Lately I've been recalling a particular image from my youth. It is that of the Isla Vista branch of the Bank of America in flames. A photo of this event, the result of politically motivated arson in 1970, was then presented on a poster as the decorative background for a "Bank of Amerika" check and so became an iconic image for popular anger against the Vietnam war and other outrages.
While Madoff is being credited by many as having committed the financial crime of the century, methinks this a case of the great thieves having the little thieves lead off in chains (Diogenes?). Major mortgage originating banks, as principal coauthors of the current economic crisis, continue to cause suffering on a breathtaking scale with shameless impunity.
A root cause of the greater economic crisis is the mortgage meltdown, which has caused the rapid evaporation of $trillions in homeowner equity. This, along with rising unemployment and often deceptive and onerous terms of certain types of loans is causing foreclosure rates to soar, in turn producing losses to investors in securitized loans. These investors were themselves, like many borrowers, were often duped by banks in collusion with risk rating agencies into buying bundles of these securitized mortgages.
Yet the banks, while at the center of this and much other wrongdoing and having received so much support in the form of taxpayer dollars, have recently managed to manipulate Congress and shape policy so as to protect themselves from those whom they have harmed.
Last April a bill that passed the House was defeated in the Senate in a 45 to 51 vote that would have allowed judges to change the terms of a mortgage loan, pursuant to a bankruptcy proceeding, thus reducing the debt load and mortgage payments for a financially troubled borrower. While mortgages on second homes and other major personal assets are subject to such write downs, one's principal residence is excluded from such treatment. Go figure. This bill would have provided a significant incentive for banks to modify loans on their own, something to which the major mortgage lenders claim they are committed. The banks and their Congressional supporters claim that such a "cram-down" law would cause them to have to raise interest rates on future loans. But if the banks are going to modify loans in any case, would not losses associated with such voluntary write-downs also put the same upward pressure on rates? In any event, the Obama administration's support for this bill was underwhelming.
As to the investors in securitized mortgages, banks had previously been claiming that the threat of investor lawsuits was preventing them from modifying loans. So Congress obliged:
The quiet passage of a law in May that makes it illegal for investors to sue mortgage servicers who modify loans through the government program is also expected to increase the amount of workouts it produces.
Mortgage Investors Fear Safe Harbor Law
This sweeping abrogation of private contracts, coupled with the Obama administration's Making Home Affordable Program announced in February providing financial incentives to banks for modifying loans, should have opened the floodgates for the hundreds of thousands of mortgage modification applicants.
But it appears not.
And yet, five months later — and two years into the housing bust — the rising tide of foreclosures remains the single biggest threat to economic recovery. In 2005, at the height of the bubble, there were some 800,000 foreclosures. This year, sadly, we are on pace to see 3.5 million foreclosures, with no end in sight. "On Main Street, the recovery will begin when foreclosures stop," said Senator Jack Reed of Rhode Island, who has been pushing the Treasury Department to get mortgage relief more quickly to homeowners at risk of foreclosure.
Treasury Ultimatum to Banks
And now for the real crazy-maker: putting aside issues of empathy, humanity, compassion and even positive effects on the broader economy, mortgage modifications are financially more advantageous to lenders than are foreclosures, particularly since home prices have fallen off a cliff.
But the most fascinating, and frightening, figures in the data detail how much money is lost when foreclosed homes are sold. In June, the data show almost 32,000 liquidation sales; the average loss on those was 64.7 percent of the original loan balance.
Here are the numbers: the average loan balance began at almost $223,000. But in the liquidation sale, the property sold for $144,000 less, on average. Perhaps no other single figure shows how wildly the mortgage mania pumped up home prices. It also bodes poorly for the quality of the mortgage-related assets lurking in banks’ books.
And yet, the losses incurred in foreclosure sales involving loans in the securitization trusts were a staggering $4.59 billion in June. "There is 100 times as much money lost in foreclosure sales as there was in writing down balances in modifications," Mr. White said. "That is not rational economic behavior." [Emphasis added]
So Many Foreclosures, So Little Logic
The article also notes that these avoidable bank losses will be passed on to taxpayers.
It's 112 days since I applied for a mortgage modification under the Making Home Affordable plan. This was after the bank actually reached out to me to resubmit an application previously denied prior to the new Obama plan. A few weeks ago a bank rep told me my loan modification was a done deal and that I'd be getting the paperwork via FedEx shortly. In subsequent phone calls I was told by various bank reps:
that my application was under further review; that the process had taken so long that new paperwork might be required; that no new paperwork was required; that for the past three months my paperwork was in the wrong department (Loss Mitigation); the new department (Imminent Default) told me I had too much in savings to qualify; someone else in the new department said my application had been sent to the old department; the old department said it was in the new department and the new department said it was in the old one and, finally, that there was a third department involved in some way that could not be explained but that perhaps that was a good sign.
I have lived for a quarter of a century and raised my kids in this relatively stable neighborhood, graced with old Victorian and Craftsman homes. The street trees are thick-trunked with branches arching to meet in the middle of the avenues forming cool, green, shaded tunnels in the summer. Although situated in the San Francisco Bay Area this community maintains much of the feeling of a small town. My wife and I called it leave to Beaver land when we first moved here. Recently, For Sale signs have sprouted up all around like mushrooms after rain. This very year I had planned to sell this house and have a down payment buy a smaller retirement home, possibly just down the street. But now my equity is up in smoke and at times I feel like returning the favor.