As wave after wave of empty loan modification promises and false homeowner rescue plans wash over us like the hot breath of a Southern Baptist preacher, precious little help arrives from on high.  It’s the dichotomy of consequence.  Americans on Main St. fight for scraps while those on Wall Street sip champagne and caviar purchased with tax payer dollars.

Amidst the wreckage of the mortgage industry, no real help for homeowners has materialized.  Legislators talk about helping Main St. Americans, but little actually trickles down.  It turns out that we were only invited to the poker game to make the pot bigger.  And as many have discovered, you can’t beat the house.  Now, as the banking industry brags about all the loans it has modified, it hides the ugly truth that the majority of these modified loans end up right back in default.  Why? Because lowering the interest rate for a few years or tacking a few payments on to the end of the loan aren’t designed to fix the problem.  These are palliative measures designed to relieve the legislative pressures.

From the excellent FHA Mortgage Guide:

“After three months,” says Comptroller John C. Dugan, “nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent.”

Too little, and much too late.

Ironically, very few of the people I talk with took risky loans or speculated in the same way Wall Street Bankers did.  Their moral crime was to have pursued the American dream and bought a home at the peak of the market. Timing is everything.  Many of them qualified for and chose responsible fixed rate mortgages.  But the collapse vaporized their remaining equity and savings, and in many cases claimed their jobs or took a big bite out of their income.  Under those circumstances it doesn’t matter what kind of mortgage you have.   You’re done.

And as they go over the cliff with their families in tow and their American dream in pieces, the morally righteous shake an angry finger and preach the gospel of personal responsibility.  “If we bail you out, you’ll just do it again!”  Why doesn’t somebody say that to Wall Street

And yet, it took only the slightest hint of improvement in this train wreck economy to start the banking industry calls for halting the stimulus, dumping proposed reregulation, and getting back to business as usual.

According to Bloomberg, Morgan Stanley analysts report that

“A remarkable change in investor sentiment has doubled the price of some collateralized loan obligation securities in the past month.”

Does that term sound familiar?  It should.

“CLOs are a type of collateralized debt obligation that pool high-yield, high-risk, or junk, loans and slice them into securities of varying risk and return.”

In other words, CLOs are kissing cousins to the collateralized debt obligations at the core of the global economic meltdown.  Cooked up by the greedy Wall Street alchemists to juice yields and fees while burying and passing the hidden risk  of incomprehensible derivatives along to foreign investors, this toxic stew of credit garbage finally boiled over and ripped apart the lab.  But hey, that was soooo last year. For now, bailouts, loans, and loan guarantees safely in place, it’s time to start pushing for this quarter’s multi-million dollar bonus.

Sure, and monkeys will fly out my….what was Wayne’s line in that movie?

So now, Republican law makers are pushing the Obama administration to include a provision in the stimulus package to drive mortgage rates down to 4%!  Okay, but I got hung up on this part:

“Senate Republicans circulated a sweeping plan to drive down the cost of mortgages by expanding the federal government’s role in the industry.”

Uh, wait a minute.  Aren’t these the same guys who opposed the stimulus package, railed about government’s involvement in banking, and accused Obama of being socialist?  I guess the government isn’t the problem when you mess up and need help.  Mom and dad are the problem when you want to get high and party, but who do you call when you total the family car?

And exactly how would they expand the federal government’s role?   Well, there’s this:

“the GOP was coalescing behind a proposal designed to give banks an incentive to make loans at rates currently estimated at 4 percent to 4.5 percent.”

Oh good.  That’s the answer.  Let’s give the banks more incentives, because $8 trillion worth of TARP funds, loans, loan guarantees, and direct purchases just wasn’t enough.

Listen, the banks are drowning in money.  Supply-side theory isn’t working.  You can pour money into the banks all day long and they still aren’t going to lend a lot of it; the risk is simply too high.  Risk is pandemic because there is no demand.  And there is no demand because jobs are vanishing at an alarming rate, unemployment and underemployment have skyrocketed, and people are losing their homes.  Everybody is worried.

I include investors in the above category.  As legislators contemplate the creation of a “bad bank” to engage in a “trash for cash” exchange of tax payer funds for toxic mortgages, the big concern is how to value–or “mark to market” in the vernacular–these securities.  No one can figure out what this garbage is worth because the underlying assets–homes in this case–keeping dropping in value.   All the help has been focused on the banks; none on the home owner.

Sure, some home owners got greedy and took excessive risk.  Sounds just like the investment banks, in miniature.  Greed is greed.  And it isn’t good.  And Gordon Gekko was a fictional character in a Hollywood movie.

So let’s stabilize the real estate market and promote demand, because Adam Smith also said

“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”

The Wealth of Nations, Book IV Chapter VIII

“I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”   -Thomas Jefferson

What would he say if he were here today?

A lot of numbers get tossed around when the conversation turns to the bailout and the ultimate tax payer bill for the excesses of the aggressively deregulated, greed-is-good, free-market ideology of the past 40 years.  None of them are as startling and disconcerting as that claimed recently in an article from Bloomberg:

“The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago. The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.”

Think about that.  Can you even wrap your brain around those figures?

And the banking industry recipients of TARP funds, loans, and loan guarantees have responded to recent requests for some accounting of their employment of these funds with comments ranging from “we don’t keep track of that,” to “we’re not going to tell you.” Nice.

Then there is Bernard Madoff, former chairman of the NASDAQ stock exchange and crown prince of greed, whose own sons apparently tipped off investigators and brought down a financial empire with tentacles reaching around the globe.

What have we learned from all this?  I’m not sure yet.  But if there is one lesson that I hope we can all take away from this–from homeowners who gambled on housing to the Bernard Madoffs of Wall Street–it is that greed is in all of us, and it is not good.

Here’s to 2009 and to hope for wisdom, humility, and hope.  I wish you a prosperous new year.

While Wall Street banks and Detroit auto makers fight over trillions of dollars of taxpayer bailout funds, the largely ignored homeowner tightens her belt and trudges on as a new flock of vultures circles overhead.  Yep, the next “big boom” for underemployed mortgage industry professionals is Loan Modification.

Watch out.  So far, loan modification is a sham, a cruel joke, a mirage.  Talked up by politicians desperate to look good, lenders so far have not been required to participate.  Modifying loans is a good idea, but it isn’t working yet.  And until it does, don’t shell out money for something you can do yourself.

For now, just recognize that it’s being promoted as the next big industry opportunity, and you’re the target market.  The last wave was credit repair, which at its nadir was network-marketed like Amway.  This time it’s loan modification, a moral cousin of ambulance chasing.  And, as the Sacramento Bee’s Jim Wasserman reported, the scam artists are out in force.

“Home Front has heard countless stories from struggling borrowers of phone calls offering to mediate with banks for $2,000 to $4,000 or more. Many are so desperate and confused they pay for what they can do themselves or get for free from nonprofit loan-counseling firms. Some say they have paid their advance fees, then can’t reach the firm.

The California Department of Real Estate cites an “explosion” of for-profit loan-modification firms as the foreclosure crisis deepens. Former lenders and real estate agents have retooled, and jumped to the newest way to generate income.

“In some instances the licensees entered the business not appreciating or understanding what the rules were,” said department spokesman Tom Pool. “You have another group that’s just not licensed and looking to make a buck.”

There are no experts.  This is a brand new problem.

Besides, Modifications May Not Help

In addition to being elusive, loan modifications have so far been ineffective.  Evidence from the modifications done this year suggests that whatever lenders are doing isn’t enough.  The OCC reports reports this:

Comptroller of the Currency John C. Dugan said today that new data shows that more than half of loans modified in the first quarter of 2008 fell delinquent within six months.

“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent,” the Comptroller said in remarks at the Office of Thrift Supervision’s National Housing Forum today.

This chart shows the effective 2008 Q1 & Q2 “redefault” rates.  The result are shocking.  While only more time and analysis will reveal the cause of the failure, the suspects are  a) loans too badly underwritten to be modifiable,  b) modifications that didn’t go far enough, and  c) consumers who replaced the attenuated mortgage payments with other debt.

Anyway, my point is this: don’t shell out a chunk of money to an expert who promises to fix everything.  Call or email me.  I’d be happy to share their “secrets” with you along with alternatives to consider when the lender won’t modify your loan.

The most discouraging thing about the recent bailout is that it has done nothing to help troubled homeowners, while passing gobs of tax payer money to Wall Street so that Goldman Sachs can pay huge executive bonuses and surreptitiously reopening tax loopholes that provide $25b in tax incentives for Wells Fargo to buy Wachovia Bank.  Coming on the heels of a year’s worth of hollow promises, this is unconscionable.

Peter Miller of the FHA Mortgage Guide offers some updated statistics.

“Meanwhile, in case anyone missed it, RealtyTrac.com reports that homeowners received 279,561 foreclosure filings in the month of October. That’s up 25 percent when compared with October 2007.

While foreclosure numbers are going through the roof — or they would go through the roof if more people had such things. HUD reports that during the last two weeks of October it refinanced 54 — FIFTY-FOUR — delinquent conventional borrowers, about one per state.

Read the rest of this entry »

I had to give myself the day today to digest what just transpired and to reflect on the significance of this event.  After watching a quarter of a million people gather in the streets of Chicago and people around the country and the world celebrating the election of this country’s first African American president, I began to realize the magnitude of the hope it has inspired.

I was also thinking about this:  it was only 44 years ago that the Civil Rights Act was signed into law.  It’s passage overcame a 54 day filibuster led by Richard Russell the Georgian democrat and the “Southern Bloc” of former confederate state senators.  Said Russell at the time,

We will resist to the bitter end any measure or any movement which would have a tendency to bring about social equality and intermingling and amalgamation of the races in our (Southern) states.

Wow.  What a long way we’ve come.

This election doesn’t solve the world’s problems.  But for many, it’s a reason to hope.

While I don’t personally need any additional motivation to propel me to the polls in the morning, I worry about the effects of apathy, disinterest, and inconvenience on the rest of you.  So I went in search today for thoughts about voting and democracy, and I found some inspirational quotes. Here are a few of my favorites.

ON INDIVIDUAL EFFORT AND INVOLVEMENT

“Politics ought to be the part-time profession of every citizen who would protect the rights and privileges of free men.” -Dwight Eisenhower

“Nobody makes a greater mistake than he who does nothing because he could do only a little.” -Edmund Burke

“All tyranny needs to gain a foothold is for people of good conscience to remain silent.”  -Thomas Jefferson

“The tyranny of a prince is not so dangerous to the public welfare as the apathy of a citizen in a democracy.”  Montesquieu 1748

“We preach the virtues of democracy abroad. We must practice its duties here at home. Voting is the first duty of democracy.”  -Lyndon Johnson

“The only title in our democracy superior to that of President is the title of citizen.”  -Louis Brandeis

IT’S A TEAM SPORT

“The citizen can bring our political and governmental institutions back to life, make them responsive and accountable, and keep them honest. No one else can.”  -John Gardner

“The survival of democracy depends on the renunciation of violence and the development of nonviolent means to combat evil and advance the good.”  -A.J. Muste

“Experience hath shewn, that even under the best forms (of government) those entrusted with power have, in time, and by slow operations, perverted it into tyranny.”-Thomas Jefferson

THE DANGERS OF APATHY

“Those who seek absolute power, even though they seek it to do what they regard as good, are simply demanding the right to enforce their own version of heaven on earth. And let me remind you, they are the very ones who always create the most hellish tyrannies. Absolute power does corrupt, and those who seek it must be suspect and must be opposed.”  -Barry Goldwater

“A democracy which makes or even effectively prepares for modern, scientific war must necessarily cease to be democratic. No country can be really well prepared for modern war unless it is governed by a tyrant, at the head of a highly trained and perfectly obedient bureaucracy.”  -Aldous Huxley

“A society that will trade a little liberty for a little order will lose both, and deserve neither.”  -Thomas Jefferson

“If once the people become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves. It seems to be the law of our general nature, in spite of individual exceptions.”  Thomas Jefferson

FAMOUS PEOPLE WEIGH IN

 ”If liberty and equality, as is thought by some, are chiefly to be found in democracy, they will be best attained when all persons alike share in the government to the utmost.”  -Aristotle

“An imbalance between rich and poor is the oldest and most fatal ailment of all republics.”  -Plato

“In a time of universal deceit, telling the truth becomes a revolutionary act.”  -George Orwell

“Democracy is never a final achievement. It is a call to an untiring effort.” -John F. Kennedy

“In a democracy, dissent is an act of faith.”  -J. William Fulbright

FUNNY IF WASN’T SO TRUE

“The two greatest obstacles to democracy in the United States are, first, the widespread delusion among the poor that we have a democracy, and second, the chronic terror among the rich, lest we get it. [1941]” -Edward Dowling

“The best argument against democracy is a five minute conversation with the average voter.”  -Winston Churchill

On the eve of this election, I hope you will vote tomorrow, regardless of your choice.  Support and encourage everyone to exercise their right and duty.  Give thoughtful consideration to the issues and discard the ugly and the superficial.  We will be living with these decisions long after the name-calling of his election have faded from memory.