The Mainstream Media Wakes Up? (HAMP)

Gee, what have I been saying now since this crisis began?

Some of them, from the Mortgage Brokers (so they say; all anonymous) are particularly amusing, and demand a response.

Let's look at how we got here guys.

Home values have appreciated at rates that dramatically exceed individual's growth in salaries.

Of course home value expansion significantly beyond the rate of inflation must eventually cause people to be unable to afford houses. The "why" on this isn't particularly difficult to figure out, but for those who were educated in Government Schools, let me lay it out for you.

Dateline: April 1st, 2007.

Working on three years ago.

Indeed, if you want to look at every article I've written referencing "house", "prices" and "contract" (as in "house prices will and/or must contract") here's the link - have fun with all 185 entries.

When you bang the drum long enough someone eventually removes the cotton from their ears to try to figure out what in the Sam Hell all that noise is about.  It appears the NY Times has finally done so.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Oh, it only took you damn near three years to print this in the paper, did it?  How come?

Mr. Katari contends that banks have been using temporary loan modifications under the Obama plan as justification to avoid an honest accounting of the mortgage losses still on their books. Only after banks are forced to acknowledge losses and the real estate market absorbs a now pent-up surge of foreclosed properties will housing prices drop to levels at which enough Americans can afford to buy, he argues.

EXACTLY.

Look folks, this isn't complicated.  You can afford to spend roughly 30% of your pre-tax income on housing.  A bit more, a bit less, but roughly that much.

So if you have a $50,000 income in your household you can afford to buy a $150,000 house.

But you can't afford to buy or remain in a $300,000 house no matter what you, the bank, President Obama or the tooth fairy wish to promise you.

The banks know this.  They've known this since the bubble began, which is why they did their level best to package up all this crap paper and sell it to other people - so they would explode, not the bank.

But at some point they saw all the "moolah" these "investors" were making (for a while) and started to eat their own cooking.  And boy, did they gorge on it in the most dangerous and outrageous fashion - they went hot and heavy into second lines (HELOCs and similar loans) which are the most dangerous of all, since they recover exactly NOTHING in a foreclosure until and unless the first mortgage is entirely satisfied.

HAMP and all the previous incantations are an outrageous and pernicious scam.  They exist for one and only one reason - to permit the continuation of massive and pervasive accounting fictions by banks and other institutions that would otherwise be rendered instantaneously insolvent.

Let's just take a couple of examples - first, Citibank.

Their most-recent 10-Q shows a large concentration of HELOC and other Second-Lien mortgages in California.  A very significant percentage of the homes in that state are worth less than the first mortgage balance.  As such, should the people who own those homes stop paying, a huge percentage of the $14.6 billion that Citibank holds in second liens in California will be worth exactly nothing.

Now let's look at Wells Fargo (WFC):

Wells has nearly $35 billion outstanding in HELOCs in California and another $12 billion in Florida - both states where huge percentages of homes are "underwater" on their first mortgages.  Again, the problem is the same - should the owners of those homes stop paying and the home be worth less at resale than the first mortgage balance the outstanding HELOC is worth a LITERAL ZERO.

Let's put this in perspective for Wells - in that same 10Q they claim $53 billion in "Tier 1 Common Equity", a 5.18% ratio.  The outstanding balance on these HELOCs in bubble states is nearly enough to DESTROY the entirety of their Tier 1 Common Equity and should some fairly-conservative assumptions be applied - that is, that a quarter of these loans will ultimately default and be entirely unrecoverable due to the first lien being underwater this would be sufficient to impair their "well capitalized" currently-claimed position.

The other "major" banks such as Bank of America have a similar picture.  Indeed, you can go over to http://edgar.sec.gov and check out any of the publicly-traded banks for their HELOC and similar second-lien exposure.

This is the reason for "HAMP" and all of the other silliness.  It is not to "protect" homeowners, it is to prevent banks from having to recognize punishing losses that, in point of fact, they should have to recognize due to their own idiotic lending practices.

Treasury knows this - that their entire "TARP" recapitalization and "stress test" game was nothing other than a sham intended to pump confidence so that these institutions could issue stock into the market and try to "rebuild" their balance sheets.

If this didn't actually hurt the public I wouldn't care.  But it does severely damage the public in multiple ways, specifically:

• These "modification" programs in the general sense do not and cannot lead to sustainable mortgages for the vast majority of homes at risk.  The reason for this is simply that the person who bought the house did so at a radical premium to what they could actually afford.  That "premium" was there as a consequence of intentional speculative activity and outright fraud in underwriting that pumped "home values" - premium that has now disappeared and cannot come back by anything short of more fraud!  Therefore these "homeowners" cannot be "saved" - any change that simply reduces payments but doesn't get rid of the negative equity problem only extends and increases the damage ultimately done.
  
  
• A huge percentage of the people trapped in these loans are cajoled or outright threatened into doing things that are severely against their own interest.  I hear daily of people who have raided 401ks and IRAs to try to remain in their homes and make these "trial payments" or participate in other similar schemes.  Retirement accounts are privileged in a bankruptcy and cannot be taken; it is essentially NEVER the correct thing to do to raid such an account to try to prevent a foreclosure or bankruptcy filing!  This sort of underhanded "suggestion" occurs all the time and in my opinion constitutes raw predatory conduct for which there should be felony legal sanction - but of course there isn't.
  
  
• The artificial propping up of home prices severely damages those Americans who would like to buy a house but cannot afford one at the present price.  If you do not own a car, you obviously want prices on cars to be low, not high.  The same applies if you don't currently own a house - you want prices low, not high.  The only people who benefit from prices that are pumped up out of whack with fundamental values are those who lent money at bubble prices and will lose that money if prices contract, along with those who build more houses at bubble prices and thus skim off unreasonably large "profits."

Let me be clear: I have no mortgage on my home at all and thus should the government do the right thing I would "lose" in that my home's value would contract further.  That's perfectly ok - I bought this home as a place to hang my hat, not as a speculative financial instrument.  I spent the money with the expectation that it would be a nice place to live, not as a means to play with leverage and try to make a fortune by finding a bigger sucker to offload my property to at a profit.

The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.

There isn't any way to do that.  Writing down loan balances on the back of the taxpayer would create a more than one trillion dollar liability on the taxpayer.

Mark Zandi goes on to prattle about how the taxpayer should eat the writedown of principal - and that we must not force the banks to eat their losses because it "could pull the economy back into recesssion."

So the solution is to make the taxpayer eat the loss?  How will that not pull the economy back into recession?

Geither and Obama haven't done this and they damn well better not.  Such a plan would not only likely cause foreigners to entirely give up on buying our government debt (thus precipitating an immediate government funding crisis) but in addition such a plan would be outrageously unfair to The American People.  It would dwarf all of the bailouts thus far, transferring the cost of more than five years of reckless and even fraudulent lending from the banks and other institutions who engaged in it to the taxpayer.

Yes, I'm well-aware that the "unlimited" credit line for Fannie and Freddie that was passed in the dead of night on Christmas Eve could, indeed, be used to allow banks to dump all their principal forgiveness into the government AND FORCE YOU TO PAY FOR IT without an appropriation of Congress.

IF that happens the proper response is for the people of this nation to rise up and demand that Obama and Geithner be immediately IMPEACHED.

No, the correct solution to this mess is the same as it was in 2007, when I began writing on the topic.  It is in fact to withdraw all of this support and allow housing prices to collapse back to reasonable and affordable levels. 

If this bankrupts the "too big to fail" banks, so be it. 

We need a banking system and we both have and will continue to have one.  Community banks and credit unions are not materially exposed to this because they weren't dumb enough to get entangled in making loans they knew couldn't be repaid, and they will be the beneficiaries of the "too big to fails" being flushed down the sewer of bad ideas - where they belong.

We do not need specific, individual banks, no matter how big and politically powerful they might be.