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Are We There Yet?

By Eastan McNeal on March 23, 2009 at 4:09 AM in Current Affairs

The FUTURE potential bonuses already passed by congress and signed by the president far exceed anything you have seen yet.

On September 26th, 2008 NoQuarter ran a piece predicting that the U.S. taxpayers would have to call on the same scoundrels who got us into this mess and pay them a handsome sum of money to try to get us out.

http://www.noquarterusa.net/blog/2008/09/26/who-ya-gonna-call

Well, here we are. So, what now?

melting128huh

There may be two observations not yet clearly visible through the bailout outrage cloud. These are observations that should be discussed because, although the future landscape appearing in this writer’s view may not be entirely defined at this point, ignoring them could contribute to a situation that we will later regret.

We will discuss the ever-popular bonuses, but first let us look at history and how we may be starting a recreation of the past 32 years of lending miscalculations, only this time as an instant replay. Let us begin with..

CRA

Although the Federal Reserve and the FDIC states that empirical research has not validated any relationship between the CRA and the 2008 financial crisis, some analysts are convinced that the CRA (Community Reinvestment Act) of 1977 (12 U.S.C. 2901) was the catalyst that started today’s financial meltdown. Under that act banks were punished for not giving sub-prime loans and rewarded when they did. That legislation has been tweaked through numerous “fixes” during subsequent administrations.

signing_carter
Jimmy Carter

The original CRA was followed by the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA). It required a four-tiered CRA lender examination rating system. According to Ben Bernanke, this law eventually led, as you will see later, to a greatly increased ability of advocacy groups and nonprofit organizations to influence the lending policies of banks.

signing_hw
George H.W. Bush

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 required Fannie Mae and Freddie Mac to devote a percentage of their lending to support affordable housing.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed restrictions on interstate banking and used CRA ratings as a consideration when determining whether to allow interstate branches and formed local and regional public-private partnerships to manage such CRA-related lending.
signing_riegle-neal-clinton
Bill Clinton Signing Riegle-Neal

In an article for the New York Post, economist Stan Liebowitz wrote that community activists intervention at yearly bank reviews resulted in their obtaining large amounts of money from banks, since poor reviews could lead to frustrated merger plans and even legal challenges by the Justice Department. Perhaps by coincidence, Chase Manhattan and J.P. Morgan donated hundreds of thousands of dollars to ACORN at about the same time they were to apply for permission to merge and needed to comply with CRA regulations.
Chase folded to ACORN
Chase folded to ACORN

. . .

Leap forward to 2009

Making Home Affordable

Making Home Affordable

The “Making Home Affordable” Program.

The Federal Reserve has announced that it will buy as much as $1 trillion of mortgage-based securities, to drive mortgage interest rates down.

To explain what this means to borrowers, the White House put up a new Web site last week, www.MakingHomeAffordable.com, with detailed information about eligibility for the new federal Making Home Affordable program, or MHA. The below is extracted from the FAQ posted on the MHA site, http://www.makinghomeaffordable.com/docs/borrower_qa.pdf

BH Obama signing ARRA
BH Obama signing ARRA

The program has two parts: Loan Refinance and Loan Modification. In a refinance, the borrower transfers to an entirely new mortgage. In a modification, the lender makes the same mortgage more affordable. One of the bullet points under paragraph two of the MHA guidelines state you may be eligible for refinancing if you have income sufficient to support the new mortgage payments. That sounds fair. But what if you don’t have sufficient income?

Here is where the government starts the instant replay.

The same section in paragraph two under “loan modification” says: How do I know if I qualify for a Home Affordable Modification? Answer: To apply for a Home Affordable Modification, you must: ..have a mortgage payment that is not affordable.

Delinquent borrowers, including people who are credit-impaired, (Mind you – this is in today’s act’s language.) may find considerable help in the modification part of MHA. There appears to be no language in this part that requires the borrower to demonstrate they have net income that is adequate, under traditional lending formulas, to justify assuming a mortgage for a property that is truly beyond their means. Sound familiar?

It does, however, require the banks to make the loans “work.”

Bank Rules

The modification arm has some stiff new incentives and rules that should help borrowers, delinquent or not, including:

Any bank that takes bailout money is now required to work with delinquent borrowers, to see if they can bring payments down to an affordable level.

That is a decent requirement – take a look at the loan. But then there is this:

Lenders must modify the borrower’s loan if the net value of the mortgage is greater with the modification than without it.

And this:

The lender will bring payments down to no more than 31 percent of gross monthly income by reducing the interest rate to as low as 2 percent and then, if necessary, extending the loan term up to 40 years and forgiving principal, in that order.

Forgiving principal? Why would any bank go along with the above – other than the fact that their parent institution accepted bailout money, and they must? The following provision may help answer that question:

The federal government will share the cost of bringing payments down.

So. Observation number one is it appears that:

  • borrower behavior is not expected to reform;
  • sub-prime lending guidelines are not expected to reform;
  • federal regulation language has changed only the nomenclature and procedure for this behavior – not end results and
  • what took 32 years to unravel by 2008 will be executed in 2009 overnight via beltway instant replay.

Observation number two: Bonuses.

AIG’s $165M does not hold a candle to what is about to be handed out directly from the U.S. taxpayers to the bankers. Here is what WE are offering them to help us rapidly replay the crisis:

Banks can receive an up-front fee of $1,000 for each loan they modify, then another $1,000 per year that the loan continues successfully.

This is on top of the closing costs and lending fees. This is essentially a bonus. To be certain that I am not injecting the word BONUS into this observation you will see that the program actually uses the phrase bonus in the kicker that is added on top of the up-front fee:

The program will pay lenders and investors a one-time bonus payment of $1,500 per loan modified.

What will this cost? How big are these planned and sanctioned bonuses?

According to CRL, The Center for Responsible Lending (http://www.responsiblelending.org) there are currently around 1,6780,000 delinquent loans. If all of these borrowers qualify and apply successfully for MHA Modification then the cost will be:

Delinquent Loans 1,678,000 Cost
Up-Front “Fee” $1,000 $1,678,000,000
Bonus $1,500 $2,517,000,000
First Year Total $4,195,000,000
30 Yr Annual Fee $50,340,000,000
Total Bonuses $54,535,000,000

Yes. You read that right. Based on each loan averaging 30 years the total we will pay bankers for sub-prime instant replay is:

$54 Billion.

William Proxmire said, a billion here and a billion there, and pretty soon you’re talking about real money. Are we there yet?

Not quite. The Wall Street Journal estimates, based on a recent White House Fact Sheet, that there may be up to four million homeowners that could take advantage of MHA Modification, in contrast to the more conservative 1.68 million number calculated by the CRL. That would be a real Proxmire Poney in the pantry to the tune of .. drum roll.. One Hundred Twenty-Eight Billion Dollars. That’s

$128,000,000,000.00. in BONUSES!

http://blogs.wsj.com/economics/2009/03/04/treasury-loan-modification-guidelines/

Exhausting Outrage

Fake Outrage is Exhausting


These are bonuses that Dodd, Frank, Geithner and Obama can’t pretend they knew nothing about. This is law – written, signed and about to be executed.

You decide. In reading this quietly published data, didn’t you just feel the clear warm changing breeze of transparency?

I mean.. Are we there yet?

  • CG

    incredible… oh the profits… thank you for sharing your observations, I confess ignorance on this one. Gee, that really is REAL MONEY you’re talking about, 60 billion here and 60 billion there! You know when it comes to easy money, especially the taxpayer variety, it will be accompanied with a good amount of fraud, once the angles are exploited.

  • JRD

    A-merican
    C-ommunists
    O-pposing
    R-equirements
    N-essary

    TO OBTAIN A MORTGAGE!!!!!

  • Linda C.

    Since we no longer have the banker as the lender anymore, they have used a “carrot technique” to get these loans modified when they are held by a third party. When you send your mortgage payment to
    the bank, they only act as a processing center. The bank probably sold the loan and therefore has no control over it anymore. The third party holder of the loan is better off financially if they let the home foreclose. The feds could force the actual loan holders to accept the modified mortgages, but they aren’t going to do so.
    If the third party is going to make more money by letting the home foreclose versus modification, then there is a problem. The government isn’t addressing this problem but only making the modification an attractive alternative to these third party people versus the total cost of foreclosures to the country.

    Geitner, Summers et al are wedded to the idea of selling mortgages as securities in neat chopped up packages which got us into this mess in the first place. As the demand for these securities grew there was a push from Wall Street, paid off politicians, as well as community organizers to lower the credit worthiness of the borrower. Poor people got houses, Wall Street could sell these securities, plus the insurance on these securities. The wealthy got even wealthier and poor people were stuck with mortgages they didn’t understand, and couldn’t pay on property that many times was fraudulently over valued. The idea that massive consumption based on debt would bring us wealth into perpetuity has not changed with the Wall Street folks, Geitner or Summers. They want to tax payers to foot the bill for what they believe is only a “confidence problem” and continue on their merry adventures at our expense.

  • Peggy Sue

    So, the fantasy game continues and the taxpayer is left holding the bag, which will stretch out to perpetuity. Even the “yes we can” crowd needs to push back and think about this seriously. I probably won’t be around for another 40 years, but my kids will. We’re strapping massive debt obligations on their backs and trying to call it “fair play.”

    It’s a con game, just an upgraded model. Same old, same old.

    Wake up, people!