Originally posted in December of 2009… how tragic is that?  Read it and you’ll see why.

HO, HO, HOmeless!

The Real Story Behind the Crisis

We Still Don’t Want to Understand.

A 46 year-old single mother lies awake as night threatens to turn to morning.  She wonders how she’ll make it through even one more day.  She can’t cry… anymore.  Can’t look into the eyes of her two young children, age 7 & 9.  For a fleeting moment she wonders if her sister, 3,000 miles away, should take the kids, for a while anyway.  She pushes that thought from her mind, reaches for her prescription on the nightstand, swallows two without water, and rolls onto her side.  She’s a Registered Nurse; she knows sleep will soon come.

~~~~~

A father of three stands in the shadows made by the tree in the front yard of his home of 14 years.  It’s 2:30 AM.  He’s wearing a tee shirt and boxer shorts. The wind is audible and cold.  His eyes fixate on the flower box he built his first year as a homeowner.  His stare moves to the driveway… his driveway… and remembers pitching underhand to his youngest son.  He had thought they would live in this house forever.  He absent-mindedly scratches his chest with the barrel of the .38 Smith & Wesson Super he’s holding in his hand.  He wonders if insurance policies pay off after suicide.

~~~~~

An older couple, returning from a trip to the grocery store, pulls into their driveway.  They’ve been married for 38 years; bought the house in ‘72.  He opens the back door of the sedan and reaches in for the bags.  She admonishes him not to do so.  The doctor said not to lift anything heavy… might tear his stitches.  They walk inside together, close the door; neither speaks.  There is paperwork taped to the front door.  It says they’ll have to be moving soon.

~~~~~

A young child listens to her father talking on the phone as he makes her breakfast.  His voice doesn’t sound normal to her ear.  He sounds nervous… he’s being very polite. Like when he’s talking to the men at church.  He hangs up and even though she didn’t ask, he tells her everything is fine.  But the child doesn’t think so.  She looks at him.  Thinks he’s crying.  She wants to help.  He wipes his eyes.  He says cutting an onion made them water.

~~~~~

A mother is on the phone first thing one morning.  She reads my column on-line.  She calls to tell me that her son, 41 years old, hung himself in the basement of his home last night.  She found him yesterday morning.  He had been laid off and out of work for nine months. He tried to convince his bank to modify his mortgage since then.  Went through his savings.  Started spending hers. Her voice shakes.  “Now,” she says, “the bank will finally get what they’ve wanted all along… his house.”

~~~~~

Happy Holidays everybody…

This has been a very hard article for me to write.  It’s been hard for me this year during the holidays.  I want to be happy.  I want to make this holiday season even more wonderful than the last, for my daughter, my wife and my family.  But it’s just harder this year.  Harder to forget everything else that’s going on around me.

The foreclosure crisis that began in mid-2006 continues to destroy the wealth of American consumers and the financial strength of our nation’s banking institutions.  And, although it pains me to say it, the end is still nowhere in sight.

It now seems likely that, before the crisis is over, not just millions, but tens of millions of Americans will have lost their homes to foreclosure, and thousands of banks will have shuttered their doors for good.  The scars will be deep and we will be a nation forever changed.

In 2007, the number of foreclosures filed hit 1.3 million, a 79% increase over 2006.  In 2008, that number had risen to 2.3 million, an 81% increase over 2007.  It appears that this year we’ll have something in the neighborhood of 3.9 million foreclosure notices sent out homeowners, if not more.  And next year, absent some unexpectedly competent response from government, is all but certain to be even worse.

As of August 2008, 9.2% of all U.S. mortgages were either seriously delinquent or already in foreclosure.  Today, that number is 14.7%.  Forecasts predict a staggering 14-17 million foreclosures over the next five years, depending on their source.  And, according to Bloomberg, mortgages of $1 million plus are now defaulting at twice the national rate, so there’s no question that the water level is rising.

Meanwhile, unemployment… the real unemployment, known as U6… has reached 17.5%.  In October of this year alone, our country lost another 558,000 jobs, and most of those in manufacturing and other areas that may never return.  In Detroit, according to the city’s Mayor, the actual unemployment rate is fast approaching 50%.

By now it should be abundantly clear that foreclosures breed foreclosures and that the problems are spreading state by state.  And it should be equally clear that our nation’s economy cannot begin to recover until the free fall in the housing market, and the resulting foreclosures, have been brought to an end.

Perhaps you’re among those only interested in blindly optimistic thoughts, and if so, there’s certainly no shortage of those.  Now that our government has run out of things to actually do, and since they’ve run out of money with which to paper over problems, as this year draws to a close it seems they simply would like us to believe the worst is over.  That recovery is right around the proverbial corner.  Few do, though, at least not in earnest.  It’s like Ben Bernanke keeps saying in so many words, the recession is over, damn it… probably… I think… sort of… it’s a jobless recovery… yeah, that’s the ticket… a jobless and homeless recovery.

I’ve come to understand many things about this housing led, increasingly complex economic crisis as I’ve written more than 200 articles on related subject matter over the last year.  I now believe in every fiber of my being that we will remain incapable of finding meaningful solutions until we as a nation come to understand the problems we’re facing and why we’re facing them.  And in this regard we have a very long way to go.

We still don’t know… and maybe some of us don’t want to know.

I have never in my life seen anything like what’s happening in this country today.  I’m not just talking about the severity of the crisis; I’m talking about the amount of misinformation and utter confusion about its proximate cause.  It is truly stunning to behold.  I can barely get through a week without bumping into another armchair economist who’s got lots of opinions on AIG, but has no idea what a Credit Default Swap is, let alone how one works, or why they were sold or purchased in the first place.

It’s uncomfortable to be around, frankly.  When did we become a nation filled with people who feel the need to hold a view on everything?  A few weeks ago I wrote a piece in favor of judicial loan modifications… you know, bankruptcy reform… the “cram down,” if you must.  Quite a few people wrote in to say they disagreed with my position, every one of them based their argument on the identical position: “It will raise borrowing costs in the future for everyone.”

It’s a ridiculous presumption, you should realize.  The “cram down” bill that recently was once again killed by the banking industry has no significant measurable potential to raise borrowing costs in the future.  For one thing, it would only apply to loans on the books at the time of its passage, so no future loans would be affected.  And for another, it only applies to those filing bankruptcy, a statistical probability that investors already price into their models.  And for a third, when a judge writes down a mortgage to the market value, that judge isn’t costing the investor a nickel… which is why it’s called the “market value”.

The funny thing about judicial loan modifications is that we clearly need them badly at the moment, as we watch another 14-17 million homes fall into foreclosure, so some miniscule, incalculable, potential threat hardly seems a good enough reason to kill the amendment within hours.  And many of the people who hold onto views in opposition to changing the bankruptcy code, would all unquestionably benefit from such a common sense approach.  But, regardless… no one changes his or her view on much of anything these days.  I suppose only two factors result in real learning: age and pain.  We don’t have the time to wait for age to do it, but stand by, because the pain will be increasing each month that passes, so maybe there’s still hope as that pain increases.

As it stands, all we’re left with in terms of a plan to stop the free fall in the housing market, is… well… we don’t really have a plan to stop the free fall in the housing market, now do we?  Even if Obama’s loan modification program was working, which it is not, it’s not designed to stop the foreclosure crisis.  Remember, it’s only designed to help “responsible” homeowners, if there’s still such a thing.

My intention is that this article doesn’t beat around the bush, so I want to go directly at the question of why we don’t have a plan to stop the foreclosure crisis.  What is it that prevents our adoption of policies that would lead to our economic recovery?

We don’t have a plan for two reasons, and both are political as opposed to economic.  What I mean by that is that we could fix the problems we’re facing, but a lot of people won’t like what we need to do.  In other words, if we could just get over ourselves, we’d all be much better off.

Okay, so here goes:

1. Stopping the Foreclosure Crisis

In terms of fixing the housing market and stopping the foreclosure crisis, we’re going to have to write down the seriously underwater mortgages to their market value, and we can’t do that because politically it’s potential suicide.

There are still many people that view the homeowners losing their homes to foreclosure today as being “irresponsible,” and who could possibly want to bail irresponsible homeowners out of their underwater mortgages?

What people fail to realize is that the mortgages that are seriously underwater need to be… and will be… written down to their market value.  The only question is the mechanism we use to write them down.  If we continue to use foreclosure as the mechanism, then we’re going to be in for a lot of pain, as we take down everyone else’s home value at the same time.

As a country, however, we don’t want to write down mortgages, in fact we barely want to modify them, because we’ve still got a sizable percentage of our population that blames homeowners for the economic collapse and therefore believes they must be punished.  And by punishing them through foreclosure, we will punish everyone else as well.

The problem with this kind of thinking, besides it being untrue, is that it prevents our elected officials from looking at real solutions to the problem.  Eventually, people will change their views on this issue, but it may take several years for the pain to become intense enough and sufficiently widespread, before people are willing to look at the situation differently.

Until then, we’ll keep foreclosing, and those foreclosures will continue to drive housing prices down… which will in turn create more foreclosures.

2. Fix the Banks and the Credit Markets

In terms of fixing our insolvent financial institutions, the only plan with the potential to succeed, short of nationalization, of course, is to buy the toxic assets off of the bank balance sheets at 100% of their face value… something that’s simply not politically palatable.  We could pay some amount less than full face value but that would only leave giant holes in the balance sheets of banks and we’d have to pony up the difference anyway.

It looks to me like Geithner’s plan is to keep the banks propped up with federal slush money, provided under one wonky acronym or another, and the suspension of all accounting rules that would give away their insolvency… until the banks can earn enough by lending to Treasury and charging us exorbitant fees.  There’s a bit more to it than that, but those are the important points.

I’m not the only one who sees this plan not working.  Geithner isn’t just forecasting economic recovery in 2010… he’s depending on it.  When it doesn’t happen, he’s going to act surprised, I’m sure, but he’ll be acting because he knows now that he’s taking a huge risk.

The “toxic assets” that are still clogging up bank balance sheets aren’t getting any less toxic on their own.  In fact, the more homes that are lost to foreclosure, the more toxic they’ll become.  So far, we’ve papered over the problems, but that only fixes the problems in the short run.  Remember, if the banks believed their balance sheets today… they’d be lending.

Let’s look at today’s conventional wisdom pertaining to the economic meltdown:

1. It’s the fault of sub-prime borrowers…

No, it’s not.  Today’s crisis isn’t a sub-prime crisis, and never was a sub-prime crisis.  From the beginning, sub-prime and prime loans defaulted at the same proportional rate.  That’s not to say that there weren’t more sub-prime foreclosures than there were sub-prime foreclosures… there were.  But proportionate to prime loans, the problem was never a “sub-prime” problem.

2. It’s unemployment that’s causing foreclosures…

No, it’s not.  Unemployment and other life events don’t cause foreclosures.  Look at the spikes in unemployment that followed the dot-com crash that began in April of 2000.  Unemployment in places like Northern California and Massachusetts skyrocketed, as did mortgage delinquencies, but foreclosures remained low.  Why?  Because in flat or slightly appreciating real estate markets, when people get in financial trouble or lose their jobs, they sell their homes, they don’t start losing them to foreclosure en masse.

3. Borrowing too much and not properly qualifying for loans caused the crisis…

I’m sorry, but no.  Roughly 54% of the foreclosures are prime loans for which people did qualify, and as far as borrowing too much, well… it’s just beside the point.   In light of where things are today, it would seem that any borrowing was over-borrowing.  And when you look at the leverage employed by Wall Street firms, which was in some cases up to 100:1, the whole idea that homeowners could have caused the economic meltdown of this country becomes preposterous.

Think about the 40:1 leverage at Lehman Bros.  On one hand, you’ve got a homeowner taking out a 100,000 mortgage, and on the other you’ve got Lehman Bros. borrowing $4 million based on that mortgage.  In terms of de-leveraging, which is the problem… the $100,000 mortgage or the $4,000,000 in leverage.  And, by the way, while we’re talking about it… who was it that thought that housing prices would go up forever?

None of this is to say that lending standards weren’t far too lax, that more sub-prime borrowers didn’t initially lose their homes than others, or that today’s unemployment rate isn’t contributing to the number of loans in default.  All are true, but none are the proximate cause of the crisis we face today.

The Birth of a Crisis… and the Crises that Followed

First of all, we’re not having a crisis; we’re having multiple crises.  The foreclosure crisis is one.  The credit crisis is another.

We could go back many years to begin such a discussion, but I don’t see the point.  Many say that the Glass Steagall Act should not have been repealed.  At the moment, however, I don’t care one way or the other whether it should or shouldn’t.  I’m sure some combination of experts and political types will figure that out soon enough, and resolving the issue today won’t change anything tomorrow morning.

For the moment, I’m only interested in what happened in July of 2006, on a day when housing prices dropped by 30% or more… although we didn’t all realize it at the time.

Declining real estate values are what cause foreclosures, and on a day in July of 2006, a number of pension funds realized that the AAA bonds they were holding were not in fact AAA… and they dumped them in a hurry.  They might have been AA… they might have been junk… no one could be sure.  All investors needed to know is that they were not AAA, as they had been rated by the ratings agencies, Standard & Poors, Moody’s or Fitch, and that was enough for them to know that they didn’t want to hold them in their portfolios any longer than they had to… and the bond market froze solid.  Money stopped moving.  And wherever the mortgages were at that moment, that’s where they would stay.

Banks, like IndyMac, who had $40 billion in mortgages on their books that they had planned to sell to Wall Street, now had real problems.  Banks don’t have any money they can loan out for 30 years.  They originate mortgages, but then they sell them to recoup their cash… or at least that’s what they did prior to the day the bond market froze solid.  Now, unable to sell their mortgages, banks immediately began hoarding cash.  Lending dried up within days.  And all of a sudden, what had been a market plush with mortgage cash, was now dry as a bone.

At the same time, there was another force in play… interest rates had been rising.  In fact, by the summer of 2006, the Fed had increased interest rates 17 times in a row.  Those with adjustable rate mortgages had already started to default, and sales had already started to slow appreciably.

Now, however, since essentially no one could get a mortgage, no one could buy a house… and prices had nowhere to go but down.  As they dropped, refinancing became impossible, and foreclosures were the only option.  The crises had begun.

Treasury Secretary Hank Paulson saw the problem as being limited to the sub-prime market and believed it would be contained there, but he failed to take into account what had really happened.  The credit markets had been broken.  Banks didn’t trust each other.  And as housing prices fell, and more loans defaulted as a result, the bonds were downgraded, and Bear Stearns was the first to go.  Paulson wanted to act at that point, but the now Democrat controlled Congress told him not to come to Congress unless he could assure the legislators that “a crisis was at the door”.

There are always a certain number of homeowners that need to sell their homes each year for a variety of reasons, both personal and career related, and when housing prices are declining rapidly, many of those sales inevitably become foreclosures.  The bubble was deflating fast and the loans that were the worst of the bunch went first.  But as prices fell, people who had over-extended themselves, and everyone else for that matter, stopped spending, and it was only a matter of time before unemployment would start to rise.  It was the beginnings of the downward spiral that continues today, albeit at a slightly slower pace than was experienced at its beginning.

The response by our government has been to pump trillions of dollars into our financial institutions in order to prevent their insolvency and make investors whole, but as long as the flood of foreclosures continues unabated, economic recovery cannot occur and we will all increasingly suffer as a result.  Hank Paulson tried to buy some of the toxic assets off of the bank balance sheets using the now infamous TARP funds, but the banks needed him to pay face value, not some discounted amount, and that would not have been politically palatable.

Even with the evidence of our deepening problems all around us, there is still a significant percentage of our population that is preventing our politicians from taking the steps necessary to stop preventable foreclosures and start the economy back on the road to prosperity.  Those that make up this group, in large part, gained their inadequate understanding of what’s transpired since 2006 from government and banking lobby inspired sound bites.  And even more importantly, their views haven’t changed over the last couple of years, even though almost everything else has.

The bottom-line is that this group continues to blame the borrower… the homeowner… as opposed to the commercial and investment banks, and if you’d like, the government regulatory agencies that stood idly by as Rome burned.

It’s a bleak picture, and sadly it is also one whose duration could be easily be reduced significantly if we as a nation shared a common understanding of how our crisis began and what must be done to stop its continuing spread.  That’s right… I have seen the enemy and it is us.

President Obama, however, now places the blame for the recession on “the irresponsibility of large financial institutions on Wall Street that gambled on risky loans and complex financial products, seeking short-term profits and big bonuses with little regard for long-term consequences.”  He and others are trying to get us to change our view of what happened so he can do something about it, but we continue to resist… we continue to hold onto our desire to punish our neighbors for buying too much.  It appears that we’d rather go down with the ship then reduce the principal on our neighbor’s mortgage.

In Conclusion…

Look… I realize that there’s more to the crisis than I’ve described here.  I realize that the bonds I’m referring to were insured by AIG’s credit default swaps, which were unregulated and resulted in a systemic risk to our financial system.  I know that AIG went under because of collateral calls that came along with the downgrading of the bonds it was insuring.

I realize that the process of securitization played a major role in how banks viewed mortgages, and why they were underwritten so poorly.  I realize that Wall Street’s CDOs, collateralized debt obligations, and other derivatives were, if not instruments of destruction, then something in that neighborhood.  And most recently, I’ve come to realize that the investment banks like Goldman Sachs, that packaged these deceptively risky investments and sold them to investors all over the world, bet against their success without disclosing their positions to investors or anyone else.

Yes, I realize that what I’ve described here is a dramatic oversimplification of a very complex situation, and I plan to write more about each aspect of the crisis in simple terms in the hopes that more people will become comfortable with what is now part of our history, and as a result tell their elected representatives that they are not to do whatever the banking lobby wants them to do.

But for the purpose of this article, none of that matters.  For the purpose of this article, I only wanted to say in no uncertain terms:

A. It wasn’t the borrowers that caused this crisis.  Did some people buy too much house?  Sure, some did.  Did some act irresponsibly?  Sure, to varying degree some did.  But today’s foreclosure crisis won’t abate as long as many cling to the belief that they should somehow sit in judgment as to who was irresponsible and who was just caught up in the worst economic downturn since the Great Depression, a task that will be increasingly difficult as each day passes.

B. Water is wet, the sky is blue, children want candy, and people want houses and money.  Some knew what they were doing and some didn’t.  So what?  No one entrusted individual people to make sure our banking system was safe and well managed.  We trusted the banks and they, of one variety or another, let us down.

C. We would be experiencing a similar meltdown regardless of whether we had a real estate bubble.  As long as some group’s actions were going to destroy the secondary mortgage or credit markets, then house prices were going to fall and fall fast.  And that’s what causes foreclosures: declining home values.

D. Our government mischaracterized its cause in the beginning.  Or, in other words… it was never a “sub-prime” borrower crisis.  We know that now.  If you still think it was a sub-prime crisis, caused by those high-risk loans… well, it’s time to take another look at the data.  Your views are wrong.

And to the homeowners who feel ashamed… who have suffered the indignity of losing a home in silence… this wasn’t your fault.  You didn’t break the bond market and send housing prices into a free fall.  You didn’t fail to address the problem, or fall asleep at the switch as a regulator.  You didn’t securitize every payment stream in the country, or leverage untold billions of investments or create untold trillions in synthetic derivatives.  It wasn’t your belief that real estate would continue to go up that caused the problem, it was Wall Street’s belief that it would continue to do so that brought the financial markets to the brink of destruction.

All you did was buy a house you thought you could afford.  Now it’s worth half of what you paid for it… or it will be worth half soon.  No one saw THAT coming.  No one.

So, don’t be ashamed and afraid to speak about what happened here.  Your neighbor may seem to know what he’s talking about, but he more than likely doesn’t know any more than he heard on television or read in some Newsweek article.  Besides, he’s going to be drowning soon enough anyway.  The economic situation we’re in as this New Year begins doesn’t discriminate… everyone will feel its powerful bite as this year continues to see our economy spiral downward.

Unless you’re a banker, of course.  In which case… stop judging others, you jackass.  You want to have a debate someone about how it was borrowers who caused the meltdown, or pick on someone for being an irresponsible… have the debate with me… pick on me.  Go ahead… it’s easy… I’m at mandelman@mac.com.  And I respond to even the most idiotic of opinions.  Bring it.

In fact, next week I’ll be in Park City, Utah, debating this very issue with a bunch of lawyers that represent bankers at a conference of the American Bar Association.  I’ll let you know how it goes, but I think you have some idea already.

For everyone else reading this… let’s stop the madness and tell our politicians we want solutions for the homeowners in trouble, not punishment.  Because at this point, we’re only punishing ourselves… because it’s the right thing to do… because we smarter now and see the situation more clearly… because there, but for the grace of God, go us all.

~~~

(P.S. If anyone wants sources for any of the data presented, just email me and I’ll send you the links.  It’s the holidays and I didn’t feel like writing a term paper, but I’ve got plenty of sources for everything I’ve written.)

And, as always, the illustration of Santa coming down the chimney into a foreclosed home was brilliantly interpreted and then drawn by Richard Taylor.

The New York Times ran a story yesterday under the headline: Gloom Grips Consumers, and it May Be Home Prices.  And all I could think to say was… “MAY?”

It “MAY” be home prices?  Like maybe it’s NOT home prices?  Okay, I get it… maybe it’s that Charlie Sheen isn’t on “Two and a Half Men” anymore?  That could be it, I suppose, it’s sure as heck got me down.

The Times story quotes the patriarch of the Markey family, who apparently lost his stone cutting business in 2009, sold the family home for half a million less than its value during the bubble and moved into a smaller one, gave up two new cars and bought a used one… you know, they Obamasized.

(I think that’s what we should call it when that sort of thing happens.  You know, there’s downsize, there’s upsize and then there’s Obamasize.)

The Times quoted Mr. Markey…

“For two years I kept thinking that things would get better,” Mr. Markey, 51, said as he stood in his empty store on a recent weekday. “Now I think the future doesn’t look so good.”

According to the Times, we the people have a “confidence problem.”  They say we’ve “turned gloomy about tomorrow,” and as consumers we’re “holding back.”

I’m sorry, but is that the problem?  It’s a crisis of confidence?  Like, all we need is a little counseling?  Like, a thousand Dr. Phils is all we need to save the economy?

I think the nice folks at the New York Times have been spending too much time at Zabars?  Because I’m pretty sure it’s not a confidence deficiency… I think it’s money we’re missing… as in income, and the lack of available credit, isn’t that right?

Okay, whatever… so, then the Times story said the following:

“There are good reasons for gloom — incomes have declined, many people cannot find jobs, few trust the government to make things better — but as Federal Reserve chairman, Ben S. Bernanke, noted earlier this year, those problems are not sufficient to explain the depth of the funk.”

The first part is fine… incomes down… check.  Homes haven’t just declined… they’ve been cut in half or more.  No jobs… okay.  Trust the government to make things better… ummm, well… that would be… absolutely no one.

But Ben Bernanke noted that the problems aren’t sufficient to explain the depth of the funk?  Bernanke noted that, did he?  Are you f#@king kidding me?  Is that what that dismal-science-doofus said?  Well, therein lies the heart of the problem.  You want top know why no one trusts the government to make things better?  Well, there you have it… ladies and gentlemen… I give you Ben Bernutcase.

Okay, back to the Times story…

“That has led a growing number of economists to argue that the collapse of housing prices, a defining feature of this downturn, is also a critical and underappreciated impediment to recovery. Americans have lost a vast amount of wealth, and they have lost faith in housing as an investment. They lack money, and they lack the confidence that they will have more money tomorrow.”

Did I read that correctly?  Economists are arguing as to whether the collapse of housing prices is a “CRITICAL AND UNDERAPPRECIATED IMPEDIMENT TO RECOVERY?”

Critical AND underappreciated?  How can something be critical AND underappreciated?  Doesn’t someone get fired if something is found to be both critical AND underappreciated?  Because I can think of situations in which you get killed because of something being critical AND underappreciated.

Alright… I have to calm down.  I have a daughter.

What in the… No, I can’t… it’s just that… oh my God… but did they just… I’m going to… you know what… no, no way am I going to… even if they aren’t… or even if they are, because… what I want to say is… no, they shouldn’t… how can they… stop, wait… calm… should I just… Holy Mother of… if he doesn’t shut the… I think the only way… but not if… don’t they ever… but what about… no, as I walk through the valley of the shadow of death I shall fear no evil… arrrggghhhh.

You see… that wasn’t even productive.  They’ve reduced me to being a babbling brook, I’m starting to talk like Mark Zandi on Lithium.  Sure, you can laugh, but what if someday, I read something like that… critical AND underappreciated… and my head explodes?  What then, right?  Who will be laughing then, I ask you?

Critical AND underappreciated… hmmm… kind of like essential but unrecognized.  I really can’t take much more of this sort of thing.

Are those grown up economists they’re referring to, or are we talking about 8 year-old economists?  Are they human economists… is it possible we’ve got armadillo economists on the job. Because I would totally understand if an armadillo economist got that wrong.  I mean armadillos don’t even talk or anything, right?  They’re like possums from New Mexico, right?  Someone please… tell me we’ve hired armadillo economists.

And then the Times said the following:

Many say they believe that the bust has permanently changed their financial trajectory.

Well, let me tell you about that, since there’s obviously no chance whatsoever of you figuring anything out on your own.  They didn’t think that way when the economic downturn happened.  But after watching you guys botch everything you’ve touched over the last few years, while telling us we’re having a recovery, and well… you know, had someone read my blog for the last two years, you could have avoided all of this, does anyone realize that?

And back to the Times story…

“People don’t expect their home to regain value, and that’s really led to a change in consumer attitudes about the economy that we’ve just never seen before,” said Richard Curtin, a professor of economics at the University of Michigan who directs its Survey of Consumers. The latest data from the survey, released Friday by Thomson Reuters, shows that expectations for economic growth have fallen to the lowest level since May 1980.

I’ve had professors like this guy Richard Curtin before, unable to think without instructions and a road map.  The guy’s probably a brilliant something-or-other, but we wouldn’t recognize what that might be if someone drew up a picture.

Now, that’s nothing… wait until you read this next paragraph…

Economists have only recently devoted serious study to how a decline in housing prices affects consumer spending, not least because this is the first decline in the average price of an American home since the Great Depression. A 2007 review of existing research by the Congressional Budget Office reported that people reduce spending by $20 to $70 a year for every $1,000 decline in the value of their home.

Okay, that’s it… ball four… take a hike… you’re done.  Stop it right now.  Back away from the research report, guys… you’re going to get us killed.  Seriously, if this isn’t scaring the heck out of you, then let me just remind you that this is The New York Times we’re reading here… this is the smart newspaper.  God help those who get their news by looking at the pictures in USA Today.

Alright, I wasn’t going to do this but give me one more… sure I’m scared, but go ahead…

“This “wealth effect” is significantly larger for changes in home equity than in the value of other investments, such as stocks, apparently because people regard changes in housing prices as more likely to endure.”

Oh dear God.  Okay, I have two very important things to say:

A. I’m not going to go search for it now, but I wrote about that very concept two years ago.  I wrote that the “wealth effect” that economists have been studying and linking to the stock market was actually wrong.  It was always housing, not the stock market, with the possible exception of 1998-1999, and even then, not really.

When they would correlate the stock market to the wealth effect, it was always at a time when housing prices were at least stable and more than likely appreciating.  So, they thought it was the stock market, but really the stock market was never a primary or independent variable, homes were always primary and independent.

Why the heck do you think I’ve been writing what I’ve been writing for the last three years?  Oh God… talk about wasting time and money, do you know how much money I’ve spent to accomplish absolutely nothing… I feel sick… this is what NASA must feel like all the time.

B. And “apparently because people regard changes in housing prices as more likely to endure?”  No, no, no… which one of your robot reports told you that, genius?  That’s wrong, wrong, wrong.  Don’t you know any actual people… I mean real people… not like my parents kind of people, but real, regular people?  You really don’t, do you?

Okay, look… and pay attention please, you need to understand this or we’re all screwed.  Houses are America’s long-term savings account… money we can’t get out of an ATM.  Stocks we know go up and down, but we also know that we have a very definite tendency to buy high and sell low.

You can’t even find a CPA in this country who can tell you what his or her average return on stocks has been for the last ten or twenty years… or five, for that matter.  No one knows the answer to that question, and it’s not because they can’t do the math.  It’s because they don’t want to know the answer.

But, you see… our homes are our retirement safety net.  We don’t care what our ROI is, we’ll pay them off in 30 years and then have something significant no matter what.  We’ll start saving at 55 too, and probably put away something more as well, but no mater what… we’ll have our homes… and they’ll be worth a significant amount, and there’s no way we’re willing to drive this country through our consumer spending without them.

You can’t even find a CPA in this country who can tell you what his or her average return on stocks has been for the last ten or twenty years… or five, for that matter.  No one knows the answer to that question, and it’s not because they can’t do the math.  It’s because they don’t want to know the answer.

But, you see… our homes are our retirement safety net.  We don’t care what our ROI is, we’ll pay them off in 30 years and then have something significant no matter what.  We’ll start saving at 55 too, and probably put away something more as well, but no mater what… we’ll have our homes… and they’ll be worth a significant amount, and there’s no way we’re willing to drive this country through our consumer spending without them.

But, what you’ve allowed to happen is inconceivable to us.  You stood by while Wall Street gazillionaires defrauded the planet and shut down the credit markets completely and possibly forever.  Then you let that fester and grow such that housing prices went into a free fall.  And you did all that right after allowing mortgage bankers to sell us a bunch of loan products expressly designed to be refinanced every few years.

It’s the trifecta of idiocy.

Worse still, when you had a chance to do something about it, you blew it at every single turn in the road… HAMP being one of your greatest hits, but there were lots of others.  And like sprinkles on top of a cupcake, you did nothing while our mortgage servicers did everything they could think of to abuse us… except literally peeing in our hair.

Hey Democrats… remember the midterms?  When you guys got shellacked, as the president put it?  Are you picking up on why that happened yet?  Is any of this ringing any bells, you collection of oblivious potted plants?  I knew Obama was actually surprised that you guys lost so badly… I knew it.  He really was surprised.  And I’m sure it’s because someone’s research report didn’t indicate the proper coordinates or some such nonsense.

Here’s a tip for next time… LEAVE YOUR OFFICES.  You’re welcome to call me and I’ll take you for a drive around real America anytime.  Actually, you probably don’t recall, but I offered that several times last time around too.  Leave your research reports behind, you won’t need to determine anything statistically significant, I promise.  It’ll be overwhelmingly in one direction.

Okay, NYT… let me have it…

“A recent paper by Karl E. Case, an economics professor at Wellesley College, and two co-authors estimated the decline in home prices from 2005 to 2009 caused consumer spending to be $240 billion lower in 2010 than it otherwise would have been. That figure is equal to about 1.7 percent of annual economic activity, enough to be the difference between the mediocre recent growth and healthy growth. And it does not include all the other effects of the housing crash, including the low level of new home construction, that are also weighing on the economy.”

You guys would turn checkers into chess, wouldn’t you?  It’s checkers, damn it… just checkers.  This is America… we play checkers.  Chess is for communists.  Just go on, I’m not even going to respond to that paragraph… it’s too stupid for words and I don’t want to encourage you to do more of that sort of thing.  That’s the kind of crap that got you and us in all this trouble, got it?  Cut it out right now.

And someone please say the following to Professor Case… “Alrighty now, we’ll let you go back to bed now.”

Let’s move along…

“Roy Pugsley, who owns a pool supply stor 2010ore in Winter Garden, another suburb here, said that he made 2,500 fewer sales during the first eight months of 2011 compared with the same period in 2007. That translates to one less person walking through the doors to buy chemicals or toys or spare parts in each hour that the store is open.”

Hey, now you’re getting closer… was that so difficult to do?  Was Ron Pugsley too busy to speak with you in 2008, 2009, or 2010?  Did you have trouble getting a meet up with the Pugmeister?  Call me next time, I’ll make sure you get in.

Is there really more?  Seriously?  And people say I write long articles….

“Mr. Pugsley said business actually increased in the early days of the recession; customers had told him they were spending more time at home. But now people buy only what they need for maintenance. “People realized that it wasn’t going to get any better, and they stopped spending on their pools, too,” he said.”

Now, do you see how quickly old Pug figured out what was happening there?  He didn’t need a research report.  He was just using his good old, God-given common sense.  All business owners have it.  We keep our finger on the pulse, because if we don’t… we go broke, our children can’t keep up with their peers, and our wives leave us for their dentists.  That’s some seriously motivating stuff, right there, let me tell you.  Plus there’s payroll, which for us, doesn’t just show up on a cloud from above.

Okay, next slide:

“At Milcarsky’s Appliance Center in the adjacent town of Longwood, business now comes from people remodeling their own homes rather than builders, and customers are picking cheaper models, said Doug Morey, a sales manager.”

Ahhh, good old Milcarsky’s… a darn fine place to pick up an appliance.  But, one question… why are we talking to Doug the sales guy?  Only time we need to talk to Doug is when we’re in the market for an appliance.

“People who might have bought that” — he taps a stove with chunky burners, designed to look like it belongs in a restaurant kitchen — “are double-thinking it. Everyone has had to cut back.”

See what I mean.  Double-thinking it?  Everyone had to cut back, so duh?  That’s not helpful.  Keep going…

“That means Milcarsky’s has cut back too. The company, which employed 26 people three years ago, now has about a dozen workers, and they are making less in salary and commissions.”

See, you didn’t get that from Doug, now did you?  Nope, you got that information from old man Milcarsky himself, am I right.  Or, maybe from his wife if she still comes in to look over the bookkeeper’s shoulder one a week.  Right?  Yes, I’m right.  Doug wouldn’t know that, and if I have to explain why that is, then you need serious lessons in small business management.

Next slide…

“I might like to think that I’m middle class, but I’m not. I’m not anymore,” said Rae-Anne Crotty, a customer service manager at the store. She now shops for groceries at discount stores, she said, and buys gifts for her children at Christmas but not on their birthdays.

No, no, no… you don’t need this information.  Anne may have liked to think she’s middle class, but she wasn’t before and she’s not now.  She should have been shopping at discount stores all along, and it’s not her whose lifestyle has changed… it’s the Milcarskys.

Also, don’t let Anne fool you.  If she really didn’t buy her kids birthday presents, and I doubt that very much, then it’s because she either took them on a vacation instead or her parents spoiled them both with new bikes and a day at the amusement park.  Care to bet on whether I’m right?

Next slide…

“It remains the prevailing view of economic policy makers that economic activity will eventually return to the same trajectory as before the recession. Mr. Bernanke and others have said that they see no evidence of any permanent change in the economy. Previous bouts of economic pessimism, as in the early 1980s and early 1990s, went away once growth picked up.”

See, we’re in real trouble, that man runs the Fed.  But at least we’ve identified the source of the problem, or at least one of the sources.  I should have known it was him.  My parents are college professor types, as are their friends, and none of them could keep a hot dog stand open for the summer either.

Bernanke hasn’t been right yet, since the meltdown began during the summer of 2007, and in fact he doesn’t even seem to know that the meltdown began during the summer of 2007.

Just the fact that he and others could possibly say that they see no evidence of permanent change in the economy is more than enough for me… can I meet with him for an hour please?  I’m serious… I could get this problem fixed in a jiffy… all I need is an hour… two if he’s as obtuse as he appears.  How do I go about getting a sit down with Gentle Ben?

How about this for something of which he and his pals could take note… I’ll make it a riddle:

Of all of the events and factors involved in this meltdown, what’s the one thing that has never happened before in our history?  What’s the one thing that is entirely unprecedented?

Want a hint?  Okay, it began on July 10, 2007.  No?  Okay, whatever it was, we haven’t seen another one of these sold, since the summer of 2007?  Still no?  Come on, work with me here… this isn’t that hard.

The securitization market froze solid… the credit markets… there have been no private securitizations to speak of since the credit markets froze beginning on July 10, 2007.  The credit markets are frozen because no one trusts the ratings.

I know I used this line in one of my last articles, but I’m going to use it again.  Instead of calling it the “abrupt re-pricing of risk,” I suggested we call it, “the abrupt reduction in trust.”

We’re a credit-based economy and our credit markets are frozen stuck because no one trusts the credit ratings on bonds anymore.  So, 97-98% of all lending is the government ever since the summer of 2007.  Hasn’t Ben noticed that?  He must have been too busy taking in garbage assets so he could loan $3 trillion trillion or so.

So, no credit markets in a credit-based economy… doesn’t that sound like it could put a crimp in things?  Of course, now that you’ve let us drive directly off the cliff, we have precious few qualified buyers anyway.  But even when that gets better, no one is going to buy MBSs, or ABSs, or anything derived from those vehicles until we fix what was broken about ours.  Capisce?

And only government credit won’t cut it.  That will lead to deflation and a permanent change.  And Ben better wake up to that fact soon, or we really are going to starve to death and in more ways than one.

Oh, and did you notice the last sentence above… from the economists and Bernanke…

“Previous bouts of economic pessimism, as in the early 1980s and early 1990s, went away once growth picked up.”

That has nothing to do with now.  This is a demand side recession, not a supply side recession.  What happened in the early 1980s is entirely irrelevant.  For one thing, it was the end of a 16-year bear market that went from 1966-1982, during which the Dow returned -6% a year.  (And I don’t need to look that up for a source, just trust me, it’s right.)

And the beginning of the 1990s wasn’t saved by anything but the dot-com bubble, so what does that have to do with broken credit markets and housing down by 50% plus… and has it occurred to anyone that there’s also the aging population… baby boomers… lots older now than in the early 90s.  Older means spends less, right?

So, stop looking in your review mirror Ben… and keep you eyes on the road… you’re driving me crazy looking backwards like that, and one of these days we’re going to run straight into a cement divider and burst into flames.

Last slide… remember Mr. Marjey from the beginning of the article… okay good…

The business Mr. Markey created, Stone Giant, grew to include two factories and 60 employees, and it installed granite countertops in up to 15 new kitchens every day.

His new company, Winter Park Granite, now installs two kitchens on the average day. He has eight employees but cannot afford health insurance for them or himself.

The family income last year was less than a third of the $175,000 that he and his wife made in 2007, their last good year.

And he sees little room for growth. He has stopped spending money on advertising.

“We’re never going to get that big again,” he said. “I was someone employing people and taking people to the good life. Now I’m just trying to survive.”

So, what do you suppose that looks like to Ben?  Someone who is absent adequate confidence?  From 60 employees to 8, and even at that they can’t afford health insurance… and income that’s one third of what they made in 2007… plus no money for advertising… just trying to survive.  Anyone think this guy is voting for Obama in 2012?  Or bouncing back in 2013 or 2014?

Yep, sure sounds like a blip on the map to me.  Probably pick back up… well, maybe never.

Are we ready to get behind something to fix this Keystone Cops movie?  Or isn’t the pain acute enough yet?

Mandelman out.

First posted in December 2009,… but re-posted at reader’s request.

I’ve had a love-hate relationship going with FDIC Chair, Sheila Bair since 2006.  In case you don’t remember, Sheila was the Bush appointee with a brain and a heart, go figure, who first uttered the term “loan modification,” to which, I believe, Hank Paulson replied: “Yeah right… Sheila, be a doll and run down to the corner and get me a Nonfat Grande Vanilla Latte, would you please.  Thanks.”

And, even though she brought it up several times after that, and Congress asked her to come testify about it, that was about as far as she got with the idea while Bush was in office.  Oh, I know, I’m leaving out the one Hope-4-Homeowners modification… so, big deal.

So, then as all the Bushies were loading up the wagons and heading west to the Lone Star State, Sheila stayed behind.  Republicans accused her of sucking up to the incoming Obama Administration, jockeying for a position that would let her keep her job.  Frankly, I didn’t care what the Republicans said at that point in the game.  If Sheila thought she could get something done in the loan modification department, then by golly, let’s give the woman a try… Lord knows Paulson was in no hurry to modify loans, unless perhaps Goldman Sachs was the borrower.

So, at this point I liked her.  After all she was getting absolutely no support from her Red State pals, and she seemed to have her heart and brain in the right places.

Then she took over IndyMac Bank and did a masterful job, the papers reported.  I don’t really know how perfect it was, but quite a few people said it was a model for the rest of the banks in this country.

Then Obama announced the making Home Affordable program, the one that had absolutely no shot whatsoever of working, and basically she went along for the ride.  She was honest on ABC News last April, telling everyone watching that the Making Home Affordable was not designed to stop foreclosures, and I published several articles in which I referenced her quotes on that subject… but no one listened back then.  That was when the Obama plan could do no wrong.  (Now, it seems, it can do nothing right.)

Sheila is also the one that negotiated with the purchasers of banks like IndyMac, so that they could buy the bank with a loss sharing agreement.  Under most loss sharing agreements, the FDIC agrees to assume up to 80% of any future losses, up to a certain threshold, and the bank gets the other 20%.  If losses exceed that threshold, FDIC picks up 95%.

Pretty cool, huh?  Maybe we should pool our money and buy one of these failed financial institutions. After all, there are going to be quite a few going on sale in the coming months.

FDIC says they have loss sharing agreements with 53 financial institutions, but I haven’t been able to find the list.  Bloomberg reported the FDIC having loss sharing agreements worth $101.9 billion, including 44.7 billion for single-family loans.

Of course, after IndyMac was sold to a new group of investors (the largest two shareholders are George Soros, Michael Dell) and renamed One West Bank, I started liking her less.  She just hasn’t been doing much lately.  Oh sure, she takes over a couple of banks a week these days, but I can’t think of a thing she’s done this whole year to help a single homeowner.  I’m sure I’m wrong about that… I hope, but it doesn’t change the fact that IndyMac and other banks and servicers have been abusing homeowners and she hasn’t done anything meaningful to prevent it.

Well, now Sheila the Care Bair is speaking out once again.  And this time she’s talking about principal reductions.  (You go girl!)  Late this week, Sheila told Bloomberg News:

“We’re looking now at whether we should provide some further loss sharing for principal write downs.  Now you’re in a situation where even the good mortgages are going bad because people are losing their jobs. So you have other factors now driving mortgage distress.”

Sheila has started talking seriously about lenders reducing the principal on $45 billion in mortgages that have been acquired from failed banks taken over by FDIC.  It’s not like this step alone would solve the foreclosure crisis the country is facing, but it would certainly be a step in the right direction, as it would establish the importance of principal reductions.

Up until now, of course, the issue of principal reductions has been a bit of a third rail with the American public.  Why should “they” have their mortgage balance reduced?  “They,” who made irresponsible decisions, took on too much risk… blah, blah, blah.

The truth is, those thinking this way are their own worst enemy, they just don’t realize it yet.  They will soon enough, however.  It may seem counter-intuitive, I realize, but I’m going to take a shot at simplifying the issue… so, here goes.

First of all, let’s just establish a few things:

A. Banks don’t really have much money to lend out for 30 years.  They have a lot of money to lend out for short periods of time, like annual revolving credit lines, things like that, but not much at all for longer-term borrowing.  That’s because people don’t put their money into banks and just leave it there for 30 years. The vast majority of people would put money into a CD for a year or two, but not much beyond that.

B. So, when a bank originates a mortgage, it plans on selling it in the secondary mortgage market*… not keeping the loan on its balance sheet.  (*The one we don’t have any more because no one trusts those AAA ratings Wall St. was so fond of during the bubble.)

C. Banks have ratios they must comply with in order to be considered solvent by federal banking regulators.  They have to have x amount of cash or cash equivalents, and they can only hold x amount of less liquid, and therefore higher interest bearing, types of securities.

D. When a bank holds a loan on its balance sheet and it is paying as agreed, it remains in a homogenous pool of loans and everything is fine.  But when a bank learns that a loan they are holding is at risk of default, the bank has to take that loan out of the homogenous pool of loans and place it as an impaired loan into a heterogeneous pool… and reserve for the future loss of that loan defaulting.  Banks don’t like doing that because the higher the reserve account balance (called the ALLL – Allowance for Liens, Losses and something else I can’t remember at this moment) the lower the profitability and therefore, the annual bonuses.

Okay, got it so far?  Hope so…

We have reached a point where we have to stop foreclosures, because if we don’t property values will continue to fall and more and more people will start walking away from their mortgage whether they can afford the payment or not.  This will put even greater pressure on the bank’s financials, because at a certain point what we’re talking about is stabilizing the banks, remember.  Lower values mean less spending, which in turn means layoffs, which bring more foreclosures… foreclosures breed foreclosures, remember?

There’s another dynamic involved and it involves the so-called toxic assets that are still on bank balance sheets just as they were last fall when Hank Paulson wanted to buy them off of the bank balance sheets with the $700 billion TARP money.  Eventually, we are going to have to buy these “toxic assets,” from the banks, or they won’t recover and start lending again and we won’t see a recovery,

When Paulson tried to buy the toxic mortgages from the Banks into order to try to stop them from closing their doors for good, the problem was that the banks wouldn’t sell them at anything less than face value, even though they had been written down in most cases, and they certainly weren’t worth anything near face value.

Paulson couldn’t come up with another way of valuing them, especially in the time he had before the banks defaulted, so he didn’t have any other option other than to buy preferred shares of stcok.  Without going into detail, preferred shares are equity, but they function more like debt or bonds, and they don’t have voting rights, as do common shares.

Paulson wasn’t fixing anything but the very near term problem of imminent default of the banking system.  And since then we’ve basically done more of the same, except that we’ve run out of money to paper over the real problem… so, the banks remain technically insolvent.  Ultimately, we need to buy the toxic mortgages off of the banks balance sheets, because only the government can take on the re-default risk, or the risk that what says AAA is actually D-.

If we pay some lower amount than the face value of the loans, then we’ll leave a gaping hole in the balance sheets of the bank sold us the assets, and I use that term lightly… and we’ll have to give the banks the money to refill that hole we created by paying less than face value.  In other words, we’re going to paying for them one way or the other.  No question about that.  We only fix the problem by paying the face value of assets we know are not worth face value.

So, the only remaining question really is: How toxic do you want the assets to get before “we” have to buy them all at face value?  We could let the entire housing market drop to essentially zero, but that would cause massive numbers of strategic defaults, which is the phrase being used to describe people walking away irrespective of whether they could afford the payment or not, which would quickly get out of control, collapse the banking system, and make any sort recovery impossible.

Critics, who don’t think homeowners deserve the government’s help, are the cause of the “third rail” aspect of the issue.  These people think that modifying a loan for a homeowner who is seriously underwater is somehow giving that homeowner an undeserved taxpayer funded gift – a reward for having acted irresponsibly.  Speaking about these unfortunate homeowners, you hear them say things like: “They took a risk and lost, so they must pay the price.”

The problem is, and I’ll try to be kind here as some of “these people” are friends of mine, they’re not looking at the situation correctly.

When you have someone with a $500,000 mortgage, and the market value of the home is now $300,000… and you modify the loan by lowering the interest rate by a few points and extending the term to 40 years… that’s no gift, sweetheart.

That may not be considered manslaughter under the law, but it’s certainly the financial slaughter of a man… or woman, as the case may be.  When you modify that mortgage by lowering the interest rate and extend the term, you just cost that person who was already $200,000 underwater, a lot of money.

The banks know this.  They also know that the likelihood of that person staying in that home and making all of the payments is slim to none because it’s going to be decades before that homeowner has any shot at building any equity.

That’s why the bank doesn’t want to modify the loan.  The bank knows that even though the person, when threatened with losing the home, will agree to almost anything to keep it… a year or two later, when the shock of losing the home has worn off, that homeowner is going to wake up one morning and realize that they’re paying twice as much as the home’s worth… and they’re going to walk away.

The only way you’re going to keep that homeowner in that house and paying the mortgage is to write down the principal to the market value.  If you keep the mortgage balance at $500,000, it’s a foreclosure waiting to happen.  Maybe not today… maybe not next year… but at some point that person will realize that they’re paying hundreds of thousands of dollars they don’t have to pay to live where they live.  And that just doesn’t make sense.

I recently received a call from a homeowner who was quite upset with her bank who had treated here unconscionably for months.  I won’t mention which bank it was except to say that it used to be called IndyMac Bank.

In typical IndyMac fashion, they had jerked her around for months before foreclosing and selling her home without telling her about it.  She found out when the new owners stopped by to take a look at the home they had just purchased at auction for $420,000.  Her balance on her loan was $760,000, and she was upset.

After a few minutes, I interrupted her as politely as I could and asked her the following question:

“What if I could call IndyMac’s CEO right now, and then called you back and said that I had struck a deal and you could keep your home. You’re approved to buy it back right now with no money down for $760,000… would you do it?”

There was silence on the phone.  I waited.  After a minute she said quietly: “That’s a really good way of looking at that.”

“What do you mean?” I said.  “You wouldn’t buy it back for $760,000?  Why not?”

“Well, because the investor just bought it for $420,000, why would I pay $760,000?”  She replied.

“But that’s exactly what you said you wanted when you asked for a loan modification,” I pointed out.

“That’s a really good way of looking at that,” she said again.

“Glad I could help,” I said back.

Okay, so I’m not exactly Mr. Sensitive… so, what’s your point?  What I showed her was a glimpse of the future.  How long do you suppose it would have taken her to realize that the modification she would have agreed to was an absurd proposition?  A year… two… three?  My guess would be that she’d wake up to the fact when her youngest, who’s now 14, was about to graduate from high school, if not sooner.

And there you have a loan modification in all its glory.  Some gift.

Hi, Mr. Banker.  Would you mind burying me in my home in such a way that I’ll never build equity while I pay way more than the market price to live here every single month for… oh, say 25 years?  You wouldn’t mind a bit?  Why, thank you kind sir… what a lovely gift.  You really shouldn’t have…

Now, if that banker had written down the principal that would have been a very different story.  In that case there’s a chance that she would continue paying the mortgage on time as agreed.

Let’s get back to the crowd that thinks of mortgage modifications as some sort of undeserved gift.

There are a few facts this crowd is missing.  Try this on for size:

The average REO property sells for 66% of the non-REO sale.  That means that when there’s a foreclosure on your street or very near by, your $100,000 home just dropped in value and is now worth something like $83,000, all things being equal.

Now let’s say another home on your block just went back to the bank.  It will sell for 66% of the $83,000… or $54,780, making your home’s value something like $73,000 and change.  Should I throw in one more REO, or is that enough?

Now the homes on your block are selling for $73,000, as a result of the foreclosures, and now someone else on your block goes into foreclosure because they’ve been transferred by their employer and they’re now underwater.  That person wasn’t underwater after the first foreclosure on the block, but by the third or fourth they most definitely are.  And when they have to move, there’s nothing else they can do.

You see, foreclosures breed foreclosures, by destroying the equity in homes not in foreclosure.

If my neighbor is at risk of foreclosure, I pray the bank will modify their mortgage.  Not for them… who gives a damn about them?   I pray the bank will modify my neighbor’s loan FOR ME, and all of the other homeowners on the block who are NOT in foreclosure.

And if that means reducing my neighbor’s principal balance to the market value, well then goodie goodie, because that means my neighbor  won’t walk away next year when he or she comes to their senses about a loan modification that makes no sense.

My neighbor isn’t costing me money by having their principal reduced, they’re saving me from having to lose money.  They’re not taking money out of my pocket by having their principal reduced, they’re stopping the market from taking money out of my pocket.  When my neighbor’s principal gets reduced, I’m the one getting the gift.

In fact, if the bank refuses to grant a principal reduction, and instead decides to foreclose and sell the home at auction, the new sales price will bring down the value of all the other homes on the block.

In fact… the ONLY way I’m not going to lose a good chunk of my home’s value in this scenario is if the bank will reduces the principal balance my neighbor owes on his or her mortgage.  Remember, I own the equity… the bank owns the property.

Of course, I realize that the people who are opposed to helping those they consider irresponsible homeowners are upset and would like to see those people punished for wanting a nice house to live in.

I suppose they think that the irresponsible people should have seen that the credit ratings agencies were about to improperly rate bonds, that Wall Street investment bankers would then sell the improperly rated bonds to investor groups all over the world, and that the result would be the total decimation of the secondary mortgage market, which would make it impossible to get credit for anything essentially overnight.  (But if they do, then they’re nuttier than a fruitcake.)

I suppose it should have been abundantly clear that housing prices were about to be cut in half over 18 months… after all, everyone else saw all of that coming.

And please don’t bring up some outrageous one-of-a-kind example of an unemployed 22 year-old who loaded up on beachfront investment properties financed with nothing down, stated income, spring-loaded adjustable rate loans… because that’s not what we’re talking about here and you know it.

Experian just published data a few days ago about “strategic defaults” that I’m sure made someone in The White House nauseous.  The data showed that 18% of foreclosures are strategic defaults, meaning that the homeowners could have made the payments, but chose not to and walked away.  That’s almost one out of five.  In light of what I explained above, isn’t that just a lovely thought?

If you’re a homeowner who is not yet at risk of foreclosure, assuming such a thing is possible today, you should be campaigning wildly for the banks to be writing down principals for everyone in the country that’s in foreclosure.

I know… you think not modifying those loans is punishing the homeowners for getting in over their heads… but in realty, it’s not punishing them… it’s punishing you.  In reality, you are running about, commenting on blogs, and advocating the kicking of your own ass.

Sheila Bair, the Care Bair, understands what it means when 18% of foreclosures wouldn’t have happened if housing prices hadn’t fallen quite so far.  She knows that the 18% will only go up as prices fall further.  And she knows that, as prices drop the toxic assets will be that much more toxic.  She knows that the sort of downward spiral I’m describing is bringing an end to our already much to wobbly banking system.

She thinks she can start the bowl rolling with mandatory principal reductions from banks with loss sharing agreements, so good for her.  I don’t care how she does it, she can sleep with Jamie Dimon or Kenny Lewis for all I care… just get it done.

Oh, and in case you’re thinking that investors get screwed when reducing the principal on someone’s loan, think again.

Remember… it’s being written down to market value, so if the investor were to have foreclosed instead of writing down the loan, that’s all he or she would have gotten anyway.

Principal reductions don’t cost investors 10¢ more than foreclosures.  And in fact, because principal reductions don’t incur the costs associated with foreclosing, reducing the principal SAVES the investor money.

It would certainly save the rest of us a bundle.

HERE’S A CLIP FROM THE BLOOMBERG STORY THAT SHOULD SUM IT ALL UP:

FDIC CHAIR, Sheila Bair is stepping up her effort to prevent U.S. home foreclosures, using the agency’s relationship with lenders to make change.  The agency now is considering whether lenders that acquire banks should share a larger portion of the losses on loans whose principal is cut, and whether the FDIC will recover the additional subsidy through reduced foreclosure rates.

“I think we’re going to gain by reducing re-default rates or delinquencies with people walking away,” Bair said. “We’ll obviously lose by providing loss-share for principal write-downs.”

Principal reductions will help borrowers who are “underwater” on their payment-option adjustable-rate mortgages, whose principal expands over time, said Julia Gordon, senior policy counsel at the Center for Responsible Lending.

“In order to make those loans affordable and give those homeowners a reason to stay rather than walk away, principal reduction is going to be key,” Gordon said.

The Washington-based FDIC insures deposits at 8,099 institutions with $13.2 trillion in assets. The agency is charged with dismantling failed banks and manages an insurance fund it uses to reimburse customers for deposits of as much as $250,000 when a lender collapses.

(THEY’RE ALSO BROKE, BUT WE DON’T NEED TO MAKE A BIG DEAL OUT OF THAT HERE… GO SHEILA!)

Mandelman out.

During a Senate Budget Committee meeting, Senator Sheldon Whitehouse of Rhode Island went straight at  Treasury Secretary Geithner over Treasury’s abysmal track record and unquestionable ineffectiveness in combatting the foreclosure crisis.  So, for that reason alone, the video below is well worth watching.

But there are quite a few other compelling reasons, as well.

Whitehouse also talked about the need to put pressure on the big banks… smacking them with a foreclosure moratorium was close to how he put it, and he spoke of the ” bureaucratic nightmare” forced on homeowners going through the loan modification process.

The Senator has, quite obviously, seemingly broken with tradition, by venturing outside the beltway to visit with some actual homeowners, realtors. and who knows who else, because he talks like a man, shocked by what he’s just learned, and simultaneously disgusted and outraged as a result.

(And speaking of being disgusted and outraged… okay, I’m sorry… that was just mean for no reason.)

Geithner responds by agreeing, pretty much across the board, with Sheldon Whitehouse’s unflattering assessment of the way things are going as far as stopping foreclosures, to-date.  Heeeeere’s Tim…

“This is a tragic terrible mess across the country still, and we are not coming to the end of that amount of pain and risk and trauma to homeowners caught up in this crisis… and many of them are completely innocent victims of the failures of the system before this.

You’re also right that servicers and banks on a whole are still doing a terribly inadequate job of meeting the needs of their customers… help customers navigate through this basis process.  And we are going to have to do a better job at trying to reach as many people as we can reasonably reach with these programs.”

Secretary Geithner goes on to explain that there have been about 4 million people that have benefitted from modifications and that even though a relatively small percentage of those are HAMP modifications, we should not discount HAMP’s contribution to lowering the monthly payments for millions.

And I have to agree with that, actually.  I’m not defending Geithner or Treasury in any way, but he’s right that 4 million mortgages or darn close, have been lowered, roughly half a million are HAMP permanent modifications, but HAMP had a very definite influence on the other 3.5 modifications getting done.

But Secretary Geithner’s message then turns to explaining the context within which the whole loan modification thing has to be viewed.  I’m paraphrasing here, but this is basically what he said:

We do not have the power under the law to compel, we have the capacity to provide incentives, and the incentives were not powerful  enough in all cases to overwhelm the rest of the muck, but given the tools Congress has given us we’re reaching more than in the past… and we’ll help many more in the future.

Now, I thought that was interesting and here’s why…

First of all, a few days ago, I wrote about Federal Reserve Governor Sarah Raskin, who delivered a speech to an audience made up of those in the mortgage servicing industry that was scathing about how the foreclosure crisis’ growth is being fueled by the poor performance of servicers, and preventing our nation’s economic recovery.

In other words, she sounded like a politically correct… me.

And now, just days later, we are shown a Secretary Geithner (almost) doing an Elizabeth Warren imitation.  And not only is he approaching Alan Alda-type- sensitive, but he says clearly that MANY are innocent victims of the past program and policy failures.

He even admits that it’s not stopping, which is another way of saying that it’s growing, and he seems to have no doubt that it is the servicers that are the problem.  If the Senator had pushed him, he might even have eventually admitted that we’re not having a recovery as he has previously thought.

But then he said something that caused me to pause… he said that Congress has not given Treasury the tools, and that one of those tools is the power to compel the servicers to act or change.  He explains that all he can do is provide incentives and, assuming that any incentive would do it, what’s been offered clearly hasn’t been enough to “overwhelm the muck,” as he surprisingly said.

I’m starting to hear a very definite shift in the attitudes towards the foreclosure crisis among our legislators and from those in our federal agencies… only the beginnings, perhaps… but it’s very definitely a new set of talking points along with a new underlying theme.

They’ve finally realized it… do you think?  They thought other things would have happened by now as a result of pumping trillions into banks and the economy overall… and they haven’t.  And housing is in a free fall, and unemployment is unchanged, and consumer spending isn’t coming back… and ohhhhh nooooo.

If I’m right about this, they’re now going to campaign to subtly (for them) try to change the attitudes of the general population so that they can garner the political support to do something that they hadn’t thought they would need to do… until recently.

I don’t know what they’re thinking of doing… or whether they’ve experienced enough pain that it inspires competence in the response, so don’t get too excited, but they’re not the same administration and Congress.  Some voices are getting through… I think.

Okay, see what you think… click play, and get back to me…

Mandelman out.

Yeah, I know… you’re thinking I picked an easy target.  Like, maybe I’m getting lazy.  Almost like going hunting and shooting a deer wearing bifocals and pushing a walker.  Well, not true, my jump-to-conclusions friend.

I didn’t want to go after the man who thinks bankers should always be bailed out, but never imprisoned… the man who handles FASB like most people handle a Suggestion Box… the man who got investors to embrace pretending as part of a financial strategy… the only adult male to make Elizabeth Warren check YES on waterboarding.

No, I didn’t want to bother with little Timmy Geithner, but after what went on when he invited a group of bloggers to Treasury in mid-August, he left me no choice.  It’s almost like he wanted to be featured in this column.  After all, Bernanke’s been here.  Sheila the Care Bair’s been here. President Obama did a stint on these pages for a month at the beginning of 2010.  I even welcomed Assistant Treasury Secretary Michael Barr into my Rear-of-the-Month Club in 2009, but until now… no Treasury Tim.  Maybe he was feeling left out so he decided to do something so incredibly odious that he knew I would be powerless in the face of his jackassedness.

Well, if that was the case, Timmy my boy… touchdown!  You made it by a mile, my loathsome pal.  In fact, just for future reference, you could have done something one tenth as hideous and hateful and I still would have scooted your cute little backside right to the front of the line of backsides that wait patiently for their chance to brought up by me.  So, I guess it’s very well done there.

I’d like to think that, since you’re reading this in the latter part of September or even in October, you’ve already read about what went on at the Department of the Treasury back on August 16^th and 18^th when Tim decided to host an intimate gathering at which some of the country’s best-known bloggers would get to listen to Treasury officials wax pathos, albeit anonymously, about a range of topics… most compellingly, about HAMP, the Home Affordable Modification Program.  Or, as it should be known by the time you’re reading this, “Hopeless for Homeowners,” or possibly by a new acronym, which I’m guessing is either CRAMP or perhaps CRAP.

I must admit, I have been having a ball lately reading all of the Johnny-come-lately journalists and bloggers who recently started claiming that they knew all along that HAMP was an abject failure, as if they’d been preaching that gospel since Inauguration Day, 2009.  Why?  Because I’m the only writer who’s been saying in no uncertain terms that HAMP was a tragic and cruel waste of time since the day Obama introduced it while giving a speech in Phoenix on February 19^, 2009, if I remember correctly. Back then, no one else was saying “boo” about the new President’s plan… that was when he was still uber-smart and was favored to fix whatever it was that was broken in America and around the world.

Me… I didn’t care what everyone was swooning over… didn’t give a damn about the economic stimulus… bridges, infrastructure, condoms, reseeding the mall in Washington, whatever.  I was waiting for him to do something about the foreclosure crisis, that at the time of his inauguration was causing more Americans to circle the drain that any force since the Great Depression.  It was abundantly clear then that the spread of the foreclosure crisis would bring a depression of a kind never imagined by the generations who would experience it this time around.

So, Obama handed the ball off to Tim Geithner, the President of the New York Federal Reserve Bank, but entirely baffled by a tax return…. Oh, why not, people?  Hope and change, remember?  Look, he’s young like Obama… that Volker guy ‘s old and Larry Summers doesn’t think chicks can do math.

Geithner had been partly responsible for the decision to let Lehman Brothers go under, for the TARP fiasco, and for American International Group (AIG) paying its creditors in full with taxpayer money.  So, it’s not like he didn’t have a track record.  As president of the Federal Reserve Bank of New York, Geithner served under a board of directors headed by JPMorgan Chase CEO, Jamie Dimon.  And as the pièce de résistance, for his chief of staff, Geithner chose a former lobbyist for Goldman Sachs.

So, fine… better late then never for the journalists and bloggers… they finally agree with me when I say, HAMP is a prodigious failure.  Now, I figured, we could get something done and save the country.

But Treasury officials told the bloggers that they knew all along that it wouldn’t work, that homeowners would be foreclosed on left and right, but, they explained, that was okay with them.  In fact, it was a good thing.  They only wanted HAMP to slow down the pace of foreclosures because if they had come to quickly when the banks weren’t strong to handle them, they would have gone under.

“Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole.”

No, I’m sorry but no, damn it.  I don’t even know what a palliative is, but it doesn’t matter.  No, no, no.

Geithner, you elitist piece of garbage, you do not get to torture American citizens because you think it will benefit the banks.  Who the hell do you think you are?  Did my president know about this?  Because you imply that he did, and if that’s the case then he should be impeached.  No American president would ever condone what you are describing and if this one did, he is not fit to lead our country.

Mr. Geithner… people have taken their own lives over what you’ve allowed to happen.  Children have gone to bed night after night scared to death, not knowing why their parents are so afraid… or so angry.  Marriages have ended.  Fathers have sat up at night wondering if their life insurance policies will pay off after suicide.  And all of this and more continues to this day and yet there is no plan to change a thing.  Because you’re happy that Wells Fargo isn’t suffering too terribly much.

And why?  Because Citibank or Bank of America would have gone under if the foreclosures would have come at a faster pace?  Bullshit.  You think that it’s because of HAMP that it’s taking banks a long time to foreclose?  You’re a moron, Tim.

If banks were going to go under by foreclosing too quickly they would have slowed the pace themselves.  We didn’t need you to invent a fake loan modification program and lie to the American people about it in order to slow down the pace of foreclosures.  Besides they could have MODIFIED THE LOANS, Timmy.

Before you showed up with HAMP banks were modifying loans much more frequently.  Is that what you wanted to do, STOP MODIFICATIONS?  So you invented a program that would do just that by promising to modify 3-4 million loans?  Did Obama know of your plan?  Did the President of the United States know that this outcome would be considered a success?  Is that what your cohorts at Treasury are saying… off the record, of course.  Cowards.

Mr. Geithner, you should be incarcerated for the rape of the American people.  You know what caused this crisis and you know damn well that it wasn’t some guy in Stockton, California with a 600 FICO score, not making a mortgage payment.  How do you sleep at night?  Do you even know what you’ve done to countless thousands of people’s lives so that the banks wouldn’t have to foreclose too quickly?

Or, maybe you’ve got something like a child labor program on your drawing board… next time are you guys at Treasury are going to be telling bloggers: Well, it must have been a strain on those kiddies, but hey look… productivity is up six points?

The showers are on Mr. Geithner.  We’ve seen, heard and felt enough of you.  Resign now before you sink the Democratic Party’s control of the House.  Because I’m here to tell you… there are hundreds of thousands of people that don’t respond to polls… until they arrive at theirs.  And then they’ll close that curtain and see your face, remember the misery of HAMP… and they’ll cast their vote for fried chicken and salad before they vote for an incumbent, no matter who it is.

Watch.  And learn.

Mandelman out.

]]> http://mandelman.ml-implode.com/2010/09/bringing-up-the-rear-treasury-secretary-tim-%e2%80%9ctransparency%e2%80%9d-geithner-and-his-band-of-banking-sadists/feed/ 0 http://mandelman.ml-implode.com/2010/07/obamas-speech-avoids-using-the-n-word/ http://mandelman.ml-implode.com/2010/07/obamas-speech-avoids-using-the-n-word/#comments Sun, 18 Jul 2010 22:24:10 +0000 Mandelman http://mandelman.ml-implode.com/?p=5

(This is the article I wrote the night President Obama gave his first speech on how his administration would handle the financial crisis.)

I will admit that President Barack Obama is facing challenges that appear near impossible to solve.  And, even though I realize that his speech the other night was intended to be more State-of-the-Union-like than a presentation of specific solutions, I still came away feeling a bit like a Christian Scientist with appendicitis.

America’s banks are, in large part, insolvent. But, with the TARP widely perceived as having accomplished nothing, American taxpayers have no appetite for further bailouts. Americans are losing homes to foreclosure at a pace not seen since the Great Depression of the 1930s. But American taxpayers are sharply divided as to how to solve the problem, with many believing that any financial rescue would be tantamount to rewarding irresponsible behavior.

American credit markets are broken. Our banks are unable or unwilling to lend, and only the government is capable of stepping in to provide capital. And yet, as General Motors learned at the end of 2008, there is little support for such lending.

Most recently, unemployment is increasing at the rate of more than 500,000 jobs a month, but one side sees only only tax cuts as having the potential to solve the problem, while the other has pegged its hopes almost exclusively on government spending.

America is deeply divided, and we all know the old adage about the benefits of being united and the downside of division.

Tonight President Obama was to speak to the American people, and clearly his speech was intended to cheer America up. Whether it did or didn’t, I have no idea. Our politicians looked pretty cheered up, I’ll say that. Why? I have no idea.

For the record, I thought the speech was very uplifting. And were I in the mood to attend a motivational seminar, perhaps I would have been cheering right along. But I’m not in that sort of mood, in fact I’m a long way from being in that sort of mood. After eight years of Bush, and an economy that promises nothing but dread for the foreseeable future, I’m only in the mood to hear specifically how our government plans to fix what they allowed to break in the first place.

In tonight’s speech I didn’t need to hear about how the government plans to handle health care. I didn’t need to hear about what they plan to do about energy. I didn’t need to hear about goals for fixing education in this country. And by the time I heard the President assure me that our nation doesn’t torture… all I could do was say to myself: “Really? Well, you’re torturing me right now.”

A few weeks ago I watched Republicans vote in unison against the president’s economic stimulus plan, and they’ve done nothing but play politics in opposition to the administration ever since. Yet, they stood up and applauded the president tonight on numerous occasions. Why? The cameras were rolling, that’s why. It certainly couldn’t be because they now plan to support the president’s agenda, because the only specific that President Obama offered was that we should all be specifically hopeful about our collective future.

If I believed that starting tomorrow morning the Republicans would be on the team, ready and willing to row in the same direction, I suppose I could celebrate the moment as some kind of turning point. But I don’t even believe that a little bit.

Why? Because it’s horse sh#t, that’s why. And if you have any doubt about this, you obviously changed the channel prior to hearing Louisiana’s Governor, Bobby Jindal deliver the Republican response to the president’s speech.

Jindal has spent the last week or more appearing on talk shows, bragging about how he would not accept some of the money President Obama’s stimulus bill provides for Louisiana. How much of the money, you ask? Well, instead of taking the roughly $4 billion that would be available from the stimulus spending, Jindal is only going to take about $3.9 billion. Once again, Republicans are treating me like I’m an idiot, and frankly I’ve had about enough of that.

The issue that needed to be addressed, in my mind anyway, is what we’re going to do about our insolvent banks. Are we going to bail them out again? Are we going to allow them to default and be taken over by the FDIC? Or, are we going to start using the “N” word… Nationalization.

Citigroup, as just one example, has been in negotiation with the administration since at least this past weekend, according to published reports. As a bank, in terms of capital adequacy, they’re dead man walking. Capital adequacy, in broad terms, is the ratio between some measure of capital to a bank’s total assets. Don’t worry… I’ll explain…

To keep things simple, let’s say a hypothetical bank has $100 in assets, and $90 in debt. That means the bank has $10 in capital or equity, and the bank’s capital adequacy ratio is 10%. Now, assets as we’ve all learned the hard way, can go up or down. A capital adequacy ratio of 10% means that the value of the bank’s assets could fall by up to 10%, and the bank would still have enough money to pay back its depositors.

But what if our hypothetical bank had debt of $99. Then the bank’s capital adequacy ratio would be 1%, and that would mean that if the bank’s assets fell in value by more than 1%, the bank wouldn’t be able to repay its depositors… it would be insolvent, and the FDIC would take it over and pay the depositors the guaranteed amounts. By taking the bank over as soon as its capital adequacy ratio falls below accepted levels, the FDIC does so with the minimum amount of risk.

So, without getting into a discussion over what capital adequacy ratios are, you should be able to see clearly why such a ratio matters so much.

There are, however, different types of “capital”. There are preferred shares, common shares, and believe it or not, deferred tax credits can be included in a bank’s capital. Deferred tax credits occur when a bank loses money in one year, and they can be applied against taxes due in future profitable years.

One measure of capital is called Tier One Capital, and it allows for common shares, preferred shares, and deferred tax credits to ALL be included in a bank’s capital. The other measure of bank capital is called Tangible Common Equity or TCE, and this methodology only allows common shares to be included.

Obviously, a TCE calculation results in a lower capital adequacy ratio than if Tier One was used, and Treasury Secretary Tim Geithner has said that the bank “stress tests,” that begin tomorrow will focus on TCE, meaning that only common shares will be included in a bank’s capital calculations.

You see why, right? Because preferred shares are more like debt than equity. Common shares are pure equity. You buy common shares in a company and what you get is the right to control the company by voting for its Board of Directors. As an owner of a company’s common shares, you are in theory entitled to a share of future profits… but the company is under no obligation to share that equity or pay out any dividends. If the stock goes up you may be able to sell your shares at a profit to another investor, but other than that, any money you receive from the company is at the discretion of the company’s management.

Preferred shares are quite different. Preferred shares are often required to pay dividends, which is a lot like having to pay interest on a debt, and they may come with rules that require the company to buy them back at some point in the future, or in the event of some significant transaction, such as a merger. And, in the event of the company’s bankruptcy, preferred shareholders are repaid from the liquidation of the company’s assets, after the creditors, but before common shareholders.

To-date. the government has given Citigroup $45 billion in cash, and received $52 billion in preferred stock. The $7 billion difference that was paid by the bank can be thought of as an insurance premium, in exchange for roughly $300 billion in government loan guarantees. But to-date, we have only funded Citigroup, and all of the other distressed banks that received TARP funds, through the purchase of non-voting preferred shares of stock that pay an annual dividend of 5-8%, and cannot be converted into common shares… so they cannot dilute the common shareholders share of the bank’s equity. Also, under the preferred shares arrangement, Citigroup is obligated to buy the government’s preferred shares back in five years.

Is it starting to become any clearer? It will in another paragraph or two…

In a TCE calculation of a bank’s capital adequacy ratio, the preferred shares are not included in determining the bank’s capital, but we taxpayers bought preferred shares, so the money we put into the bank… the $45 billion in the case of Citigroup… can’t be included in the bank’s capital adequacy, and that’s why Citigroup now wants the government to convert its preferred shares to common shares. By doing so, the government will:

1. Give up the roughly $3 billion in annual dividends that the government would receive as a preferred shareholder.
2. Lower its position to that of a common shareholder, so if Citigroup does eventually become insolvent, U.S. taxpayers would be paid out dead last… after the bank’s creditors and holders of preferred shares.
3. Give up the guarantee that the preferred shares will be bought back by Citigroup in five years.
4. Gain the right to vote to elect the bank’s Board of Directors, which means the government would be directing the bank’s policies and strategies. (This one may sound okay, but withhold your judgement for a moment.)

Citigroup common shares are worth roughly $12 billion today. So, if you convert the government’s $52 billion investment into the bank’s common stock… the government would own 80% of Citigroup! Remember when I said that the government would gain the right to elect the bank’s Board of Directors as common shareholders… and it didn’t sound like such a bad thing in point number four just above?

Well… my friends and neighbors… that’s not just A VOTE for the Board… that’s THE VOTE. An 80% owner of Citigroup is THE owner of Citigroup. And that, my dear Republicans and Democrats… liberals and conservatives… is NATIONALIZATION… the “N” word… whether President Obama wants to use it or not.

Tonight’s speech was uplifting, I suppose. But we need answers… real solutions… real bipartisanship. I don’t need to see happy legislators applauding a rock star president. I’m sorry President Obama… this isn’t about confidence… it’s not a psychological problem. It’s God damned rock hard real. People all over the country are crying themselves to sleep tonight… and every night… people don’t lack confidence… they’re afraid and they should be.

I won’t stop demanding action until that crying stops. Because I feel I know too much about the people of our nation… and if you don’t take action soon… if too many people continue to fall into the abyss created by this meltdown… I fear we’ll start hearing more people using the “N” word. And it pains me to say that I fear that when desperate people with nothing to lose start saying it… it won’t stand for “Nationalization”.

First of all, I just want to say that part of me feels as if I’m responding to one of those Internet rumors that says something about “Obama’s Citizenship Case to be Quietly Heard by Supreme Court,” or that “Starbucks Coffee Found to Cause Erectile Dysfunction”.  So, if that turns out to be the case then I guess the joke is on me.

On the other hand, if it’s true that President Obama and his band of Happy Harvard grads and Goldman alum have actually asked for input from various constituents on how to reform the housing finance system, well then I don’t really know exactly what to say, except that all of a sudden I’m  so deeply afraid that I may have to fly back to my hometown and see if my Mom will let me sleep in my old room,  bring me soup and jelly sandwiches, and sing to me until I fall asleep.  As I write this, I keep stopping every few minutes to go look out the window for no apparent reason. Stop it, Mr. President… you’re freaking me out over here.

Do you suppose that next week he’s going to ask if we have any thoughts on Afghanistan?  Oh my God!  I’m taking an Adivan.  Who did he ask about health care reform?  Oh my God!  Is that why he hasn’t gotten that much accomplished in the first year of his term?  I had figured that it was because of Republicans refusing to support anything but “NO”.  Was it really because he wasn’t sure how to proceed?  I think I may throw up.

It’s like my whole world has been knocked off of its axis.  All I can think of is what my high school Latin teacher used to say: “An nescis, mi fili, quantilla sapientia mundus regatur?”

Which means: “Don’t you know then, my son, how little wisdom rules the world?”

However, my Latin teacher also used to say: “Audaces fortuna iuvat,” which means “Fortune favors the bold”.  So, feeling like I had to push forward if for no other reason than to make certain I didn’t pass out, I started to read the list of questions to which my president was seeking answers.  Maybe they’d be easy questions, I hoped.  I only made it to question number two before I stopped in my tracks:

2. What role should the federal government play in supporting a stable, well-functioning housing finance system and what risks, if any, should the federal government bear in meeting its housing finance objectives?

Now, all I could think to do was answer in Latin, because nothing is that scary in Latin: “Aio, quantitas magna frumentorum est,” I said out loud to no one in the room.

It means: “Yes, that is a very large amount of corn.”  You see, the thing is, at 48 years old, I actually don’t remember all that much Latin from high school.

Try question number three: 3. Should the government approach differ across different segments of the market, and if so, how?

And I replied: “Aut insanit homo, aut versus facit.”

Which means: “The fellow is either mad or he is composing verses.”

Skip over that one, maybe question number four?  4. How should the current organization of the housing finance system be improved?

Appareo Decet Nihil Munditia?  I replied quickly and in a confident tone, which means: “Is It Not Nifty?”  Hey, when I took Latin, we still said “nifty,” so how old are you, 26?

Okay, number five’s got to be the one… come on… give me something I can swing at anyway.

5. How should the housing finance system support sound market practices?

“Antiquis temporibus, nati tibi similes in rupibus ventosissimis exponebantur ad necem,” I said, sounding as serious as a Roman Emperor asking a question of the Senate.  It meant: “In the good old days, children like you were left to perish on windswept crags.”

I was losing steam.  One or two more like these and I’d be Googling “Costa Rica”.

6. What is the best way for the housing finance system to help ensure consumers are protected from unfair, abusive or deceptive practices?

Okay now… here’s one… I could take a shot at this one for sure.

Well, maybe one thing we could try is to hire people for any of the dozen or so mammoth federal regulatory agencies that are supposed to protect consumers from unfair, abusive or deceptive practices THAT WOULD ACTUALLY DO THEIR JOB?

Or, in lieu of that, how about we turn the whole thing over to the Las Vegas casino companies.  I mean, you can’t even do math in your head in a casino without getting thrown out in a dark alley with a limp that doesn’t go away for 45 days.  I’ll bet you the casinos could protect us from the financial bad guys, what do you think?

On a roll now… bring on lucky number seven.  Come on lucky seven, Daddy needs a new pair of shoes!  (Elvis was now singing “Viva Las Vegas” in my head.)

7. Do housing finance systems in other countries offer insights that can help inform US reform choices?

Other countries?  What other countries?  This is America, Mr. President.  We barely even know there are other countries.  We know about a few vacation destinations, like Mexico, London, Paris… are those “other countries”?

I stared at my computer’s screen and said: “Amoto quaeramus seria ludo,” which means: “Joking aside, let us turn to serious matters.”

Okay, skip that one.  How about number eight?  Wait, there is no number eight?  Oh, come on.  Did the administration think that we’re smart enough to field those types of questions, but not smart enough to handle more than seven.  Like eight would have thrown us into a tizzy?

Wait, maybe I skipped over number one too quickly.  Like a test in school, I went back to see what I had skipped.

1. How should federal housing finance objectives be prioritized in the context of the broader objectives of housing policy?

I responded with the first thing that came to mind: “Assiduus usus uni rei deditus et ingenium et artem saepe vincit.”

It means: “Constant practice devoted to one subject often outdues both intelligence and skill.”  And I think that actually about sums up my position on that, so yes… that’s my final answer.

See, I answered two out of seven.  That’s not all that bad.  I don’t always do that well when we play, “Are You Smarter Than a 5th Grader,” at home.

Well, I guess all I can hope for is that my fellow constituents are a heck of a lot smarter than I am when it comes to setting public policy that will dictate how mega billions of dollars of the world’s finances are handled, and where we’ll all live.  Don’t be a smart ass… they could be.  One of my neighbors figured out how to program his Tivo to record television shows when he calls his home phone from his cell phone… or something very close to that, I can’t exactly recall.  It was amazing though.

Mr. President, I realize that you’re dealing with some seriously tough questions and challenges these days, but no one said it was going to be easy, right?  Hillary probably made it look that way, but that was really Bill that was president before, not her, so it probably  was a little deceiving.  Tell you what… send me more of those emails asking for money like you used to when you were campaigning and I’ll sport you a twenty here and a fifty there just like I used to… would that help?

Mr. President, I wanted to tell you this when you were still running for office, but you were never alone.  I whispered: “Aspice, officio fungeris sine spe honoris amplioris.”

It means: “Face it, you’re stuck in a dead end job.”

Regardless, I suppose, now it’s up to us… the American people… to help our president figure out how to fix the catastrophic mess that the banks created and the government has allowed to deteriorate to the point where buying a house sounds about as attractive as… hmmm… running for President.

Okay, Mr. President, I’ll get to work on this in the morning, but I have to tell you… next time… if you’re going to tap out on something like this, could you please let us start working on the problem before you’ve let it go this far down the loo?  Like, I wouldn’t have minded tackling some of these questions six months back, maybe even a year ago would have been nice.  You could have just said:

“Look, all I’m going to have time for this year is debating whether health care reform includes death panels, a few trips to obscure countries to restore our reputation overseas, and of course the bailing out of anything classified as “too big to fail.  Other than that, and attacking Fix News, no it’s Faux News, you guys are going to have to pick up the slack.”

I, for one, would have been okay with that a year ago.

Now, I’m thinking we’re circling the drain at a pretty good clip there, Mr. O.  Now, Zillow’s working on an iPhone App that shows the decline in your home’s value every 12 hours.  Now you tell us you don’t already have a plan?  I mean, I knew nothing you were doing was making any sense, but I just assumed that I wasn’t in-the-know enough to understand what was happening behind closed doors at the White House, and that one day you’d emerge… after the mid-terms perhaps… to announce that you’re taking some bold action that no one was expecting.  But, no?  No?  Seriously?  That’s not going to happen?

Mr. President… I have to tell you… this is very disturbing for some of us.  I really don’t know what to say, but like I said, I’ll take a shot, even though what I really want to say is:

Acta est fabula, plaudite!

It means… “The play is over, applaud!”

(And it was said to have been emperor Augustus’ last words.)

Ergo bibamus.

Who’s the moron in the Obama Administration? Someone needs to find out and let me know so I can name names, because the monumentally tragic absurdity known as the Making Home Affordable program, or the Home Affordable Modification Program, or any of the other wonky acronyms this administration has come up with, just went from ill-conceived to stupid. It jumped the shark, in a manner of speaking.

This past week, the administration announced, again with much fanfare, that they would be announcing some fabulous improvements to the absolute failure that is HAMP, the government’s answer to the ongoing foreclosure crisis that continues to fuel the freefall in housing prices that assures our recession’s future.

So, once again I waited to see what the smartest guys in the room would come up with, again feeling like Charlie Brown eyeing that football, and thinking to myself: If you pull that thing away at the last moment again… Lucy, you got some ‘splainin’ to do. (When I think things to myself, I often sound like Desi Arnaz in my head.)

So, they made the announcement and I wrote an article about it and I tried hard not to be a unqualified naysayer. I don’t like bashing the Obama Administration all the time. I’m even willing to wait longer to see my doctor or pay a tax on my health insurance if they’ll just stop the bloodletting in the housing market before it turns Somalia into a better place to own a home than Southern California. That’s not unreasonable, is it?

But they did it again, damn it. The Harvard contingent that’s packed in like sardines in this administration once again demonstrated that they have no idea what they’re doing when it comes to the foreclosure crisis. Their best idea to-date, no actually their only idea to-date, is to continually release questionable-at-best, manipulated economic data to tell us that the recession is over, as we struggle to stay afloat hoping to not be laid off, and wondering how much we could save each month by growing our own tomatoes after our bankruptcy has been discharged.

Well, there’s that and the giving of trillions to the banksters in one form or another.

The “new and improved” HAMP advertised “principal reductions” and “more help for the unemployed,” as it relates to loan modifications, which made for a fabulous sound bite, and predictably led the tribe of sycophant journalists to write about how the new plan would help stop more people from falling into the abyss.

So, here it is Saturday morning. I got up, poured my coffee and sat down to read the language of the new HAMP more carefully, and now all I want to do is beat someone or something with a baseball bat… or go take a nap. Because, I have to tell you… I’m getting real tired of stupid, and this is really stupid.

The new and improved HAMP caused Moody’s Economy.com to release revised forecasts for the new plan, saying that it could prevent nearly 1.5 million foreclosures from now through 2012, compared with an estimated 650,000 forecasted under the old plan.

Am I the only one that finds that hysterical, in addition to being interminably sad, of course? I mean, none of the forecasts for the old HAMP have come anywhere near close to accurate, so now Moody’s releases forecasts based on those hippy-dippy numbers? And that’s not funny? In addition to being stupid, of course? I‘m sorry, but I’m laughing my ass off over here.

So, here’s what the new and improved HAMP will… and more importantly will not do for homeowners:

1. Help for the Unemployed – For distressed homeowners receiving unemployment benefits at the time they apply for a loan modification under HAMP, lenders are now supposed to lower their payments to no more than 31% of their gross income for three months… as long as the homeowner is not more than 90 days in arrears at that time.

Then, as if it mattered one iota, the unpaid amounts are to be added to the loan’s principal so they can be defaulted on… I mean repaid… at a later date.

It appears that the administration is hoping that three months later the unemployed homeowner will have found gainful employment and therefore will qualify for a normal HAMP loan modification in which payments will stay at some reduced amount. Of course, if the borrower doesn’t manage to find a new job in 90 days… and not just a new job mind you, but one that adequately replaces his or her lost income… we’re not talking “would you like fries with that”… well, then it’s foreclosure time at the family ranch once again.

Okay, everybody stop. Whose idea was this? Find him… test him to make sure he’s not mentally challenged due to a metal plate in his head or by some sort of birth defect… and assuming that’s not the case, punish him severely and publicly in order to dissuade others from engaging in this level of thinking in the future. Clearly, we need to raise the bar here, and allowing this sort of thing to slip by as being in any way acceptable for adults will only perpetuate a race to the bottom in the idea generation department. Next thing you know you’ll be taxing health insurance benefits… oh wait… never mind, bad example.

Let’s look at this component of the new plan…

First of all… and the administration knows this all too well… we have a record number of people in this country that are unemployed for more than 26 weeks, a near record number of part-time workers for economic reasons, and a decline in average hourly wages across the board. And that’s according to the government’s own most recent report.

So, let’s see… how many weeks in three months? Hmmm… carry the 7… divide by 9… I don’t know… shall we call it 12? I wonder how many of the unemployed homeowners applying for a loan modification will replace their income to the level required in 12 weeks or less? And since lenders and mortgage servicers won’t even talk to anyone about a loan modification until they’re 60 days delinquent, and the new plan only applies to homeowners that are less than 90 days delinquent… so that leaves what… a thirty-day window?

The administration’s new plan will only apply to unemployed homeowners in that 30-day window?  Seriously?  And then they’ll get a lower payment for 90 days and unless they find a new job that replaces their old one in that time, they’re back to foreclosure? Wonderful, that just sounds positively wonderful.  Crackerjack work, wouldn’t you say?

Oh, and even in the best case scenario, the amounts that go unpaid get tacked onto the loan anyway? And just when do those get repaid? Come on… this is characterized as providing extra help for unemployed homeowners?  Really?

This is extra help, like a Dr. Scholl’s footpad helps 40 years of wandering in the desert.

2. Consider Principal Reductions for Underwater Homeowners – For homeowners behind in their payments and considered “deeply underwater,” the new and improved HAMP will “require lenders and servicers that decide to participate to consider” providing a reduction in the principal balances of mortgages. They will also be “encouraged” to reduce principal balances for underwater homeowners who are current on their payments.

First of all, the word “consider” comes from the Latin word “considerare,” which means: “to look at closely, observe”. And the word “considerate” means: “marked by deliberation, of persons deliberate and prudent, and circa 1700, meaning “showing consideration for others”.

So, before I say anything else, I’d like to propose that we pass a new law immediately that prohibits the use of either word in conjunction with anything having to do with banks. All those in favor? Yep, I thought so.

Getting back to the specific issues at hand… weren’t the banks already required to “consider” principal reductions in conjunction with granting loan modifications under the HAMP guidelines. Oh yes they were… or rather are. Look up the HAMP guidelines, you’ll see.

So what’s the deal now? Are the banks now being double-dared to consider writing down the loans?  Are they being told to think on it extra hard.

Why in the world, and especially at this stage of this tragedy, would our government even CONSIDER writing language like this into an already failed plan that’s continuing to publicly pull our nation’s economy towards an extended state of financial ruin?

And don’t even talk to me about banks being “encouraged” to write down mortgages for homeowners who are not delinquent on their mortgage payments, because not only do I not believe this will ever happen to any meaningful degree if at all, but I find the entire idea utterly preposterous. If you want to help those who are not (yet) delinquent on their mortgage payments, how about doing something to stop their neighbor’s home from being auctioned off at 60% of it’s market price. That might help, what do you think?

We certainly don’t need Bank of America devoting any of its obviously scarce resources to calling homeowners who aren’t delinquent and saying: “Hi, yes I’m calling from Bank of America. I realize you’re not delinquent on your mortgage payments, so we thought we’d give you a call and see if we can’t write down the principal balance for you.”

And all of this assumes that lenders and servicers will decide to participate in the first place, because like every other government program to-date, it’s all voluntary. The banks don’t have to do diddlysquat. And, as The New York Times pointed out in its editorial discussing the changes to HAMP:

“… lenders might wait to see if bigger incentives are offered later. They may also prefer foreclosure to modifications because the long foreclosure process lets them postpone taking losses.”

Both points are of course true, assuming that any lender’s internal discussions on the subject would even rise to the level at which either point might become relevant.

The administration must do more. They owe these homeowners… and the American people more.

There are quite a few people out there that feel that homeowners unable to make their mortgage payment deserve nothing more than foreclosure. Their thinking, in most instances, is that these homeowners have brought this on themselves and now it’s time to pay the proverbial piper. Their bad decisions have consequences and the government has no business “bailing them out”. Yada, yada, yada.

I could not disagree more with this perspective and it’s important for me to state precisely why I think the way I do.

A. This is not 2006, 2007, 2008 or even 2009. This is 2010. The government has had several years and two administrations to do something about our downward spiral in the housing market and it has unquestionably failed at every single turn. Meanwhile, our government has bailed out the Wall Street banksters whose actions were the proximate cause of the crisis. It wasn’t today’s homeowners who thought housing prices would go up forever, and as a result leveraged themselves 40:1, it was the bankers who thought that way and did just that as a result.

B. Sub-prime loans are not the issue, and haven’t been for well over a year, maybe two. Today, more than half of the foreclosures are prime loans, so it’s not about people who shouldn’t have qualified for buying their home. People losing their home today have simply been caught up in the deflationary collapse that’s been allowed to go on almost unchecked for far too long.

C. Had the government stepped in sooner and more effectively, and there were plenty of opportunities for it to do so, we wouldn’t have (U3) unemployment hovering around 10% with no relief in sight, so many of these homeowners wouldn’t be unemployed and losing their home as a result. (U6 unemployment, the real unemployment number, is still north of 17%)

D. Had the government stepped in sooner and more effectively… and had the banks not shattered the credit markets by pushing AAA rated mortgage backed securities whose value was questionable at best… housing prices wouldn’t have fallen as far as they have and therefore many more people would be able to refinance as their loans adjust higher instead of the situation in which we find ourselves today.

E. The government’s failure to more effectively address the housing crisis has caused values to fall to the point where every homeowner in America has sustained enormous losses, to the point where even the most prudent of plans have gone awry. Retirements are being postponed, and all Americans are paying the price. Taking effective measures at this point to stop the carnage in the housing markets doesn’t represent a special interest bailout of irresponsible homeowners, it represents the only responsible path the government can possibly take to assure the future prosperity of its citizens and nation as a whole.

Hopefully, that made my position sufficiently clear.

This new and improved HAMP for the unemployed is not going to help 1.5 million homeowners instead of 650,000, as forecasted by Moody’s. In fact, with HAMP itself still languishing somewhere between total failure and abysmal failure,  in terms of its ability to help homeowners who are not unemployed, I’d be surprised if it helps anyone at all.

And the idea that anyone could possibly peg their hopes on banks “considering” anything, or acting in anyone’s best interests but their own, based on any level of encouragement, first makes me laugh… and then pity those willing to do so.

The entire idea is absurd, and whoever is responsible for authoring such enhancements to the HAMP program, deserves to be publicly ridiculed. They are obviously people whose intelligence is lacking to such a degree that they should not be allowed to drive a car, or even cross busy streets without assistance.

Here’s a thought… Perhaps the whole thing is just part of Obama’s plan to stop immigrants from coming into this country illegally by allowing the United States to become a nation whose economy provides less opportunity for prosperity than Mexico. ‘Cause you know… that just might work.

If that’s the case, however, then I’d like to reverse my position on the whole “build a fence” idea. Capisce?

Mandelman out.

Ergo bibamus.

Okay, I’m back from a much needed vacation (more on that later) and there seems to be some amount of chatter going on out there in on-line-loan-modification-land about yours truly, apparently started by some guy named Mo Beddard, or whatever his name is, I really don’t know.  Apparently, he’s some sort of mortgage-broker-turned-loan-modification-blogger-type who has, for whatever reason, gotten it into his modicum of grey matter that I’m somehow a bad guy because I liked the guys that operated a company called Green Credit Solutions, or Green Credit Law Center.

You see, the California State Bar Task Force recently shut down Green Credit as they were working hard to finish negotiating on behalf of the 1,500 or so homeowners that remained in the incredibly inefficient, and down right stupefying loan modification negotiation process, brought to all of us by our banks and federal government.
According to the company’s records, since its inception in the latter part of 2007, the company represented approximately 5,000 homeowners seeking loan modifications; 1,000 of which were either declined and never charged, or received refunds for whatever reason.  Therefore, at the end of their day, Green Credit successfully completed loan modifications for roughly 2,500 homeowners, which I might point out is more than most of the lenders or servicers participating in President Obama’s Home Affordable Modification Program, known by the wonky acronym, HAMP.

And that makes Green Credit… NOT A LOAN MOD SCAM.  Are there any questions about this point?  A “loan mod scam” is a company that takes your money and delivers nothing in return.  A “loan mod scam” does not save 2,500 homeowners from being thrown out of their homes by obtaining loan modification agreements from banks and servicers.

Moe has also written a stream of utter and entirely unfounded nonsense about me being paid by law firms as a result of referring homeowners to their practices, something that has simply NEVER HAPPENED.  I’ve tried to explain this fact to Mo by commenting on his blog several times, but although I don’t know the guy from Adam, he’s certainly shown himself to be someone who prefers not to be bothered by facts.  He even implies that I’m some sort of criminal in several of his almost incoherent diatribes.  I’m not going to bother responding to stuff like that because it just seems silly to do so, but recently I spoke with an attorney that’s had some dealings with Mo a few years back, along with a few others that have known Mo, and it’s interesting that he and Green Credit do have something in common: They’ve both shut down firms offering to help homeowners obtain loan modifications.  Oh well, no matter…

Mo is obviously some sort of sociopath with a following and I guess I’m supposed to care one way or the other when he says something.  I don’t, however, so let’s get to Green Credit and end this interminable boredom.  I’m only going to do this once, so if anyone cares about this topic… now’s the time to pay attention.

I met the guys at Green Credit last year in the late fall… maybe November of 2008.  One of their senior executives contacted my firm, asking that I meet with them in my role as a communications strategist.

The senior managers at Green Credit were very forthcoming in showing me their internal operation and allowed me to interview several of their clients so I could learn more about the whole loan modification conundrum.  They ended up retaining my firm for a couple of months to create a few things like an electronic brochure, a newsletter, and other miscellaneous minor stuff like that.  My main consultative contribution was to tell Green Credit’s senior managers that they should be extremely understanding of the plight of homeowners, and further that they should go out of their way to let homeowners know that today’s situation is not their fault.  It’s the banks that broke the world through fraud and unconscionable leverage, not homeowners.  My firm has represented literally hundreds of companies in the U.S. and abroad and by comparison, Green Credit would be considered a tiny client engagement, to the point of being insignificant.

Months later, in the Spring of 2009, Green Credit was audited by the Department of Real Estate and they invited me sit through that audit, which I did.  I asked the DRE examiner whether they were doing anything seriously wrong, or whether it was a matter of administrative compliance, and the examiner stated that it was only compliance issues as far as the DRE was concerned.

The State Bar closed them recently, charging that they were “practicing law without a license,” which sounds pretty bad, but I don’t think anyone was actually concerned that they were going to go to court and try any cases, or anything like that.

You see, last October, the Department of Real Estate (DRE) here in California came out with a new “advance fee agreement,” which was to be used by all DRE licensed companies offering to assist homeowners with loan modifications.  That new agreement stopped firms regulated by the DRE from charging homeowners up front to work on obtaining a loan modification.  Instead these companies would be required to place funds paid by homeowners in some sort of trust account, withdrawing them at certain points along the way.  The end result of this new advance fee agreement was that it would seriously impair a company’s operating cash flow.

In my mind, the advance fee agreement was always a manifestly stupid response by a state regulatory agency who clearly hadn’t the foggiest idea what was going on as related to loan modifications, nor any idea what to do about regulating the emerging industry in order to protect consumers from unscrupulous operators.  I mean, either you’re a scam or you aren’t.  If you are, then you shouldn’t be allowed to steal only some money… you should be closed down.  And if you’re not a scam, then the government has no business regulating how a company is allowed to charge for its services.

The DRE could have carefully investigated the situation related to the legitimate operations offering to obtain loan modification agreements from lenders and servicers.  They could have, but they didn’t.  Instead, they decided that limiting the cash flow of the legitimate companies would somehow help protect consumers.  It didn’t, of course.  The scammers went right on scamming, and the legitimate operations like Green Credit, consulted with their attorneys and went through all kinds of gyrations in an attempt to find a way to operate in compliance with state law in order to complete the client files they had taken in to-date.

Now, this next point may shock some of you… certainly those that haven’t read any of the 260 articles I’ve written on this and related topics over the last year… but I don’t give a rat’s ass about trivial and contrived compliance issues.  I only care about the millions of homeowners who continue to be unconscionably screwed and consistently abused by our nation’s banks and mortgage servicers.  If someone did something wrong in the compliance department, but also modified several thousand loans, I’m not all that concerned.  I’d rather have my house saved than a firm that’s worried about following all the rules, especially because I’ve watched the mess that our state and federal government has made over the last two years related to loan modification companies.

If the guys in Sacramento or Washington D.C. think that I view ANYTHING they’ve done to-date as being even remotely competent, let me be oh so clear… I DON’T.  As far as I’m concerned, our government is functioning just slightly above where I’d expect a troop of trained chimps to be functioning.

As a matter of fact, since we’re on the subject, I’m not really much of a “law-and-order” guy.  I don’t mean that I don’t like the television show, I mean that I don’t always believe in following the letter of the law in this country, and I certainly don’t when I find the law to be unfair at best.   That’s right… in my view, if you can save my home, I don’t care if you work for the mob… got it?

And, lest you not recall, this country was started by a bunch of guys who were committing treason, and it was made great by a group of people who refused to follow the Supreme Court’s unspeakable madness we refer to as segregation.  That’s right… Rosa Parks was out of compliance, was she not?

In fact, truth be told, I’m the kind of guy that would harbor a fugitive if I knew that his or her crime had involved doing whatever was necessary to feed an orphanage… and there was no other way to do it.  And as far as lying to banks… well… I encourage it.  They deserve nothing from any of us.

I would have thought that anyone and everyone who has read more than one or two of my columns would already know these things about me, but apparently some things need to be said in no uncertain terms, so here goes…

1. I’ve never been paid plugged a nickel having anything to do with a loan modification or referring a homeowner to a lawyer.  Never, not even once, not even a nickel.  Mo’s a liar.  And Mo, in case you can read, I’m easy to find, so grab your bus pass and head on over whenever you muster up the courage to do so.  Otherwise, as someone familiar with Mo’s colorful past said to me recently: “Mo should have smoked more of the pot he was dealing when he was busted and maybe then he wouldn’t have been arrested later for beating his wife.”

Was that too subtle?

2. I feel badly that Green Credit was shut down before finishing the work on behalf of the 1,500 homeowners they had left in their pipeline, as it’s referred to in the industry.  But if anyone wants to be upset about that, perhaps they should be mad at the State Bar or DRE.  Had Curt Melone or Chris Fox, Green Credit’s founders, wanted to take the money and run, they would have done so ages ago.  They may not have been in compliance with whatever, but because of them more than 2,500 people didn’t get thrown out of their homes last year.  Perhaps the state could have helped them be in compliance instead of making it essentially impossible.

Was that too subtle?

Don’t bother writing in on this subject; it’s highly unlikely that I’ll read the comments.  It’s time to move on to more important things… like toasting my bagel.

Mandelman out.

Epilogue…

Okay, look… I don’t really have anything against Mr. Bedard, nor do I actually care whether he wants to attack me by spouting untruths.  My readers are certainly more than capable of discerning what’s true and what’s not.  I have tens of thousands of readers each month and communicate with hundreds of lawyers across the country almost constantly.  If those lawyers were compensating me because I referred a homeowner to them, there’d be a lot more people accusing me of it than Moe Bedard, wouldn’t you think?  Besides, if I was being paid for referring homeowners to lawyers, I wouldn’t be broke all the time.

Mandelman Matters isn’t a business plan.  Apparently, Moe offers a class on how to make money blogging and I’m thinking about signing up.  Mandelman Matters sells no advertising, and makes no money.  It’s easily the most expensive hobby I’ve ever had.  Read it if you like it, don’t if you don’t.  I write it for me, no one else.  But, by all means, feel free to check or challenge any of my facts.  They are always right.  And if they’re not, I sure do want to know and will correct the matter instantly.

(I missed one fact last year… I called Massachusetts a “judicial foreclosure state,” when in fact it’s a non-judicial one.  Several readers wrote in within minutes of the article’s posting and I corrected with a notice at the top of the page right away.)

Yeah, Moe’s a jackass, but he’s obviously also a jackass that in his own way wants to help homeowners, and fight unfair treatment by lenders and servicers.  He started one of the first loan modification firms in Southern California and he’s made some mistakes… so what.  Hell, I’d probably like the guy… again, if he wasn’t such a pant-load.

His partner in the persecution of Green Credit as the second coming of the evil empire is a woman named Krista Railey, who was a blogger at ML-Implode, the site that hosts Mandelman Matters at no cost, by the way.  Krista, although perhaps a bit fanatical at times, always seemed to be a good person and there’s no question that she fancies herself the loan modification compliance queen.  I haven’t read anywhere near all of what she’s written about me and Green Credit, and she does go a bit around the corner at times, but she’s right that she complained to me that she thought Green Credit was out of compliance on several occasions.

Just like now, I told her I wasn’t the compliance police and I didn’t care as long as they were saving homes for homeowners, which they undoubtedly were throughout their existence.  If I’ve assured Krista once, I’ve done so a thousand times: I have or had no business relationship with Green Credit or ML-implode, beyond what I’ve described herein.  No money has changed hands having to do with me, and I don’t know anything about anyone else’s dealings.

I can’t tell who is going to be deemed to be “compliant” and who isn’t.  The California State Bar obviously has no idea what they’re doing when it comes to lawyers offering loan modifications, nor does the FTC.  I’ve written numerous articles that draw out precisely why I say these things, so check them out if interested.  If you can’t find them, ‘cause my blog does suck that way, email me and I’ll send you a link.  (My email is: mandelman@mac.com)

It should be obvious that our state and federal governments have failed at every single turn in our growing foreclosure crisis.  Nothing they’ve done or said has been remotely helpful or honest, and as far as transparent… don’t even get me started.  These guys are transparent like Mt. Rushmore is transparent.

There have been several others that have been shut down or are being investigated by one group or another related to loan modifications.  I’m going to write about each one that I know something about, and I’m going to challenge the FTC and State Bar’s idiocy whenever needed and appropriate.

I will tell you who’s not going to be investigated as related to loan modification scams: Any of the banks.

IndyMac/One West Bank… the poster child for unreasonable foreclosures, in my view, should be fined a zillion dollars and the bank’s CEO should be wearing an orange vest and picking up trash on the 405 Freeway for what his bank has done to homeowners.  And unquestionably, HAMP’s now infamous “trial modifications” are the biggest scam to hit loan modifications since Hope-4-Homeowners managed to modify one mortgage… instead of the many thousands promised.

So, that’s the long and short of it.  I’ll keep following the scams, and the not-so-scams.  And I’ll keep helping in any way I can, which will soon be a lot more than ever.

Stay tuned… I’m about to make something available to homeowners that can’t be had anywhere else.  Something that will help level the playing field between the banks and homeowners.  Something that will save homeowners thousands of dollars and months of frustration.

That’s all for now though… Look for it… it’s coming very soon… only days away.

And remember… The church is near, but the road is icy.  The tavern is far, but we will walk carefully.  Ahhh… it’s good to be back… I missed you guys.

Ergo bibamus.

Wasn’t it fun this past weekend to read and hear the flurry of teaser stories that were all over the news media about how the Obama Administration was going to take some new type of very serious action related to the abject failure of the HAMP program?  There was supposed to be a new sheriff in town… again.  Well, to be honest… this time I didn’t even try to kick the football.

I heard Lucy call me out: “Come on Charlie Brown… kick the football… you can do it!”

Only this time I said: Bite me, Lucy.

So, no… I wasn’t the least bit surprised when I heard what the Obama Administration had proposed to do in response to the banks and servicers appalling performance related to loan modifications, which, by the way, was basically nothing.  Why would anyone be surprised?

I do have to admit that I was surprised by one thing… very surprised, actually.  You see, I’ve been watching this whole trial modification scam thing pretty closely, and waiting for Treasury to announce the number of permanent, or one could say “actual” modifications that have been completed to-date.  Treasury, of course, has a hard time counting things, so I understood that it would take some time for them to report the numbers, numbers not being their strength and all.  So, I was figuring that out of like 650,000 trial modifications the government would report maybe 10-20,000 actual modifications.  Boy-oh-boy was I wrong.

According to Treasury… as of September 1, there were something like 1700 permanent modifications, and NONE of the trial modifications through October had been moved from trial to permanent.  NONE.  Not a one.  Damn.  Now that’s entertainment.

It’s hard to fathom.  You have to realize that I knew from day one that the plan wouldn’t work.  The night of Obama’s speech last February introducing the program, I ran the headline “I’m Sorry, Mr. President… That’s Just Not Enough”.

But who would have ever thought that these callous, colossal clowns managed to create a program less successful than the always-funny “Hope-4-Homeowners” program!  That’s not easy to do when you stop to think that after 6-7 months, and with a budget of $320 billion, Hope-4-Homeowners only got one modification done.  To under-perform that program takes a special kind of idiocy.  It occurs to me that you could have created a program that fined banks $1,000 for doing modifications and come out about the same.

I don’t know about you, but 1700 out of 650,000 makes me want to believe that the 1700 were mistakes that slipped through.  It makes more sense to think that the HAMP program was designed to create foreclosures… and only 1700 of 650,000 slipped through and got modified by accident.

As a side-note, I recently learned from an executive inside Bank of America, who of course asked to remain anonymous, that B of A has only offered 9 principal reductions.  Nine.  Number 9… number 9… number 9.  When I heard the number 9, I responded by saying: “How did they pick the 9… some sort of drawing?  Or am I going to find out years from now that the nine were all related to Kenny Lewis?”

It’s also funny, or monumentally sad, to think that I’d be writing the exact same story were the number 17,000 out of 650,000… or even 170,000, for that matter.  At 170,000, the program would be failing to modify loans 75% of the time!

In the immortal words of Casey Stengel: “Can’t anyone here play this game?”

Well, Monday finally came around, I sat patiently awaiting the news.  What would the administration do about this embarrassment?  I mean, here you have the President of the United States, and a whole cadre of Harvard pals, designing a program to be implemented by the banks, and basically the banks responded by saying… “Um, no thank you.”  What would they do in response?

Michael Barr, the Assistant Treasury Secretary for Financial Institutions, came out with quite a few laugh-out-loud statements, which I included in an article I wrote yesterday.  In one of his comments he said, I assume in a tough talk kind of voice, that the banks wouldn’t get a dime of HAMP money for modifying loans until they issued permanent modifications.  That line caused me to spit my Fresca all over my desk.

I’m not going to bother looking up the exact numbers, but HAMP offers banks either $1,000 or maybe its $1,500 in year one, for modifying a loan.  Then they get a grand a year for the next four years, assuming the borrower continues to make his or her payments as agreed, and if memory serves, will receive a total of $4,500 from the program if everything goes as it supposed to go.  People… I’m sorry, but $4,500 over five years isn’t even enough money to get me to go out of my way to do anything, so it’s hard for me to imagine Wells Fargo doing back-flips over the potential to receive such an amount.

Another component of the administration’s response on Monday was to say that they were going to “shame” the banks into compliance, and the media actually reported this like it was something new.  Wasn’t “shame” the strategy last July?  Remember?  Weren’t the report cards supposed to “shame” the banks and servicers into modifying loans?  I could have sworn.

And besides… hasn’t it become abundantly obvious that these guys aren’t capable of shame?  Goldman Sachs, as just one example, announced that it had a banner year and would be using $17.6 billion of the $39 billion in taxpayer dollars they’ve received this past year, to pay year-end bonuses, and they didn’t seem the least bit ashamed.  I hope I wasn’t the only one who, upon hearing of the administration’s new plan to shame banks, thought: “Again? Who thinks that’s going to work… besides Michael Barr, of course?”

Okay… enough.  The administration’s response on Monday was a waste of time, right?  Can we all agree on that?  I’m getting tired of making fun of it, frankly.  They’re making it too easy.  I feel like Barry Bonds hitting balls off a ‘T’.  For the record, I didn’t ask for their charity.  I’m capable of digging in and finding stuff to be sarcastic about without it being handed to me.  I’ve got skills.

After a year of watching this mess unfold every single day, I’ve only got one question:

Was HAMP designed for homeowners… or was it designed for banks?  I’m serious here.  President Obama said it was for homeowners, but it sure worked out nicely for banks, didn’t it?

In my view, a “trial modification” is the biggest loan mod scam in history.  All those people that have gotten in trouble for scamming homeowners out of three grand… you’re off the hook, as far as I’m concerned.  I don’t like you, or anything, but what you did is petty theft compared to what HAMP is accomplishing.

Here’s what it says… word-for-word… on Freddie Mac’s Website about HAMP’s trial modifications:

“If you’re eligible, your lender will offer you a three-month trial period at a new mortgage payment amount. To successfully complete this trial period, you will need to make three monthly payments on time at the new payment amount.  Once you’ve successfully completed the three-month trial period, your mortgage lender will permanently modify your mortgage.”

Really, Freddie… you lying sack of garbage… is that what you think happens?  What… are you stupid, or a scammer, because you’re understanding and presentation of the HAMP program isn’t even close to reality.  Which is it… sheer idiocy or intent to defraud?  ‘Cause those are the only options available at this point, wouldn’t you say?

It also says, and again word-for-word, on Freddie’s site:

“Freddie Mac has directed its lenders/servicers to suspend foreclosures on mortgages we own for all homeowners who are being evaluated for or are currently in a trial period for a Home Affordable Modification.”

Has this EVER happened?  Has a lender EVER suspended foreclosure because a borrower was being evaluated for a HAMP modification?  EVER?  Even once?  Because I happen to know of several instances in which attorneys have gone into court to try to get a judge to enforce this point, and none have ever done so to my knowledge.  In fact, here’s my article on one such instance: “California Superior Court Judge Says HAMP Has No Teeth”.

Look, I know to successfully sue a lender for fraud requires proving intent on the part of the bank being sued.  And I understand that’s no easy thing to do.  But, I’ve come to believe, and I think it’s quite obvious, that certain banks have absolutely no intention of modifying loans, yet they allow borrowers to think there’s a possibility that their loan could get modified.

Let’s take a quick peek under the covers at IndyMac.  Pat Pulate, a brilliant guy when it comes to the whole mortgage mess, and a friend, by the way, wrote a terrific article on IndyMac’s inner workings just a day or two ago and you can find it here.

But, without getting into any detail, just understand that the FDIC has entered into an 80/20 “loss-sharing” agreement with IndyMac, so 80% of future losses will not be born by the bank.  In addition, the new owners of IndyMac, paid a discounted amount for the mortgages on the bank’s balance sheet, so in addition to only having to shoulder 20% of any future losses, they only paid a percentage for the loan, so even though it may look like they’re taking a loss… they’re actually not.

The fact is… IndyMac, as just one example, should NEVER modify a loan… NEVER.  If they act in the bank’s best interest, they should foreclosure on every single delinquent loan as fast as possible, sell them for whatever as REOs, and thereby put any future risk of re-default onto the taxpayer via Fannie, Freddie or FHA.

Here’s a quote from an email I received from a homeowner this morning:

We were awarded a “temporary loan modification” for three months. Just the other day, we received a letter stating we were denied a permanent modification. No further instructions were given about what to do going forward. After many calls, I got in contact with someone who told me I need to reapply and that because I was denied, my mortgage has actually increased by $1,500!!! That’s actually $3,000 more than our temporary modified amount was. It’s beyond criminal what the banks are doing.

Here’s another also from this morning:

I have an Indymac mortgage and I applied for the program in March 2009 according to their website specifications.  After a few letters from Indymac saying they were reviewing my papers, I stopped hearing from them. Thereafter,  I contacted them by phone and by fax for a status of my loan modification from June 2009 through August 2009.  They have no records of my phone contacts.  Although I requested by fax on four occasions that they send me a status of the modification on my home loan, they never contacted me but confirmed they had my faxes.  In September I hired a lawyer to take over the process when Indymac discovered I was late on my property taxes and established an impound account where I needed to pay them $8,505.20 or my monthly payment would increase from $2612 to $3696.  My current payment is $2988 with tax impounds.  Because I hired a lawyer, I am behind one month on my mortgage, which inspired Indymac to contact me, not regarding the modification, but regarding the money I owe.

Their records still reflect I owe them the $8505.20 impounds even though I paid this on October 13, 2009.  I continue to get the form letters from Indymac regarding their offer for me to apply for a home loan modification.  I have submitted all the applicable paperwork three times to them through myself and through my attorney.  It is now December 2009 and I still have not heard a thing from them regarding my modification nor has my attorney.  It would simply be nice to know one way or another if my loan will be modified or not.  The whole process has been really pathetic and I think it is a big scam.

And that’s just IndyMac.  As of August 2009, the FDIC has entered into 53 loss-sharing agreements with banks.  And, although I don’t know the details of every bank that was acquired by another, I do know that JPMorgan Chase bought Wamu’s loans for roughly 2¢ on the dollar.  Go ahead, you do the math… I’m tired.  And I’ve got meetings to attend.

Please keep those emails coming.  I won’t publish your name if you don’t want me to.  You can reach me at mandelman@mac.com.

Oh, and one more thing… Barack… you and I… we’re done.  I don’t care if it’s Sarah Palin and her cousin that’s running in 2012… if you don’t do something about this, you are done as far as I’m concerned.  What a waste of time you have proven to be.  What a disappointment.  I suppose the only bright side to your presidency is that at least we don’t have to worry about you accomplishing anything, so whew… dodged a bullet there.