 1930’s were to one Adolph Hitler, and their votes for him in 1933 were much as so many voters chose just nine days ago – votes made out of fear, votes made while telling themselves that it won’t be that bad.
    Few Amercians realize that the German people in 1933 weren’t really voting FOR things that Mr Hitler was proposing – they were voting against Bolshevicks, who would come in and kill their families as surely as the Czar’s family ahd been killed. Even many Jewish people voted for Mr Hitler – they told themselves, if they were rich, that maybe he meant only to curtail the untidiness of poorer Jewish people. And if poor, they thought maybe only the rich banking families would seriously be disturbed by new policies. of the

    Meanwhile, great proportion of Americans no longger think straight, if they think at all. Although as many as 67% of all New York City residetns suspect that Nine eleven wasn’t as the official story proclaims, most other Americans accept it. After all, people know Intelligence and Security agencies protect us from sinister cabals and conspiracies while simultaneously there is the notion that conspiracies don’t exist and are only “theories.”

    Holding two contradicting thoughts at the same time is called cognitive dissonance.

    But I can’t stop myself from feeling that Mr Hitler was the epitome of what the conformist side of German Society held as being the proper leader for their nation, just as the conformist side of American society has chosen Mr Obama as the epitome of the leader of our conformist culture.

    That all resonates for me right now. And Milton Mayer said it succinctly – “Like a thief in the night, tyranny always descends upon sleeping societies in a cloak of patriotic conformity.”

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