More on the “forecosure issue”

As our elected officials have started to come to terms with what they’ve done:

The financial services industry is growing increasingly concerned as more politicians get behind the idea of a broad moratorium on home foreclosures, which banks and many outside analysts say could be good short-term politics but terrible long-term policy.One senior Wall Street executive told Morning Money over the weekend: ‘President Obama should be very cautious about aligning himself with Congressional leaders who are playing politics with the foreclosure issue. With foreclosed properties comprising one in every four homes sold in the United States, the spreading moratorium could disrupt real estate deals in progress, slow down the process of clearing the backlog of troubled home loans and [endanger] the economic recovery.’

“The recovery” meaning financial markets, not the economy that you and I actually live in, which is stagnant:

Now there are a number of details that have been drowned out by the massive public relations campaign that’s been put forward on this such as this New York Times article.  There’s a wonderful quote to describe this: “The most effective propaganda paradoxically uses information to drive information out of circulation.”  It was the same thing when the crisis started and we heard about all kinds of derivatives–which are problematic–rather than the massive housing bubble that they filled.  Curiously, that will actually help to explain the MERS problem.

MERS is an electronic mortgage registry database that was used to speed up the whole process of securitizing these loans faster than they could keep track of who actually owned the properties they were for.  See this NYT article from 2009 describing the system.  The key quote is this:

MERS, a tiny data-management company, claimed the right to foreclose, but would not explain how it came to possess the mortgage notes originally issued by banks. Judge Logan summoned a MERS lawyer to the Pinellas County courthouse and insisted that that fundamental question be answered before he permitted the drastic step of seizing someone’s home.

“You don’t think that’s reasonable?” the judge asked.

“I don’t,” the lawyer replied. “And in fact, not only do I think it’s not reasonable, often that’s going to be impossible.”

If they really believed they were worth multiple trillions of dollars, you’d think they’d spend the time to make sure they could take back these valuable properties, but of course they didn’t, which was why it was a multi-trillion dollar bubble.  If you’re pawning something off on people, you want them to take it off your hands for more than its worth so they are the ones stuck with it and you’re gone when they realize it’s not worth what they paid.  The person in that position is here is the real estate broker, the lender assumes the deed to the property and is supposed to take a loss if the buyer can’t actually pay for it.  For assuming this risk they take interest on the loan.   What we have been surrounded by is a bizarre “bank always wins” mentality.  It’s having your cake and eating it too, then getting another one when it’s gone.

This is why the bizarre decision to preserve the debts that couldn’t be paid by doing a creditor bailout was so terrible, not “taxpayer dollars” which were far less than they’ve gotten in loan guarantees and access to the fed’s discount window.  The recipients of that money often pay a 15% capital gains tax rate on their alleged “investments” compared to the 25% income tax anyone who makes more than $34k a year pays and all of the sales taxes people pay for necessities.   Even people who have been able to keep up with their mortgage payments are in “negative equity” and paying for a loan on a house at bubble levels despite the bubble bursting.

Only under such a uniform standard could we so easily determine who the houses belong to.  Only under an effective media blackout could the NYT print a story attributing the “foreclosure issue” to something so mundane without embarrassment.

Drain Clogs – 10-11-10

Remember those foreclosure queens?

Earlier this year, Yves Smith wrote:

A good Washington DC contact told me that a public relations/media push to demonize those who decide to walk away from mortgages they can still afford to pay (aka “strategic defaulters”) is underway. Expect to see a good bit of moral fervor as those who choose to cut their losses are attacked as immoral, irresponsible, and abusive.

There is a wee problem with the “blame the ruthless borrower” narrative. Banks who acted in a ruthless manner have trained their customers to behave the same way. This shift in prevailing attitudes is the logical and inevitable result of financial firms taking an increasingly predatory posture toward their customers. Borrowers are responding in kind, by taking a cold-blooded and legalistic look at their agreements with lenders.

In retrospect, that was a huge understatement.  Oh yeah, there was the line about “the recovery” too:

Here’s a provocative thought: what if ‘extend and pretend’ within our nation’s troubled mortgage markets is actually providing a lift to consumer spending? It’s not as far-fetched as the idea might initially sound, and it might help explain some interesting data we’ve seen as of late — and it also might explain why the statistical recovery we’re seeing now doesn’t really feel like a recovery to most Americans.

And, if I’m right, it also explains why we may very well slip right back into the throes of recession all over again as we head into 2011.

So the story went that people were leaving their houses to go on a shopping spree or something.  I never said it was reasonable, just that it was out there.  The peak was a column titled: “Honey, I Lost the House.  Let’s Party”

“What a relief, Marge, not to have that huge mortgage payment hanging over our head anymore.”

“You can say that again, Harry. Let’s celebrate. Maybe take a nice vacation. Or buy a new car.”

“What if the bank forecloses on our house? We could be living on the street next year.”

“Exactly. Which is why we need a new car. Maybe something roomy like a Chevy Suburban.”

By now you’ve probably seen the analysis, if you can call it that, on how mortgage defaults are driving consumer spending.

Yes, you read that correctly. Those deadbeat homeowners, facing possible eviction and in some cases unemployed, are throwing caution to the wind — and money at retailers.

Yeah, the problem was that it wasn’t something that could be defined, let alone actually requiring scrutiny.  The Federal Reserve even did a study that concluded:

After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home’s value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the “double-trigger” theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest.

“Negative equity” meaning underwater, paying more than the home was even worth and “income shock” meaning unemployment.  In other words, mostly people losing their jobs and homes at the same time.  There was another study that was going to be used to come up with a technical definition to punish people, but concluded that only 20 percent of the defaults were attributable to people not putting all their income into their mortgage payments and whatever else was apparently to be budgeted for them by the financial sector.  Then, the New York Times commissioned another study, discovering that people with the most income above their capacity to pay their mortgages probably just had higher incomes.  The whole thing was really disgraceful, especially considering the fact that there were a lot of cases where they didn’t even know who owned which properties because they were pumping up the housing bubble so fast they had to contract other companies to try to track all of the little tiny mortgage bits scattered across the four corners of the earth and seize them back for the Bank Collective.

All that may have died, but it’s pretty strange to reflect on now that they’ve been caught just saying they owned the property anyways.  A contract is a contract and all of that.

Dean Baker:

Virtually everyone has had the experience of being forced to pay a late fee or a bank penalty because of some fine-print provision that we overlooked. Sometimes, begging by good customers can win forbearance, but usually we are held to the written terms of the contract, no matter how buried or convoluted the clause in question may be.

That is the way it works for the rest of us, but apparently this is not the way the banks do business, at least when those at the other end of the contract are ordinary homeowners. As a number of news reports have shown in recent weeks, banks have been carrying through foreclosures at a breakneck pace and freely ignoring the legal niceties required under the law, such as demonstrating clear ownership to the property being foreclosed.

It gets even better:

GMAC, the former financing arm of General Motors and now called Ally Financial, has become the poster-child for these sorts of practices. Jeffrey Stephan, a leader of one of its foreclosure units, acknowledged that he had signed thousands of affidavits claiming that he had reviewed documents he had never seen.

In addition to being a major sub-prime lender during the heyday of the housing bubble, Ally Financial also has the notoriety of being primarily owned by the federal government following its collapse last year. This fact may ensure greater accountability at Ally, but there is no reason to believe that its practices are qualitatively different than those of other servicers carrying through foreclosures.

And Fanny Mae, the GSE the financial sector occasionally uses to either blame or attempt to punish poor people depending on the circumstances, is at their service on this one as well:

“We are disturbed by the increasing reports of predatory ‘foreclosure mills’ in Florida working for Fannie Mae servicers,” Frank, D-Mass, wrote in a letter also signed by Grayson and Brown. “Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?”

And lastly, here’s a video of some jackass pining for the days of debtors’ prisons for you.