This piece by CNN senior writer Tami Luhby is typical of the confused reporting you get in the national media on the housing/foreclosure mess. People of all political leanings read or watch CNN, and this is the kind of confused reporting they use to evaluate policy.
First Luhby says that the Obama administration has tried all kinds of things to fix the problems. That is not the case. There were two programs, both flawed at their roots. Both of them relied on the incredible idea that the financial sector that caused the problem would fix it. Everyone who was following the problem closely realized that there were insurmountable conflicts of interest in the foreclosure process, between investors in different tranches of RMBSs, Trustees for RMBS trusts, the originators, and even the FDIC, Fannie Mae and Freddie Mac. Banks own the major mortgage servicing companies, and are themselves originators, owners of originators, investors in different tranches of RMBSs, trustees for RMBSs, and even holders of second liens on the same properties.
There is no mention of the crucial fact that the Obama administration worked to defeat cramdown in Chapter 13 in violation of a campaign promise? No one thought it would fix all the problems, but everyone knew it would fix the problems of those people who had jobs and could pay for a house at its current fair market value.
Flying past the history, Luhby says that the best thing we can do now is to speed up foreclosures. Again, she ignores the conflict of interest problem, and an even deeper problem: servicing companies can’t foreclose because they can’t find their paperwork and are creating junk documents to evade legal requirements.
Even if the servicing companies do manage legitimate foreclosures, that puts the property into a bulging inventory that eats up what little cash is still coming in to RMBSs. Those foreclosed properties are expensive, what with maintenance and taxes, not to mention servicing fees and costs. They add to the overhang of existing housing that drives down the value of everyone else’s homes, and there are no buyers.
Luhby recognizes this problem, and says that the solution is to sell property to investors who will rent or resell. That will require special help for (wait for it) investors! Yes, because this is such a bad idea it requires subsidies:
To entice investors to purchase these homes, as well as other foreclosed properties owned by banks, the administration could advocate for changes to the tax code, Gaines said. For instance, more favorable capital gains or depreciation rules could attract buyers.
Why on earth anyone would want to help investors is a flat-out mystery to me. Why not help homeowners instead? At this point people still in their homes are likely to have jobs, and are able to make reasonable payments, either as mortgage payments or rent to own payments.
That carries us to an equally inane idea, expanding HARP to homeowners who are more than 25% underwater. Currently, if you have a mortgage of $160,000 on a house worth $120,000, you may be able to refinance to a lower interest rate. That way you get to pay an extra $40,000 for your house. The wonderful new idea is to let people do the same thing on houses worth even less than 75% of the mortgage, so in our example, you could wind up paying $160,000 for a house worth say $100,000. Who would do something that stupid?
Lubhy turns to the balancing view from experts. One suggests mediation. Why? Others point to the HARP expansion, which they claim will put money in people’s pockets and act as a stimulus. Nonsense. It robs people of their future, because they’ll never get back all that extra money they are paying for their homes, money they could have used to fund their retirements. Furthermore, I doubt that there are any homeowners whose only debt problem is an underwater mortgage. If you are in trouble on your mortgage, almost certainly you have a pile of other debt. That is the beauty of cramdown: it solves the whole problem in one step.
Luhby doesn’t say that bank balance sheets are so weak that they cannot survive the losses they will eventually incur. She doesn’t seem to realize that the banks are preventing sensible solutions to the problems, in the expectation that eventually taxpayers will provide some a back door bailout.
Maybe there’s a PR push from the banks. Today’s New York Times has a similar article by Agnes T. Crane and Martin Hutchinson. attributed to Reuters Breakingviews. Here is their conclusion:
Short of forcing banks to act, new government schemes are doomed to similar ineffectiveness. The housing market will eventually recover on its own. At this stage, it would be better for lawmakers to deploy precious capital, real and political, elsewhere.
The banks are right to wait out the Obama Administration and Congress. They’ll cave, it’s just a question of when.