Keeping People in Their Homes

Keeping People In Their Homes, 14 Months Later

The NYTimes has a pretty remarkable piece in tomorrow's edition which makes clear that the Obama Administration strategy to keep people in their homes, funded with less than half the funds of what AIG alone received, is, let us say, not working.

A pointed passage:

Capitol Hill aides in regular contact with senior Treasury officials say a consensus has emerged inside the department that the program has proved inadequate, necessitating a new approach. But discussions have yet to reach the point of mapping out new options, the aides say.

“People who work on this on a day-to-day basis are vested enough in it that they think there’s a need to do a course correction rather than a wholesale rethink,” said a Senate Democratic aide, who spoke on the condition he not be named for fear of angering the administration. “But at senior levels, where people are looking at this and thinking ‘Good God,’ there’s a sense that we need to think about doing something more.”

Back in July, I wrote:

There have been calls from some quarters for a 2nd stimulus plan, an acknowledgement that what the first stimulus has not done enough to stop the current economic deterioration.  This may be necessary, but I think what will need to be done is much more comprehensive than just a new stimulus plan.  Future action could include a much more aggressive action against foreclosures, a more honest assessment of the health of our financial sector, an immediate capping of credit card rates and a rollback of actions taken by credit card issuers in the last few months, a speeding up of the 2010 stimulus spending, a completion of the Doha trade round and a much more aggressive G20 effort to produce a more successful global approach to the global recession, the quick passage of the President's community college proposal, enacting comprehensive immigration reform which will bring new revenues into the federal and state governments while removing some of the downward pressure on wages at the low end of the workforce, and recasting both the President's climate and health care initiatives as efforts which will help stop our downward slide and create future growth.

The new attention to this faltering program is a welcome step by the Adminstration and its Treasury Department.

Next Generation Thinking about the Mortgage Mess

In a post a few weeks ago I argued that policymakers were going to have to attack our core economic challenges we face with much more creativity and vigor than we have seen so far.   The Times today has an excellent op-ed by Daniel Alpert which offers up some such next generation thinking about how to get out of the mortgage mess - a critical part of any emerging national economic strategy - equal in size and scope to the problem itself.   

It begins: 

BY providing financial institutions with enough capital to survive (and even thrive) over the past year, the federal government prevented the global economy from grinding to a halt. But it may also have unwittingly encouraged banks to slow the resolution of delinquent, defaulted and underwater loans secured by homes and commercial real estate. Such “extend and pretend” behavior does little except delay losses — which helps explain the recent crop of prediction-beating, market-rallying bank earnings reports — while prolonging and worsening the damage done by bad loans.

Just this week, the White House met with a gaggle of mortgage company executives to discuss why their loan modification programs have been so ineffective. In fact, a recent study by the National Bureau of Economic Research illustrates that these programs haven’t been ineffective so much as unused: only 8 percent of seriously delinquent borrowers have received any form of mortgage modification and fewer than 3 percent of such borrowers received a concession on principal or interest payments from their lender. By contrast, about 50 percent of those seriously delinquent loans had foreclosure proceedings initiated against them. That’s a record rate of 1.9 million foreclosure filings in the first half of this year.

Banks, of course, typically lose more money by foreclosing on a home than by renegotiating the principal of a loan — but, as foreclosure timelines often run 12 to 18 months, that loss takes far longer to show up on their balance sheets. As a result, banks are pushing the mess (and the attendant additional losses) well into 2010 while they maintain the fiction that borrowers will be able to repay severely underwater loans in full. Banks are even beginning to turn down borrower requests for immediate “short sales,” in which homeowners sell for whatever they can get and then give all proceeds to the lender, because this, too, means that the bank must record a principal loss at once, rather than down the road.

The sheer magnitude of the debt bubble — doubling to $11 trillion in home loans and adding tens of trillions in total American debt in the past decade — along with the collapse of real estate prices, make it extremely unlikely that any of these houses will recover their value soon enough to mitigate the losses embedded in banks’ balance sheets. And by stretching out the time over which banks will continue to have their capitalization hit by losses, banks cannot soon fulfill their mission of providing new capital for the recovery and growth of the economy. Fearing for their own solvency, banks are instead salting away enormous, record-setting reserves.

To put the bubble behind us, we need to place mortgage lenders on a path to settling up with underwater homeowners. One of the few viable ways to do this is for banks to accept the voluntary surrender of deeds and then lease the homes back to their former owners. The former homeowners should then retain a right to purchase their homes back at fair market value, after, say, five years, during which time they would need to get their financial affairs in order.

Congress could pass legislation, within the bounds of constitutional protection of contracts, that would require lenders to provide such a lease-back arrangement to any borrower who wants one. The former homeowners would pay rents set in accordance with local rates (which in almost all cases would be considerably lower than the total of their former bubble-era mortgage payments, taxes and insurance premiums).

Count me as one of those who believe that for the national to see broad-based prosperity in the years ahead the banks will have to take some kind of "haircut" on consumer debt. Restructuring, deleveraging, or whatever we are going to call the process of lessening the debt load of consumers will at some point become seen as a requirement for the future success of the American economy and not some malevolent form of "moral hazard."  Until American consumers can get back in the economic game "recovery" will be more wish than reality. 

Congressional GOP's Numbers Drop Some More

The weekly Daily Kos poll is in.  The trends continued unchanged - Obama still very popular, Democrats significantly more popular than the GOP, Congressional Dems continue to tick up a bit, Congressional Republicans continue their free fall.   As of today the Congressional Republicans have an 18 percent approval rating - 18 percent!  Obama 69.  As DemFromCT writes

Tune in next week to see if John Boehner can make himself and his Republicans any less popular. He's -11 himself since the first poll 1/5-8, and the Congressional GOP is -12 (in contrast, Nancy Pelosi is +2 and Congressional Dems are +5.) 

The net-net on the battle over the Recovery Plan? Congressional Democrats gain 5 points, the Congressional GOP, in an already catastrophic position with the public, drop 11.  

It will be interesting to see how Bobby Jindal interprets these numbers in prepping for his Tuesday response to President Obama. Will he really carry the water of the wildly discredited and out of touch Washington GOP? Or distance himself from them, carving out a more constructive position in the national debate? Will be interesting to see. 

Economic Recovery? No, Just Pass the Cannoli

On Wednesday I went on Fox News to talk about the stimulus.  Or so I thought.  Fox anchor Neil Cavuto ended up spending more time talking about cannoli and weight loss than the struggle of every day people and the American economy.  Check it out:

 

Krugman on Rising to the Challenge

From his column today:

And I don't know about you, but I've got a sick feeling in the pit of my stomach - a feeling that America just isn't rising to the greatest economic challenge in 70 years. The best may not lack all conviction, but they seem alarmingly willing to settle for half-measures. And the worst are, as ever, full of passionate intensity, oblivious to the grotesque failure of their doctrine in practice.

There's still time to turn this around. But Mr. Obama has to be stronger looking forward. Otherwise, the verdict on this crisis might be that no, we can't.

Chuck Todd's Question Last Night

Like many other commentators, I thought the President was terrific last night.  Commanding, thoughtful, grounded, pragmatic.  He made a powerful case not only for the Recovery Plan, but for his Presidency.   Let's hope we see more of these formats in the future.  They are good for the nation, and good for the President.  

But there was one exchange that I kept coming back to this morning - his answer to Chuck Todd's question about consumer debt.  Chuck's question was similar to one I asked recently in this post, Spend? Save? What's The Right Course for Everyday Americans?   I post the question and answer below for your consideration, as I think getting this one right may be a predicate for us designing a Recovery Plan that will do what we need it to do over time: 

Q Thank you, Mr. President. In your opening remarks, you talked about that if your plan works the way you want it to work, it's going to increase consumer spending. But isn't consumer spending or overspending how we got into this mess? And if people get money back into their pockets, do you not want them saving it or paying down debt first before they start spending money into the economy?

THE PRESIDENT: Well, first of all, I don't think it's accurate to say that consumer spending got us into this mess. What got us into this mess initially were banks taking exorbitant, wild risks with other people's monies based on shaky assets. And because of the enormous leverage where they had $1 worth of assets and they were betting $30 on that $1, what we had was a crisis in the financial system. That led to a contraction of credit, which in turn meant businesses couldn't make payroll or make inventories, which meant that everybody became uncertain about the future of the economy, so people started making decisions accordingly -- reducing investment, initiated layoffs -- which in turn made things worse.

Now, you are making a legitimate point, Chuck, about the fact that our savings rate has declined and this economy has been driven by consumer spending for a very long time -- and that's not going to be sustainable. You know, if all we're doing is spending and we're not making things, then over time other countries are going to get tired of lending us money and eventually the party is going to be over. Well, in fact, the party now is over.

And so the sequence of how we're approaching this is as follows: Our immediate job is to stop the downward spiral, and that means putting money into consumers' pockets, it means loosening up credit, it means putting forward investments that not only employ people immediately but also lay the groundwork for long-term economic growth. And that, by the way, is important even if you're a fiscal conservative, because the biggest problem we're going to have with our federal budget is if we continue a situation in which there are no tax revenues because economic growth is plummeting at the same time as we've got more demands for unemployment insurance, we've got more demands for people who've lost their health care, more demand for food stamps. That will put enormous strains on the federal budget as well as the state budget.

So the most important thing we can do for our budget crisis right now is to make sure that the economy doesn't continue to tank. And that's why passing the economic recovery plan is the right thing to do, even though I recognize that it's expensive. Look, I would love not to have to spend money right now. This notion that somehow I came in here just ginned up to spend $800 billion, that wasn't -- that wasn't how I envisioned my presidency beginning. But we have to adapt to existing circumstances.

Now, what we are going to also have to do is to make sure that as soon as the economy stabilizes, investment begins again; we're no longer contracting but we're growing; that our mid-term and long-term budget is dealt with. And I think the same is true for individual consumers. Right now they're just trying to figure out, how do I make sure that if I lose my job, I'm still going to be able to make my mortgage payments. Or they're worried about how am I going to pay next month's bills. So they're not engaging in a lot of long-term financial planning.

Once the economy stabilizes and people are less fearful, then I do think that we're going to have to start thinking about how do we operate more prudently, because there's no such thing as a free lunch. So if you want to get -- if you want to buy a house, then putting zero down and buying a house that is probably not affordable for you in case something goes wrong, that's something that has to be reconsidered.

So we're going to have to change our bad habits. But right now, the key is making sure that we pull ourselves out of the economic slump that we're in.

For more on my thoughts on the politics of the Recovery Plan see this recent post, What The Senate Bill Cut  and this one, The Utter Bankruptcy of Today's Republican Party.

What the Senate Bill Cut

Over at Daily Kos Meteor Blades has a list of what the Senate cut from the House bill.  

The cuts include many investments near and dear to NDN's heart, things we have fought hard for in recent months.  

As I wrote yesterday "reconciling" these two bills is not going to be easy, and will set a precedent for how the two chambers and the White House reconcile future legislation.  

Important to watch is what commitment emerges this week to keep people in their homes.  The Senate version of the bill has more money for fixing the AMT - which affects people in the upper end of the middle class - than is being floated for dealing with what may be the single most important act we can take to attack the financial crisis - stablizing the housing market.  Michael Moynihan has been making the case this week for a new USA Mortgage, a 4 percent 30 year mortgage for all Americans.   It is an idea that deserves serious consideration. 

Whatever happens this week, the leaders of our government cannot, for one moment, give the impression that the banks and those with means are getting the lion share of attention and bailout, leaving once again those struggling to get by to get what's left over.   This is the core of the politics the American people rejected last fall, and the core of the mandate the new President has been given. If President Obama is true to his arguments of this past week, and he believes the GOP has been peddling tired, failed and worn ideas, then he has an obligation not to allow too many of them in the final recovery bill and financial rescue plan that emerge this week.  Given where things seem to be heading this may be harder than the new President would have wanted.

Noon Update - Carla Marinucci of the SF Chronicle has an extensive analysis today of the moment's politics which features commentary from NDN.  It is well worth reading. 

Monday 8am Update - Paul Krugman offers a powerful critique of the Senate bill this morning, while one of its architects, Senator Specter, offers this defense.

Monday 1pm Update - Tom Edsall has a piece up on Huff Post right now which shows why the AMT "fix" is such a bad idea.   

Feds Near Deal to Keep People in Their Homes

The Washington Post reports to today that the FDIC and Treasury Department are close to a deal that would keep people in their homes. Since NDN began its Keep People in Their Homes campaign a month and a half ago, momentum has steadily built to restore stability to the housing market.

From the Post:

Negotiators for the Treasury and Federal Deposit Insurance Corp. are nearing agreement on a plan to have the government guarantee the mortgages of millions of distressed homeowners in what would be a significant departure for the federal rescue program, which has so far directed relief exclusively to banks and other financial institutions.

The plan, which sources said could cover as many as 3 million homeowners in danger of foreclosure and cost $40 billion to $50 billion, would go well beyond previous government and private-sector initiatives. Critics say these have attracted too few lenders or offered too little aid to homeowners to stem the foreclosure crisis.

But with economic anxieties continuing to mount and political pressure growing for expanded help to homeowners, federal officials could announce a new program to cover as much as $600 billion in mortgage loans in the coming days, sources said. They spoke on condition of anonymity because the negotiations were ongoing.
...

"The key to our economic recovery is in addressing the root cause of this crisis -- the housing crisis," said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee. "Federal agencies and financial institutions must do more to modify the mortgages they hold in order to stop foreclosures and help families keep their homes."

Also, on Tuesday in the Wall Street Journal, Andrew Caplin, Thomas Cooley, Noel Cunnihgham, and Mitchell Engler wrote an op-ed called "We Can Keep People in Their Homes." NDN's argument, that arresting the financial cave-in involves, at its core, keeping people in their homes, looks to have reached the tipping point. We urge those involved in negotiations to make this a reality. 

Pearlstein on Wall Street's Responsibility

Steven Pearlstein has a wonderful close to his column today:

In putting several trillion dollars in government funds on the line, the country has now done just about everything that Wall Street could have asked to address the financial crisis. The question now, as John Kennedy might have put it, is what Wall Street is ready to do for its country. So far, the answer is not much.

After getting their closed-door briefing yesterday from Paulson on the government's latest initiatives, Wall Street's finest literally ran from the Treasury to their waiting limousines, bypassing a media scrum eager to convey any scrap of wisdom or insight.

Court reporters will tell you they can always tell the innocent from the guilty on these kinds of perp walks, and the Wall Street crowd yesterday looked particularly guilty, unable even to conjure up a soothing word to a nation fretting over its shrunken 401(k)s, or a simple thank you to taxpayers for having saved their bacon. Their silence and invisibility throughout this crisis attests to the moral and political bankruptcy of a financial elite that is the perfect match for the financial bankruptcy they have now visited upon their investors, their creditors and their customers.

After yesterday's "historic" meeting, we are told by industry apologists that we are supposed to be grateful to nine leading banks for having "volunteered" to accept additional capital from the Treasury, along with a government guarantee for newly issued bank debt, even if it means having to accept a dilution of existing shares and a few harmless restrictions on their operations.

Pardon me if I'm less than blown over by this munificent offer, but it hardly seems commensurate either with the severity of the current crisis or the depth of the banks' culpability in fomenting it.

If Wall Street were truly serious about convincing Main Street that we're all in this together, its top executives would have stepped before the cameras yesterday and promised not to cut lines of credits to long-standing business customers who have never missed a payment.

They would have committed themselves not to foreclose on any homeowner who is willing and able to refinance into a new, government-guaranteed, fixed-rate mortgage set at 85 percent of the current value of the property.

They would have offered to suspend dividend payments until capital levels had been restored to pre-crisis levels.

They would have given us their solemn promise not to advise clients to hold on to their own investments while quietly dumping whatever they can from their own portfolios and shorting every security in sight.

With the Treasury now desperate for help in managing its new rescue efforts, they would have volunteered, at no cost to taxpayers, the services of some of those investment bankers and financial wizards who now don't have much else to do.

And the maharajas of finance could have set a wonderful example if they had all gotten together and agreed to work for a dollar a year until the crisis has passed.

There's a word that captures the instinct to take these kind of bold moves in the midst of a national crisis -- it's called leadership. We've seen quite a bit of it these past few weeks from public officials like Hank Paulson, Ben Bernanke, Tim Geithner, Sheila Bair, Nancy Pelosi, Barney Frank, John Boehner -- even George Bush. Wall Street, by contrast, has served up a nothing sandwich, a lack of leadership that's been stunning.

 

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