The Foreclosure Crisis – We Won’t Be Able to Fix It, Until We Understand It

 

 

Over the last several months, I’ve had the opportunity to take my show on the road, as it were, traveling to Seattle, Portland, Reno, Las Vegas, Phoenix, Tucson, Salt Lake City and Chicago in order to meet with some highly respected consumer defense attorneys, and in several instances I’ve been invited to speak in front of groups of lawyers, homeowners and other advocates dedicated to mitigating the damage being caused by the foreclosure crisis.

 

And for the most part, I enjoyed my trip very much.  One of the things I learned during my travels, however, was distressing to say the least.

 

There are still far too many people, including professionals, that don’t understand what specifically happened that brought us to this place.  What made the last three years so miserable for so many homeowners?  And what should today’s homeowners at risk of foreclosure know, so that their individual situations can have the best possible outcomes.

 

From the earliest beginnings of the financial crisis, only one thing has been clear to everyone: It’s complicated… multi-faceted… and jam packed with jargon.

 

Many will say that there were a multitude of factors that contributed to this country’s ills, and while I would readily acknowledge that to be the case, I don’t find such thinking particularly helpful when trying to better understand the situation.  Besides, I’ve written dozens of in-depth articles covering the myriad of topics involved in our economy’s downturn, so that’s not what I’m going to do here.

 

Instead I’m going to focus on two  areas crucial to understanding everything else involved. 

 

  • What caused the meltdown that began during the summer of 2007, and led to the terrifying Fall of 2008?  Was it bad loans, bad borrowers, bad brokers, bad bankers, bad Bernanke, bad regulators, bad ratings, or something else entirely?
  • Why has the Obama Administration utterly failed in their efforts to stop the free fall in home prices, mitigate the damage caused by foreclosures, and at least help to put the middle class on a road leading to recovery?

 

By understanding the truth of what happened and why at these two pivotal moments in time, everything else will fall into place, for it was these two moments that set the course for a global economic downturn that, if history is any sort of guide, is quite likely to impact our society for the next 40 years… unless we do something to change that fate.

 

In truth, this is nothing that I haven’t written before, in fact you could find in-depth explanations of these same events in many articles I’ve written over the last three or four years.  I’m writing now because I’ve been able to find highly credible verification for everything I’ve said to-date, in the 650-page Senate Finance Investigation Committee’s report, and in an in-depth expose’ that ran in the New York Times about a month ago.
And wherever possible, rather than me explaining things, I’m going to let the experts tell the tale…

 

 

1.     What caused the meltdown and when did it start?

 

For the most part, if you ask anyone this question the answers will fall into two categories.  On one side the answer will be bad borrowers, and on the other will be bad bankers… some will want to throw bad brokers and loans under the bus as well.  The problem is that neither of those answers is new… we’ve had both before… and it didn’t lead to what we’re experiencing today.

 

It took some time along with resources that only a government like ours could have mustered, but the U.S. Senate’s Permanent Subcommittee on Investigations published its report last year titled, “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.”  It’s 646 pages long and I think it’s safe to say that it’s the most complete analysis of the factors and failures contributing to our financial crisis available.  (You can get a copy at that link just above.)

 

 

What we’re trying to determine is the pivot point… the one event that led to the worst economic downturn our country has experienced in 70 years. 

 

First you need to understand the ABCs of credit ratings.  We’ll start with some background on  bond ratings and why they’re so important to your mortgage and your home’s value.

The purpose of a credit rating is to forecast a security’s probability of default… in the case of S&P, or expected loss, in the case of Moody’s.  If a security has an extremely low likelihood of default, credit rating agencies rate it AAA.  Securities more likely to default, receive lower credit ratings.

 

Essentially, credit ratings predict the likelihood that a debt will be repaid.

 

Just like bonds, we as individuals have credit ratings… called FICO scores.  A credit rating of 800 would mean that it is highly likely that you will repay a loan, so you can be loaned money at a lower interest rate.  And a lower credit rating would mean the opposite.

 

We started using credit ratings in the late 1800s so indicate the creditworthiness of certain financial instruments, including corporate bonds, mortgage backed securities, or collateralized debt obligations (“CDOs”).  Our country has three major credit rating agencies: Moody’s, S&P, and Fitch Rating Ltd.

 

“When asked about the meaning of an AAA rating, Moody’s CEO Raymond McDaniel explained that it represented the safest type of investment and had the same significance across various types of financial products.”

 

After the stock market crash of 1929, people stopped paying attention to credit rating agencies, because of how poorly they forecasted the crash or the impact that it would have in the years following the crash.  Basically, investors lost trust in the ratings system, and as a result the credit rating business remained stagnant for decades… until 1970.

 

A former senior credit analyst at Moody’s explained that investors use ratings to:

 

  • Institutional investors such as insurance companies and pension funds may have portfolio guidelines or requirements.  For example, a pension plan might require that its money only be invested in AAA rated securities.

 

  • Investment fund portfolio managers may have risk-based capital requirements or investment committee requirements that determine what money can be invested where.

 

  • And of course, private investors that lacking the resources to do their own analysis use the published ratings to determine the risk of the investment.

 

Okay, you understand at least most of that right?  Bonds are like IOUs.  They are how the world borrows and lends money, so just like people, bonds need credit ratings to borrow and lend.  Bond investors buy and hold bonds based on ratings, because those ratings tell investors the degree of risk involved relative to the expected return.  The higher the rating, the lower the expected return.

 

U.S Treasury securities are rated AAA.  They are considered as safe as cash,

 

July 10, 2007 – A Day That SHOULD Live in Infamy

 

During the second week of July 2007, S&P and Moody’s announced the first of several mass rating downgrades, shocking the financial markets.  Here’s what the Senate investigation’s report had to say about what happened.

 

On July 10, S&P placed on credit watch, the ratings of 612 subprime RMBS with an original value of $7.35 billion, and two days later downgraded 498 of these securities.  On July 10, Moody’s downgraded 399 subprime RMBS with an original value of $5.2 billion.

By the end of July, S&P had downgraded more than 1,000 RMBS and almost 100 CDO securities.

 

(NOTE: Just so you know, these downgrades represented less than ONE PERCENT of the securities backed by sub-prime loans… there were ONLY FOUR LENDERS INVOLVED, and one was Long Beach Savings and another was Washington Mutual.  Remember that for later.)

 

This volume of rating downgrades was unprecedented in U.S. financial markets and caused the rated securities to lose value as they almost overnight became much more difficult (READ: Impossible unless at fire sale prices), to sell, and leading to the subsequent collapse of the RMBS and CDO secondary markets.

 

 

The collapse of the RMBS secondary market is the market for residential mortgages.  After this happened, you couldn’t get a mortgage or refinance one.  With mortgages no longer available, housing prices started to fall… fast.

 

Investors like banks, pension funds, and insurance companies, who are by rule barred from owning low rated securities, were forced to sell off their downgraded RMBS and CDO holdings, because they had lost their investment grade status. RMBS and CDO securities held by financial firms lost much of their value, and new securitizations were unable to find investors.

The subprime RMBS market initially froze and then collapsed, leaving investors and financial firms around the world holding unmarketable subprime RMBS securities plummeting in value.  A few months later, the CDO market collapsed as well.

Traditionally, investments holding AAA ratings have had a less than 1% probability of incurring defaults.  Analysts have determined that over 90% of the AAA ratings given to subprime RMBS securities originated in 2006 and 2007 were later downgraded by the credit rating agencies to junk status.

In the case of Long Beach Savings, 75 out of 75 AAA rated Long Beach securities issued in 2006, were later downgraded to junk status defaulted, or withdrawn.

Those widespread losses led, in turn, to a loss of investor confidence in the value of the AAA rating, in the holdings of major U.S. financial institutions, and even in the viability of U.S. financial markets.  Inaccurate AAA credit ratings introduced risk into the U.S. financial system and constituted a key cause of the financial crisis.

The July mass downgrades, which were unprecedented in number and scope, precipitated the collapse of the RMBS and CDO secondary markets, and perhaps more than any other single event triggered the beginning of the financial crisis.

 

Read that last paragraph again, if you wouldn’t mind.  That’s why many of you that have read my columns over the last few years have seen me say that IT WASN’T THE LOANS, IT WAS THE SECURITIES.  I know, inside the securities were loans… but the bottom-line was that if those bonds had been rated properly, instead of engineered to receive a AAA rating, we would not have had the massive downgrades and the market would not have frozen almost overnight.

 

How many homeowners had anything to do with packaging securities and getting them rated improperly thus destroying the RMBS and CDO markets in 2007?  None.  Then homeowners couldn’t have triggered the financial crisis.

 

Inside RMBSs you will find a relatively small percentage of actual loans.  The rest is leverage, credit enhancements, derivatives, and don’t worry about understanding all of that, just understand that only 5-10 percent of what’s inside are actual loans.

 

When a mortgage for 100,000 defaults investors are supposed to lose maybe 20 percent of their investment, the home is auctioned off to mitigate the loss, and life goes on.  But because of the amount of leverage incorporated into these securities, in some cases leverage of 40:1… so a $100,000 default could trigger losses of $4,000,000.

 

And was that the fault of homeowners?  No.  But wait, there’s more…

 

 

A Regulatory Failure of Previously Unseen Proportion

 

Despite identifying over 500 serious deficiencies in five years, the Office of Thrift Supervision (“OTS”) did not once, between 2004 and 2008, take any public enforcement action against Washington Mutual to correct its lending practices, nor did it lower the bank’s rating for safety and soundness.

 

From the Senate investigation’s report…

Hindered by a culture of deference to management, demoralized examiners, and agency infighting, OTS officials allowed the bank’s short-term profits to excuse its risky practices and failed to evaluate the bank’s actions in the context of the U.S. financial system as a whole. Its narrow regulatory focus prevented OTS from analyzing or acknowledging until it was too late that WaMu’s practices could harm the broader economy. 

OTS’ failure to restrain Washington Mutual’s unsafe lending practices allowed high-risk loans at the bank to proliferate, negatively impacting investors across the United States and around the world.

WaMu’s President described WaMu’s prime home loan business as the “worst managed business” he had seen in his career.

 

When those loans began defaulting in record numbers and RMBS mortgage related securities plummeted in value, financial institutions around the globe suffered hundreds of billions of dollars in losses, triggering an economic disaster.  The regulatory failures that set the stage for those losses were a proximate cause of the financial crisis.

 

Did homeowners run WaMu into the ground?  No.  Were homeowners in charge of running the OTS?  Also, no.

 

 

CONCLUSION

 

Okay… are you with me?  Were there bad loans?  Yes.  But we’ve had bad loans before and they didn’t cause this before.  To cause the RMBS and CDO markets to freeze almost overnight and then collapse, required lenders like Long Beach Savings and WaMu to package them into securitized bonds and then have them improperly rated.

 

That’s what led to the UNPRECEDENTED mass downgrades that began on July 10, 2007.

 

Starting on that fateful day in July 2007, investors reacted as if someone had yelled “FIRE!” in a crowded theater.  They dumped bonds they had been holding, in some cases because their by-laws required them to do so… and in other cases, they dumped them because they reasoned that if S&P and Moody’s had downgraded those, what would happen to others?

 

Did we have a housing bubble?  Yes, of course we did.  But the housing bubble had already started to deflate a year before that summer of 2007, by which time, Fed Chair Greenspan had raised interest rates 17 consecutive times, causing housing prices to begin their decline.

 

Housing bubbles, however, always deflate on a relatively gradual slope.  Why?  Because no one puts their house on the market for $500,000 and then a week later lowers the sale price to $400,000, and a week after that lowers it to $300,000.  Home prices always go down gradually, as a result, and that started to happen during the summer of 2006.

 

The events of July 2007, however, so dramatically overshadowed the deflating housing bubble that no one knew what hit them.  All of a sudden, there were no mortgages available.  Banks who had planned to sell the loans they had originated into the secondary market now saw that the market had frozen solid… and they started hoarding cash to shore up their balance sheets.

 

As the enormous write downs started making headlines beginning at the end of 2007, no one knew who would get out of what was happening alive, and who would end up being Lehman Bros.  Perhaps it was coincidental, but the Financial Accounting Standards Board had, during the fall of 2006, adopted two new accounting rules, FAS 157 and 159… the “mark-to-market” rules, as they were referred to back then.

 

These rules were adopted largely in response to the Enron debacle.  They required companies to write down their holdings each quarter to market value, and normally maybe that wouldn’t have been so bad, but starting in the last quarter of 2007, CDOs were falling in value fast as the market for them collapsed.  And the impact of the new rules that required the marking of these assets down to market value was akin to throwing gasoline on a fire.

 

 

Banks were now unsure of each other’s balance sheets so they stopped lending to each other.  And the Fed reacted to what was now a liquidity crisis by pumping hundreds of billions into the financial system.  But, it wasn’t a liquidity crisis, in its purest form.  It was a crisis born when trust in the ratings system of securities was destroyed that had caused the markets to collapse.

 

Housing prices were in a free fall.  People pulled their listing off the market, and hunkered down, while the decline in available credit and home process caused consumer spending to go off a cliff… and the layoffs soon followed.

 

The deflationary spiral had begun, and the timing couldn’t have been worse.  It was the last year of the Bush Administration, at that point un unpopular Republican president with a Democratic controlled House of Representatives.  After Bear Stearns experienced a run on its bank, causing Treasury Secretary Paulson to hand it off to JPMorgan in the middle of the night, he contacted House Speaker Pelosi, but was told not to come to congress for help… unless he could assure them that there was a crisis at the door.

 

And that’s precisely when he went there… on that day in September when there was a crisis at the door… a crisis that required $700 billion in a matter of days or all would be lost.  The chain reaction that would have taken place had we not moved to shore up the financial system would have meant absolute chaos in our streets as payrolls would not have been met.

 

So, what part of all that was the fault of homeowners?  All homeowners did was express their desire to buy homes, and provide a better life for their loved ones.  Were some fed loans they had no chance of repaying?  Yes, but that’s tragic, not greedy.  Did some buy homes they couldn’t afford?  Yes, but precious few, compared with the 4.5 million foreclosures that have already come to pass.

 

But, it’s important that everyone recognize something else as well.  Long Beach Savings and WaMu, New Century, and the rest… are not JPMorgan Chase or Bank of America.  So, if you open your mind a bit you should be able to see of glimpse of things from their vantage point… they didn’t cause the mass downgrades of July 10th to occur either, and what happened after that happened to everyone as a result of the events that occurred on that July day.

 

The water went down in the harbor, and all the boats went down with it.  Homeowners went under for the same reason GM did…. or anyone else for that matter.  But the blame game had begun.

 

 

 2.     Why did the Obama Administrations utterly fail in its efforts to mitigate the damage caused by foreclosures?

 

During the last 4-5 years, I’ve seen a side of America that I never knew existed.  And I’m not just talking about the number of foreclosures, or the lack of empathy that so many of us have for each other… although both have been shocking.  No, I’m talking about the number of government programs that failed both spectacularly and consecutively.  It truly has been awe inspiring to see the total absence of competence, followed by a lack of shame for a job not done.

 

It’s not that I haven’t seen my government perform poorly in the past…

 

I was around for the 1970s, for heaven’s sake.  The decade that began with the National Guard gunning down college students at Kent State, which was followed by Watergate, inflation and gas lines, and then ended with Americans being held hostage in Iran.  Remember what happened when we tried to rescue them?  One of the helicopters crashed into a C-130 aircraft starting a fire that destroyed the two aircraft involved.  Eight American servicemen died and we left the remaining helicopters behind.

 

It’s no mystery why those in my age group have never been overly confident in our government’s abilities.  But, the last four or five years have been breathtaking in so many ways.

 

The question that we’re here to answer is why did the Obama Administration fail again and again to effectively mitigate the damage being caused by the foreclosure crisis.  I knew exactly what would happen as a result, and in fact I wrote it down on hundreds of occasions.  And I was not the first, nor was I alone.

 

So, how is it possible that with all those smart people dressed in natty attire meeting and analyzing and proposing… how could they have managed to get every single thing almost entirely wrong… again and again.

 

An article in The New York Times, on August 19, 2012, titled, “Cautious Moves on Foreclosures Haunting Obama,” examined the Obama Administration’s decisions related to attempts to rescue the sinking economy in 2009.  What the article had to say was illuminating…

 

“(Obama) tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.

During his first two years in office, Mr. Obama and his advisers repeatedly affirmed this carefully calibrated strategy, leaving unspent hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity.

“They were not aggressive in taking the steps that could have been taken,” said Representative Zoe Lofgren, chairwoman of the California Democratic caucus. “And as a consequence they did not interrupt the catastrophic spiral downward in our economy.

Mr. Obama insisted the government should help only “responsible borrowers,” and his administration offered aid to fewer than half of those facing foreclosure, excluding landlords, owners of big-ticket homes and those judged to have excessive debts.

He decided to rely on mortgage companies to modify unaffordable loans rather than have the government take control by purchasing the loans, the approach advocated by his chief political rivals in the 2008 presidential race, Hillary Rodham Clinton and John McCain.”

 

Wow, read those paragraphs twice and you’ll hear circus music playing in your ears… as you weep uncontrollably.  What this president understands about the U.S. economy, you could put into a thimble.

 

First of all, I don’t know anyone that, in 2009, was betting that a recovering economy would be taking care of anything anytime soon.  And secondly, the fact that his administration left hundreds of billions of dollars unspent that congress had already allocated to buy mortgage loans… … well, all I can say about that is that if I ever did something like that in my lifetime… I’d be so deeply ashamed that, at the very least, I’d never show my face in public again.

 

I wonder if Barack Obama knows that, failing to interrupt the catastrophic spiral downward in our economy,” is going to be one of the key things for which he’ll always be remembered.  That’s some legacy.  I can only speak for myself here, but I’d rather go down in history for being wrong in how I acted, than for pure inaction… for being a potted plant during a time of crisis.

 

And as far as our president’s obsession with the term “responsible borrowers,” I’d like to point something out.   African Americans are about twice as likely to lose a home to foreclosure these days than are whites.  Does that make white people twice as responsible as black people, Mr. President?  How about a bill that would allow banks to charge black people higher interest rates on loans than white people?  I know, they already do that, but a bill would put an end to all that closet racism that goes on around this country, and you know… bring the ugliness right out in front where it really ought to be.  Well, Mr. President… would you check “YES” on such a bill?

 

Or, maybe it’s not a black and white thing… maybe it’s the rich v. poor difference.  So, do rich people make their mortgage payments more than poor people because they’re more “responsible,” Mr. President?  Or, is it just because they’re richer?  It’s all very confusing, sir.  Maybe you could go on T.V. and give one of your impeccably timed speeches about this topic, sir.  What do you think, Mr. President?

 

Okay, I’ll stop.  As long as you guys reading along at home are getting my point.

 

Again, taken directly from the Senate investigation’s report…

 

But it is impossible to know whether a more forceful response would have produced better results.

 

Administration officials argue that the missed opportunity was relatively small because mortgage companies were unprepared to help homeowners even if the government had pushed harder — and the government was unprepared to take the companies’ place.

 

“We operated at the frontier of what was possible,” said Treasury Secretary Timothy F. Geithner.

 

Now, here’s something you won’t see every day… I’m afraid I’m going to have to agree with Mr. Geithner on this point.  Because it’s the dirty little secret that no one really believes, but is the truth of the matter.

 

The mortgage servicers of 2008 were probably in many ways the worst kind of companies to take on the job of trying to modify millions of loans.  Of course, at the same time, they were also the only possible option, I realize.

 

Mortgage servicers have always been the sort of companies that are great at handling repetitive, almost robotic, tasks… and they can handle millions of them day in and day out efficiently and effectively for years and years.

 

 

They have systems that are intentionally inflexible.  And because of operating on very small margins, they employ as few people as possible, relying on systems and outsourcing whatever they can so as to keep their fixed costs down.  That way, should a servicer’s volume fall at any given moment, the organization is not caught carrying fixed costs that would wipe out any hope of profits in very short period of time.

 

For the most part, they hire people who don’t seek creative freedom in their day-to-day lives on the job… people who don’t make judgment calls, because the company’s systems handle the decision making whenever possible.  They’re set up to do two things… collect payments and foreclose, because that’s all that’s ever been asked of them.

 

The personality of a mortgage servicer is never that of a “risk taker.”  And foreclosing when a loan is delinquent is the only thing for which a mortgage servicer cannot be sued.

 

Mortgage servicers, in a very literal sense, are the ultimate assembly line driven organizations, and yet in 2009, with no time to even prepare to attempt such a change, we told them they would now be making hand-made cars.  And when they told us, and by us I mean the Treasury Department officials who were put in charge of HAMP and the nation’s housing policy, that they couldn’t do what we were asking… we said: DO IT ANYWAY.  Just stick everyone in a trial modification, was a decision made by Secretary Geithner, and sort it out later.

 

The homeowners, after all, were only thought to be foam on a runway, so what’s the difference?

 

You see, loan modifications are like snowflakes… everything about each one is different.  Nothing is the same about one and another.  Different investors have different Pooling and Servicing Agreements, which are the 500-page contracts that dictate what a servicer can and can’t do when servicing a given investor’s loans.  Each borrower is in a different situation to varying degree, and the qualifications for the variety of programs produced by the administration beginning in 2009, were changing on a monthly basis.

 

What would happen if we told Wal-Mart that they were all of a sudden required to be Nordstrom in the morning?  Think they’d be able to pull it off without a hitch?  Hardly.  In fact, business school case studies are filled with stories of corporations that found it next to impossible to make far less significant changes over many years or even decades.

 

 

UPS, for example, had a dickens of a time shipping packages by air, even though Federal Express had been doing it for some time and was eating into Brown’s market share to the point of threatening the company’s very existence after more than 75 years.

 

And IBM’s troubles changing from a maker of mainframes and minis to personal computers is legendary.  But, even knowing the implications of these storied transformations in corporate America, we thought that mortgage servicers would somehow be able to re-orient their operations by roughly 180 degrees over the summer of 2009?

 

Well, that just wasn’t even remotely possible… and those closest to the situation had to know that… and yet they went ahead with their plan anyway, without saying a word to the taxpayers they were to serve.

 

I remember posing the question in one of my articles of 2011… how it could possibly be that servicers still didn’t appear to be appreciably better at handling loan modifications than they were two years prior.  How could it be, I reasoned, that anyone could do something for two years and not get better at it whether they wanted to or not?  After all, if I made you take a golf lesson every day for two years, would it even be possible that you would be no better at golf after three years?

 

It was a question that, at the time, I found myself unable to answer.  And it drove me to want more than anything to learn more about mortgage servicers, which I got the opportunity to do straight from the horses mouth, as it were, when I was contacted first by Ocwen, and a few weeks later, by Bank of America.  Over the six months that followed I felt as if I’d become exponentially smarter as I came to understand the servicer perspective and added that knowledge to what I already knew from the homeowner’s side of the aisle.

 

Finally, I knew the answer to the previously unanswerable question of how one could do something for two years and still not appear to be appreciably better at it.  There was only one possible answer and yet I had not been able to see it before understanding the view of the servicer.  The only way one wouldn’t be better at something they’d done for two years would be if whatever they were trying to do… was impossible.

 

 

For example, I could try to fly by flapping my arms every day for two years and I’d venture to guess that I’d be not one bit better at flying that way after two years had passed.  And while the analogy of using my arms to fly was admittedly too extreme to be appropriate, the idea was correct.  And those at Treasury knew it the whole time, which explains why they did little in response to the obvious inadequacies of servicers when handling loan modifications for the first three years.  They knew that there was nothing to be gained by riding them harder.

 

They just didn’t tell the rest of us what was going on… they just didn’t care what we knew or didn’t know about the situation, because they didn’t care what we thought of their program’s performance one way or the other.  Remember… we were delinquent on our mortgage payments, and that gave us all the rights of a convict in our nation’s prison system.

 

Sorry, if you don’t like the food or living in the equivalent of one of San Francisco’s gay leather dungeons, but really… you wouldn’t be here if you hadn’t chosen to be a criminal in the first place.

 

Once again, from the Senate investigation’s report…

 

By the end of 2009 only 66,465 borrowers had received government-backed mortgage modifications, and the pace of foreclosures continued to rise: more than 900,000 homes in 2009 and more than a million in 2010, more homes than in any American city save New York.

Peter P. Swire, Mr. Obama’s special assistant for economic policy in 2009 and 2010, said both the administration’s successes in repairing financial markets and its shortcomings in helping homeowners could be traced to the president’s reliance on Mr. Geithner and Mr. Summers.

Mr. Summers declined to comment on the record, but other current and former officials echoed Mr. Geithner’s view that the administration had done well under the circumstances.

Some said they underestimated the complexity of helping millions of people. Some said they tried too hard at first to protect taxpayers from unnecessary losses. But they agreed that the most important problem was beyond their control: the mortgage industry was set up either to collect payments or to foreclose, and it was not ready to help people.

“They were bad at their jobs to start with, and they had just gone through this process where they fired lots of people,” said Michael S. Barr, a former assistant Treasury secretary who served as Mr. Geithner’s chief housing aide in 2009 and 2010. “The only surprise was that they were even more screwed up than the high level of screwiness that we expected.”

 

All they were prepared to do was collect payments and foreclose.  And why would they be prepared to do anything else?  They needed to do anything else before.

 

And frrankly, I’ve beat up on Mr. Barr plenty over the years, so I’m not going to devote time to doing so again now.  But, you see, this is the problem with the people Secretary Geithner obviously chooses to surround himself… they epitomize the word OBTUSE.

 

Michael, it wasn’t THEY that were bad at their jobs to start with, because what you were asking them to do was anything but “their job” up until that point.  What if I said tomorrow your job was to be a baller in the NBA?  And then sat courtside burning you for being bad at your job.

 

Look at Barr… what a parker!  And there’s another brick from Barr.

 

And dude… do you really want to talk about being surprised by a high level of screwiness?  Because you guys at Treasury are the poster-children for that, assuming I’m watching my language.

 

 

Okay, point made.  Now back to the Senate investigation’s report…

 

“Here we are in 2011, looking at high levels of foreclosures on the horizon, looking at significant failures in process, and nothing much has changed,” Sarah Bloom Raskin, a Federal Reserve governor, said at a housing finance conference in February 2011.

 

(I covered her speech at the time, by the way, and that link will take you to the article where you can read her speech in its entirely… it’s absolutely great.)

 

“It seems to me we have reached the point where this sign of failure is hindering our economy’s ability to rebound.”

 

(Ya’ think?  Oh goodie!  That’s where we were trying to go though, right?)

 

As for foreclosures, the advisers said more modest forms of aid would work just as well in most cases. Indeed, some economists argued that debt reduction would counterproductively persuade other borrowers to stop making payments in pursuit of a better deal.

 

(Which advisers, which advisers, damn it!  We need to find them and force them to wear tin foil from now on so we’ll know where they are at all tines.  It’s a danger to our society to have them wandering about without a leash.)

 

But the decision ultimately was political. Mr. Obama and his advisers were convinced that even in the depths of an unyielding crisis, most Americans did not want their neighbors rescued at public expense.  Several cited the response to the Arizona speech — including the televised diatribe by a CNBC personality, Rick Santelli, that helped give rise to the Tea Party — as proof that they were wise not to do more.

 

(Okay, so that’s about the tenth insider I’ve seen say that Santelli’s rant on CNBC actually was a significant influence on our country’s housing policy these last few years.  And that’s just so unbelievably f#@ked up that I don’t know what to say or do… except to say that we should demand that if Obama wins a second term in November, he and everyone in his White House, loses their television privileges until 2016. 

I’m not kidding… I mean it.  Letting these guys watch television poses far too great a risk to our domestic tranquility and that is to say nothing of what could happen to the lives of our men and women fighting overseas as a result of Obama catching Diana Olick at the wrong moment.  (That Diana link is funny by the way.)

 

“There’s a lot of risk aversion in Washington,” said James B. Lockhart III, who participated in some discussions as director of the Federal Housing Finance Agency, administrator of Fannie Mae and Freddie Mac, “and I don’t think anybody knew how bad it was going to get.”

 

(Oh my Lord in heaven… who didn’t know, who didn’t know?  I knew.  Lot’s of other people knew.  It was the only thing that could have happened, you housing market genius you… the only possibility.  The problem is, I’m fairly certain that you haven’t even learned anything from your experiences being wrong about everything. 

 

Do you realize what you’ve caused by being wrong in your job every single time?  If I were you, I’d be so insecure about my ability to make good decisions, that I’d be scared to death to leave my house or cross the street.)

 

 

Well… and there you have it. 

 

Although I know I’ve told it before, this time I tried to tell the story using the most credible sources for verification of the facts.  And although I’m not naïve enough anymore to think that I’ll change many minds overnight, I’m only hoping to change some.  And then maybe those people will pay it forward and change some more.

 

And maybe before we know it, a few more will come to understand what’s gone on these last few years, and soon maybe at least most will understand the true cause and effect of the financial meltdown and ongoing foreclosure crisis.

 

Because there’s one thing about which there should be no question… we won’t be able to fix it, until we understand it.

 

Mandelman out.


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