Mandelman Commenting on ProPublica Article…

I rarely do this sort of thing…

But, ProPublica posted an article about real life foreclosures not fitting the conventional wisdom of what most people think they are… they’re not a bunch of low income minorities who should never have been able to buy their homes in the first place, for example.  I posted a comment in response to the article they posted, and then someone who reads Mandelman Matters showed up and responded and I responded again… and I wanted my readers to be able to see what we talked about…

ProPublica seems to be posting quite a bit about the foreclosure crisis of late, and some of it seems pretty good, although I haven;t had enough experience with the site really.  I remember last year thinking that they didn’t get it… so who knows.

Their article follows… then my comments…

Tale of Three Cities: Foreclosures Don’t Always Follow the Script

As a symbol of the national foreclosure crisis, Jaymie Jones isn’t what you might expect.

The 52-year-old Seattle-area woman worked her way up in the financial-services industry over three decades from bank teller to mortgage executive.

In spring 2007, she bought her dream home in Kirkland, signing a 30-year, fixed-rate mortgage.

Then, as Jones celebrated New Year’s Eve on a beach in Mexico, the call came: Her division was shutting down. Jones tapped her savings over the next year and tried for a loan modification, but in the end, the bank filed to foreclose. The dream was over.

In the conventional narrative of the foreclosure crisis, rapacious lenders hooked up with irresponsible buyers in a tale of “Lending Gone Wild.”

There was certainly much of that. But a Seattle Times-ProPublica analysis of foreclosures from three areas hit hard by the housing crash tempers that image — and punctures some other popular notions about the mortgage meltdown.

Most of those in foreclosure were young people, right? Not true. Like Jones, half of them were over age 40.

Predatory lending caused foreclosures, correct? In fact, nearly three out of four loans did not have any of these three key predatory loan features — balloon payments, prepayment penalties and high interest rates.

And as for the common assumption that most people in foreclosure lost their homes? Surprisingly, not so. More than half of them were able to keep their homes, with some selling them for more than they owed.

The Times-ProPublica analysis provides new insights into the foreclosure crisis and helps fill an acknowledged gap: Much of the data on home loans is insufficient, hidden or hard to obtain.

Although politicians and regulators have moved to gather more information about lending practices and foreclosures, consumer advocates say progress is too slow. And it’s unclear how much will be made public.

“For those of us who want to understand how the foreclosure crisis has affected borrowers and communities, it is frustrating to not have access to publicly available data that can really help us to understand what happened and why,” said Carolina Reid, a research manager for the Federal Reserve Bank of San Francisco.

Even a basic number — borrowers in default or foreclosure — is hard to pinpoint, said Guy Cecala, publisher of Inside Mortgage Finance, a leading trade publication. That’s because those who track the data have no way to weed out homes that are counted multiple times because they’ve gone into and out of the foreclosure process more than once.

Cecala’s best guess, based on industry surveys: 4.8 million homes are in serious delinquency or foreclosure.

But, “even the best foreclosure numbers don’t give us the reason for the foreclosure,” Cecala said. “It’s hard to address a problem when you don’t know all the causes of it.”

Debate about root causes of the crisis has re-emerged in recent days with a partisan split on the Financial Crisis Inquiry Commission about whether failed government housing policies or private-sector lending abuses deserve the most blame.

To address the lack of information about foreclosures, The Seattle Times and ProPublica decided to create a database that could provide some answers. Reporters pulled a random sample of more than 1,200 foreclosure filings from 2005 through 2008. That entailed around 400 filings for each one of the central counties encompassing the Seattle, Phoenix and Baltimore areas.

Overall, the data underscore how the housing bubble and lower lending standards of the era reinforced each other, seducing many homeowners to get in over their heads. Comparing the three counties also reveals regional differences in the profiles of those who got into trouble.

In the Phoenix area, one of the biggest housing bubbles in the nation suddenly burst, unleashing an equally sudden wave of foreclosure filings.

In the Baltimore area, job losses in an aging city threatened home purchases and neighborhood revitalization.

And in the Seattle area, longtime homeowners responded to lenders’ aggressive pitches by tapping into rising equity, taking on more debt, and refinancing into adjustable-rate mortgages.

Click to read more: Seattle: Waves of Refinancing , article continues…

NOW HERE’S MY RESPONSE, AND MY SECOND RESPONSE FOLLOWS:

There are two primary misconceptions why Americans are allowing the foreclosure crisis to continue:

1. People believe that the “banks” are foreclosing because it’s in their best financial interests. And it makes sense that they think this way, as that’s what “banks” have always done in the past.

2. Banks are foreclosing on homes bought by irresponsible and often low income people that should never been allowed to buy their homes in the first place and can’t possibly afford them. And virtually all of the imagery of the foreclosure crisis features poor minorities in run down homes with trash piled everywhere.

If either of these thoughts were true, then the people would be right to ignore the foreclosures as they would be the natural order of things.  Unpleasant to watch, but unavoidable, so wake me when its over.

So, it’s not illogical that most of the country seems to be uninterested in stopping the foreclosure crisis, even though they themselves are losing enormous amounts of accumulated wealth in their homes as a result of the crisis continuing.  If you believe points one and two above, then there’s nothing to be done… so wake me when it’s over.

BUT NEITHER POINT IS TRUE.

While low income minorities certainly have suffered as a result of the crisis, they are by no means the lion’s share of the affected population.  It’s just that the “The Anderson Family” rarely stops for a photo-op in front of their Volvo wagon before driving away from their home for the last time.

And “banks” are not the ones foreclosing… “servicers” are foreclosing.  And “servicers” ALWAYS make the most money by servicing a delinquent loan for as long as possible and then foreclosing.

Servicers aren’t acting in the best interests of investors or borrowers, or even our society as a whole.  They are acting in their own best interests, which are to keep your loan delinquent for a while before foreclosing.

The unsolvable part of the crisis is that in many cases there are no fiduciaries to the loans… the investors are holders of “certificates” entitled to a share of the cash flows produced by a pool of loans, but they don’t consider themselves landlords, by any means.

And if not servicers, then who will be involved in negotiating loan modifications?  Servicers can’t be relied upon to do it, their incentives are not aligned with any others, and the government would have to take over the loans to modify them.

The country needs to come to understand that the cause of the crisis was not a housing bubble popping, it was not caused by irresponsible people buying homes they can’t afford.

It should be obvious by now that none of us will be getting out of this unscathed. The water is rising and, while the crisis may only be causing flooding in 15% of homeowners with a mortgage, it is already at least lapping at the rest of America’s toes.

The only real question is whether the people will come to understand what’s happened and is being allowed to continue  to happen before we all learn the truth of the matter the hard way.

Already 42 million Americans are receiving food stamps, up from 11 million in 2005.  Million dollar mortgages are defaulting at twice the national average.  More than half of all foreclosures are prime loans, and there are few states today unaffected by the foreclosure crisis.

Because foreclosures breed foreclosures… they lead to lower property values, which lessens  consumer spending, which reduces corporate profits, resulting in higher unemployment, which ends in more foreclosures.

It’s a feedback loop that won’t stop until it has wiped out America’s consumer economy and destroyed the accumulated wealth of America’s middle class.

THEN, HERE’S MY SECOND COMMENT:

For the record… home prices fell for different reasons at two different times.

1. The Bubble Begins to Deflate… By summer 2006, the Fed had raised rates 17 times in a row in its attempt to keep inflation in check.

As rates rose, fewer qualified for loans, homes stayed on the market longer… prices fell.  Those who had put no money down, had adjustable or teaser rate loans, or who had counted on low rates or higher values in the future so they could refinance… fell into foreclosure.

But that’s what was supposed to happen…

Who knows what would have happened from there, had the housing bubble continued to lose air.  We never got to find out…

2. The Banks Break the Bond Market… On July 10th, 2007… something happened that never happened before.

Standard & Poors and Moody’s, announced they were downgrading ratings on 1,032 bond issues, fewer than 1% of all bonds backed by sub-prime loans, but it didn’t matter…

Investors panicked, many dumped holdings at fire sale prices.  Many had been sold to pension plans, whose bylaws prevented them from holding anything but triple A rated securities.

Investors worried that if S&P and Moody’s were wrong about these bonds, what about the trillions in bonds backed by Alt-A and other mortgages.

The bond market froze.  Within two weeks, banks wouldn’t loan money to each other, and the Fed had to reverse its position from two weeks prior, and started pumping cash into the system to keep liquidity from drying up.

All of a sudden no one trusted ratings on bonds, so no one would buy or hold bonds backed by mortgages. And the secondary market, which is where banks sell loans they’ve originated, was no longer buying mortgages, since they couldn’t sell bonds backed by such mortgages.

Lending stopped… banks started hoarding cash. Over a couple of weeks, we went from lending… to no loans.  You couldn’t get a first mortgage or a second.

With no loans available, housing prices started falling… fast.

But this was no housing bubble slowly deflating, this was a free fall situation that would soon take down Wall Street, spawn a global financial crisis, and wipe out the accumulated wealth of America’s middle class.

Treasury Secretary Hank Paulson, and Fed Chair Ben Bernanke didn’t see what was happening until it was far too late.  In Paulson’s book, On the Brink,” he admits: “We were just wrong.”

Bear Stearns went first.  Then September 17th, 2008, Lehman Bros. announced that it was filing for bankruptcy, and AIG… well, that’s another story.

THE KEY PROBLEM…

Somewhere along the way, we started blaming “irresponsible sub-prime borrowers” who were said to have bought homes they couldn’t afford.

Many people had seen new McMansions going up during the bubble, and had started to get just a little jealous or concerned that perhaps they were falling behind their peers… and now they said to themselves:

“Ah ha! I knew it wasn’t me… they were irresponsible borrowers… I knew it!”

No one saw the bond market break, but everyone heard of houses in foreclosure.  And I suppose that its easier to blame neighbors for being irresponsible than Goldman Sachs, or others on Wall Street whose greed and abuses of the system weren’t widely understood, or explained by the media.

Today, the only lender in this country is the federal government, through Fannie, Freddie or FHA.  There are no “securitizations” to speak of, which is the process through which mortgages are transformed into debt securities sold to investors.

Our banks were holding hundreds of billions in mortgage-backed securities and collateralized debt obligations (CDOs) on their balance sheets and in off-balance sheet SPVs (Special Purpose Vehicles). There was no longer a market, so marking them down to market value meant they were worthless… they were “toxic assets.”

Banks had also borrowed against their now worthless assets by up to 30:1,  and the entire U.S. banking system was about to implode.

Enter: TARP

Paulson said he’d need $700 billion to stop our ship from sinking, and we know what happened from there.  To-date we’ve pumped $12.2 trillion into our banking system, but only 1/1000th of that amount into stopping the foreclosure crisis.

Why?  Because there is no widespread political support for bailing out what too many still think of as “irresponsible sub-prime borrowers who bought homes they couldn’t afford, and who therefore should be punished by losing their homes.”

And so, housing prices remain in a free fall, unemployment is still rising, and homeowners have lost $9 trillion in equity since 2006.

The housing bubble’s demise might have caused the worst economic downturn since the Great Depression, but it didn’t… it never got the chance.

Those at risk of foreclosure today didn’t do anything wrong.  They just did whatever they did at the wrong time.

It’s not the borrowers… it’s the banks.

AND… there’s more on the ProPublica site if you’re interested…

Mandelman out.

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