I Finally Figured It Out… It’s The Banks.

First posted in April 2009… and still relevant today…

I wrote my first article about loan modifications on January 28, 2009, and had someone told me at that time where that article would soon lead, I would never have believed it. Back then, it simply would have seemed inconceivable to me that our government, under the leadership of President Barack Obama, would take something so simple and logical and turn it into one of the most convoluted and ridiculous messes I’ve ever seen.

It’s enough to make me wonder if Paul Bremer or Michael Brown are somehow involved, because only the guys who screwed up Iraq’s reconstruction and Hurricane Katrina respectively could possibly transform such a nice chicken salad into something so much less appetizing in such a short period if time.

Oh, don’t get me wrong… I’ve seen our government do plenty of stupid things in my lifetime. In fact, truth be told, I’ve seen them screw up a lot more times than I’ve seen them succeed. But usually, our government screws up things that are at least somewhat difficult to get right. In other words, when you’re attempting to secretly fund rebels in South America with the proceeds from Israeli arms sales to Iran in exchange for hostages… well, screw-ups are hardly a surprise. But, if you spill all your popcorn while still in the lobby of the movie theater? Well… all I can think to say is: Walk much?

I think it’s worth slowing things down a bit, just so we don’t get all befuddled with extraneous information too early in the game. (I hope you’ll stay with me, because I promise it’ll be worth it.)

Phase One…

A. We had a real estate bubble. Housing prices, in just a few short years, went up much higher than they should have, and as a result millions of mortgages were originated with loan amounts that today bear no resemblance to the home values they are secured by.

B. Lending standards were too lax too, it’s true, but that wasn’t really the biggest problem, as it turns out. The type of loans, new fangled adjustable rate mortgages were being used in huge numbers and when many of these loans adjust, they do so violently, like pulling back as far as you can on a thick rubber band and then letting go… schwacko!

Phase Two…

A. At about the same time, the bond rating agencies were using ratings models that didn’t account for things like precipitous drops in property values, 100% lending, inflated appraisals, and lending standards slightly less strict than those used by children on elementary school playgrounds. They rated bonds improperly, the secondary mortgage market froze overnight, and refinancing became impossible.

B. The first homeowners to lose homes to foreclosure were the ones most vulnerable to rapid changes in the market, we came to know them as the “sub-prime borrowers,” but really they were just regular people who bought the wrong thing at the wrong time using the wrong type of mortgage. Even Hank Paulson has admitted that there were so few sub-prime borrowers that he couldn’t imagine their defaults ever spreading to other segments of the housing market. (Obviously, Paulson’s problem is his imagination deficiency.)

C. Nothing was done to stop the dominoes and so they continued to fall unchecked, and soon multi-billion dollar write downs by the banks and other financial institutions were slashing the value of balance sheet assets every quarter like clockwork. New accounting regulations didn’t help matters any, kind of the way pouring gasoline all over the place doesn’t help stop a fire.

Phase Three…

A. Bear Stearns went first, but Paulson was able to engineer a rescue of sorts and since few regular people were affected, few in the media saw the firm’s demise as being anything close to earth shattering. Finally, however, on September 15, 2009… smack dab in the middle of John McCain’s speech on the economy, Wall Street imploded, Lehman went bust, and AIG, chained to Lehman through its issuance of credit default swaps, went right over the side after the giant investment bank.

B. With the bond markets already broken, these events locked up the credit markets and soon money had stopped moving altogether. A few days later, Paulson and Bernanke, realizing that the entire world was about to go into a tail spin from which it would be unable to recover, ran like the dickens over to Congress to let them know that they’d better get America’s checkbook out and start writing zeros. America’s banks were essentially insolvent, and Greenspan told congress that he had to rethink his understanding of how the world worked. (I wonder how that’s going, by the way.)

C. With credit now a thing of the past, housing prices had already started to tumble and their descent was picking up speed. Of course, with no one buying houses at the time, it was hard to tell exactly how fast or how far they were falling, and foreclosures were increasing in number and frequency as well.

Phase Four…

A. As foreclosures increased, property values fell, and as property values fell, foreclosures increased. Consumers stopped spending and soon the unemployment numbers started to rise, and rise, and rise.

B. President Obama, upon taking office, announced that he had three priorities: 1. Fix the U.S. economy. 2. Fix the U.S. economy. And… 3. Fix the U.S. economy.

1. He leapt into action, immediately going to work on a spending and tax cut plan designed to begin paying dividends sometime in 2011, which promises to be really cool for the 740 people that will still be living indoors in 2011.
2. Next he introduced a housing rescue plan that by his own admission would not help the millions of homeowners at the greatest risk of foreclosure, but would assist quite a few other Americans mildly annoyed with their mortgage payments.
3. And finally, the third leg of Obama’s stool, Treasury Secretary Timothy Geithner, figured out a way to invest $78 billion into a bank worth about $12 billion, and still come out owning only 36% of the bank.

Well, bravo… bravo… and bravo!

Then he left for Europe, but not before launching a media inspired advertising campaign against loan modification companies, when he uttered the phrase: “If you have to pay, walk away.”

When I heard him say it, I thought to myself… “Gee… that was very Apollo Creed of him, wasn’t it? I guess Apollo would have added several rhymes, as in ‘Hear what I say, you don’t have to pay, just walk away, it’s a brand new day’… or something to that effect.” But, my point’s the same… it was a stupid thing to say.

“What happened to Obama,” was all I could wonder to myself and aloud. What happened to Mr. I’m Going to Think Things Out Carefully Obama? If you have to pay walk away? What kind of nonsense was that? Don’t even tell me he wrote that line. I mean it… don’t. I won’t believe you. That doesn’t even sound like him.

You see, the American taxpayers had been very clear on how much they liked the idea of “bailing out” the banks, the auto companies, and most of all, the irresponsible homeowners who had been dumb enough to purchase homes in 2005, 2006, or heaven forbid, 2007. And so, on January 28, 2009, when I wrote my first article on loan modifications, I thought they seemed like the most logical solution in the world.

Even better, there were private sector companies that had formed to fill the need, and they were helping homeowners negotiate with their banks to avoid foreclosure and remain in their homes… all without costing the taxpayer a dime. A perfect solution, I thought. The banks agree to modify the loans they probably shouldn’t have made in the first place, the homeowners get to keep the homes they bought to live in, and my home’s value won’t fall all the way to the floor. Absolutely fabulous. Made me proud to be an American capitalist once again.

Obama’s plan wouldn’t help many people in trouble, but at least the private loan modification companies were growing and would soon have greater capacity. More would soon hang out shingles and they too would grow to be able to help more troubled homeowners. Oh sure, there had already been a couple of stories of fraudulent loan modification scams, but I just considered that to be expected in the midst of such utter chaos and disarray. I never even considered that our President would embark on a mission to put this industry out of business.

Fast Forward…

So, he did… and I wrote a bunch of articles in an attempt to draw attention to the situation. Many people read the articles and soon I was getting calls from people all over the country, including several in the political arena and the media.

To get input for my articles, I approached a loan modification company I knew well. They agreed to provide me with whatever data I wanted to see, make some introductions in the industry, and even allow me to attend their audit by the California Department of Real Estate. The experience was fascinating, to say the least, but it was driving me insane. How could our government say that because there were some scams in the loan modification industry, that all in the industry were scams? Especially when I was meeting with companies that were unquestionably modifying hundreds of loans every month for distressed homeowners.

After all, while some stockbrokers were certainly scams, my government never told me to avoid the entire securities industry as a result.

The media went off on the loan modification industry like they were one step above child predators, and within a few days really, it started to seem as if there was a fraudulent loan modification company lurking around every corner in every town in America.

At the same time a few facts kept sticking in my mind. California was investigating roughly 250 cases of loan modification fraud, and that’ never seemed like a big enough number in a state with 36 million. And on every show, from Dateline to 20/20, they’d talk like there were thousands, but only profile one… maybe two examples. If there really were so many thousands, why weren’t we hearing about mass arrests several times a week? It simply seemed too quiet for there to be thousands upon thousands of people being defrauded.

And meanwhile, I was running around with a film crew, taping interviews with homeowners and loan modification company executives. The homeowners that had used private loan modification firms were all happy as all get out that they had done so. All had tried the government hotline and all had contacted their bank directly to no avail. Finally hearing an ad on television or radio, they called a private loan modification company and as a result were able to save their homes. It was an amazing disconnect to see what was happening on the streets and then listen to the government and the media tell a completely different story.

The government’s own Website was proclaiming: “Don’t pay for a loan modification.” The media was echoing the sentiment. Those that don’t qualify for the President’s plan should just call their banks directly. Simple as that.

To be blunt, I never even bought it for a second. Banks are debt collectors. A consumer calling a bank to ask the bank to write off some of the money that consumer legally owes them… well it sounded preposterous, how’s that. I was sure that couldn’t possibly go smoothly, and even if it did ultimately get done, it couldn’t possibly be a fair negotiation because the parties were anything but equal.

Calling the federal government hotline… well… screw it… I’ve explained this before, and I can’t believe anyone would accept the government hotline as something that had even the potential to work effectively. Call the federal government’s help line… yeah right. Like I can count on the folks over at the newly formed Department of Homeland Security to save me in the even of a terrorist attack.

Trust me when I tell you this… if some terrible terrorist sh#t ever really does go down… don’t call the government… run and hide quick. Grab a gun and start shooting, but don’t stand there calling the federal government cause that’s what your statue is going to look like after you’re gone… you standing there with the phone to your ear as you waited on hold… right before you got gunned down in the phone booth.

So, this past Friday, I met my film crew in the afternoon to film another loan modification company and I will admit I was getting a little discouraged. I couldn’t understand what was happening all around me.

The interview went great. The guy was wonderful. He explained everything he goes through with customers and for customers and I gained a much deeper understanding of what was actually involved in a loan modification. He even offered to call a bank and the government hotline with the cameras rolling and I waited silently to hear every word of what was about to happen.

Both calls were a complete bust. That’s right… he got nowhere with the bank he called… and nowhere with the government program. The guy who answered the government hotline phone number sounded like a slightly intoxicated man from Kentucky perhaps, who wanted very much to read us his script:

“Thank you for calling for information on President Obama’s Affordability and Stability Act. The program’s details are still be worked out, but you will be glad to know that its almost ready and will offer some fabulous benefits for you and other homeowners in need of assistance…. ” It really was too much. After he put us on hold, we waited so long that we just left the camera rolling, turned out the lights and went outside for a smoke, or whatever. I know… very Michael Moore… so, what’s your point?

The bank was even worse. They just transferred us around from department to department until we got disconnected. “Oh well,” I thought. “We’ll try it again next week.”

But there was one thing the guy I was interviewing said last Friday afternoon. One sentence that hardly registered with me at the time. He was telling me what it was like to work with a bank on behalf of a homeowner to obtain a loan modification, and I was asking for every little detail. And it didn’t come together for me until about 1:00 AM Sunday morning…

He was explaining how difficult the banks were, when he said: “IndyMac won’t even deal with loan modification companies anymore.” “What?” I said.

“Yeah, ” he explained, “they used to but not anymore. Now, when we call them, they won’t talk to us unless we have the borrower on the phone at the same time. Then as soon as we do that, the person from IndyMac will say immediately ‘You know, you don’t have to pay them. You can just call us directly.’ And stuff like that. And when the loan mod’s done, they won’t even tell me what the deal is that they’re offering. They tell the borrower that they can’t talk to them with me on the phone and that they’ll just have to mail their loan mod offer to the borrower’s residence. Then I ask the borrower to send me a copy to make sure they’re agreeing to what we wanted them to agree to.

I don’t know why, but it went right by without me giving it a second thought. But in the wee hours of Sunday morning it hit me like a ton of bricks.

It wasn’t Obama saying if you have to pay walk away. It didn’t sound like something he’d just say on his own. How could he be so certain of something like that? How could he be so sure that consumers didn’t have to pay a loan mod company? He KNEW his program would leave millions out… he admitted that… so how could he know with such certainty that consumers never had to pay a company to help with a loan modification…. And at this point I had chills all over my body as I was typing… my eyes were watering… I was breathing hard…

He knew because IT WAS THE BANKS THAT TOLD HIM SO! No one else would have been credible enough to get Obama to say “if you have to pay walk way,” knowing that his rescue plan would fall short of covering millions of homeowners. Only the bank’s assurance that consumers could call them directly would have been enough to get the President to come out with such a blanket statement on his way to Europe! It was THE BANKS! The God damned Banks! They had promised Treasury and the administration that they were perfectly happy to help consumers with their loan modifications and didn’t need those pesky loan modification companies around to help. Besides they were all scams, right?

Oh my God! I’m sure they are perfectly happy… so happy that they won’t even talk to a loan modification company representative anymore at IndyMac or Wells Fargo… even when the borrower is on the phone and has signed an authorization for the third party to handle the negotiation. I’m sure they’d much prefer to deal with a distressed borrower who doesn’t know what to ask, or what to ask for… a banker I interviewed last week had even told me that sometimes when a borrower calls for a loan modification, and they attempt to get that borrower to make back payments, the borrower does end up making the payments without ever getting a loan modification.

The banks told Obama that they were all that was necessary, to get the paid professionals OUT OF THEIR HAIR! And because there are so many branches and so many banks, Obama felt comfortable telling the entire country: “If you have to pay, walk away.” Don’t worry, just call your bank directly. Oh my God!

Does everyone have chills on their arms? That’s the only way this could have happened. The only way this whole thing could have gone from such a simple and obvious solution to a muddled mess of fraud accusations on television every night. I wonder where all those stories were called in from, huh? You ever try to get a television news magazine to run a story on something? Have you? Huh? Well, it’s not easy, I assure you. Unless maybe you’re the CEO of Bank of America… I bet its’ a whole lot easier for the CEO of Bank of America.

It’s much better for the banks to have the loan modification companies out of the picture. And all they had to do to get the ball rolling towards them, was assure the administration that the loan modification companies were all scams and totally unnecessary to boot. The perfect one-two punch.

How else would a bank know to tell a customer that they don’t have to pay someone who is also on the phone helping that customer? I mean, the person could be a brother-in-law, right? Spooky.

And there I was, talking to someone who makes his living helping homeowners get their loans modified for a fee, and he’s telling me that all of a sudden banks won’t even talk to him and when he calls with his borrower on the call, the bank goes out of its way to announce to the consumer that the he or she doesn’t have to pay that company that’s in the process of helping them at that very minute. Have you ever heard of such a thing?

Lastly, and I could have sworn I heard a gong ring when I realized it. If all the loan modification companies are scams… and if you have to pay, you should walk away… and if the Treasury’s Website says you should never pay for a loan modification… THEN WHY DOES THE CALIFORNIA DEPARTMENT of REAL ESTATE have its own “Advance Fee Agreement,” that licensed real estate brokers must use when handling loan modifications. It took the DRE in California months to come up with a final on that agreement. Why would they have devoted the time and resources to a form that would only be used by scammers?

So, the state regulatory agencies obviously know that all loan modification companies aren’t scams. They’ve admitted it by publishing the names of companies that are approved to use their Advance Fee Agreement form to facilitate the transaction. While Obama tells the country… if you have to pay, walk away… but if you walk away… walk to someone who uses the right advance fee agreement?

Oh what a tangled mess we weave when first we practice to deceive!

I feel like the lawyer in the Christmas classic, “Miracle on 34th Street,” when he figures out that the Post Office can be a government agency who can verify the existence of Santa Claus… sort of. Well, in reverse, actually. It was the banks that have created this mess.

It’s not that all loan modification companies are bad. I haven’t been seeing things. It’s that the banks HATE doing loan modifications because they force the bank to eat some of their profits and they don’t want to do that. But, since the president says they have to if they want to participate in his program which offers them money… they figured at least if the loan modification professionals are out of the picture, and it’s just them against the individual consumer, they’ll win out every time.

Sure, the loans they modify might end up re-defaulting, but they’ll just blame it on the borrowers like they did last year when the same things happened to loan modifications negotiated between bank and borrower. Everyone will buy it… they’ve got half of us all convinced that sub-prime borrowers are capable of perpetrating almost any evil on society. Well done. Really… I mean it… very well done.

But not quite good enough… I’m coming after you bankers… bank executives… I’m coming after you today. I want to know exactly what your lobbyists have said and to whom. I’m calling everyone I know. I’m writing about everything I learn. You’re not going to get away with it… not on my watch, as really important people say.  I am your huckleberry…

Later today, I’m doing a follow-up interview with a guy who was a senior executive at IndyMac, Countrywide, and GE Capital. Be afraid, be very afraid. Fill yer hand you son-of-a-betch, ’cause here I come. You messed with the wrong guy this time…

I’m an angry over-educated Jew on a mission… Woddy Allen meets Steven Segal… watch out… I’ve got a Blackberry and I’m not afraid to use it…

Mandelman out.

Ergo Bibamus!