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By refusing to halt foreclosures to sort out the mortgage mess, the treasury secretary again shows his favour to Wall Street
Treasury Secretary Timothy Geithner is good at telling fairy tales. Geithner first became known to the general public in September of 2008. Back then, he was head of the New York Federal Reserve Board. He was part of the triumvirate, along with Federal Reserve Board chairman Ben Bernanke and then Treasury secretary Henry Paulson, who told congress that it had to pass the Tarp or the economy would collapse.
This was an effective fairytale, since congress quickly handed over $700bn to lend to the banks with few questions asked. Of course, the economy was not about to collapse, just the major Wall Street banks. To prevent the collapse of the banks, congress could have given the money "â?? but with the sort of conditions that would ensure the financial sector would never be the same. Alternatively, it could have allowed the collapse, and then rushed in with the liquidity to bring the financial system back to life.
But the Geithner fairytale did the trick. Terrified members of congress tripped over each other to make sure that they got the money to the banks as quickly as possible.
Now, Geithner has a new fairytale. This time, it is that if the government imposes a foreclosure moratorium, it will lead to chaos in the housing market and jeopardise the health of the recovery.
For the gullible, which includes most of the Washington policy elite, this assertion is probably sufficient to quash any interest in a foreclosure moratorium. But those capable of thinking for themselves may ask how Geithner could have reached this conclusion.
The point of a foreclosure moratorium would be to ensure that proper procedures are being followed. We know that this is not the case at present. There have been several outstanding stories in the media about law firms that specialise in filing documents for short-order foreclosures. They hire anyone they can find to sign legal documents assuring that the papers have been properly reviewed and are in order.
In some cases, this has led to the wrong house being foreclosed. People who are current on their mortgage "â?? or who, in one case, did not even have a mortgage "â?? have been foreclosed by this process. The more common problem would be the assignment of improper fees and penalties to mortgage holders. Or, in many cases, foreclosures have probably occurred where the servicer did not actually possess the necessary legal documents.
A moratorium would give regulators the time needed to review servicers' processes and ensure that they have a system in place that follows the law and will not be subject to abuse. This is the same logic as the Obama administration used when it imposed a moratorium on deepsea drilling following the BP oil spill.
No one can seriously dispute that there is a real problem. Three of the largest servicers, Bank of America, JP Morgan and Ally Financial have already imposed their own moratorium to get their procedures in order. This is just a question of whether we should have regulators oversee the process or "trust the banks".
If the argument for a moratorium is straightforward, it is difficult to see any basis for Geithner's disaster fairytale. If there were a moratorium in place for two to four months, then banks would stop adding to their inventory of foreclosed properties.
But most banks already have a huge inventory of unsold properties. Presumably, they would just sell homes out of this inventory. This "shadow inventory" of foreclosed homes that were being held off the market has been widely talked about by real estate analysts for at least two years. It is difficult to see the harm if it stops growing for a period of time.
Of course, it actually was Obama administration policy to try to slow the process of foreclosure. This has repeatedly been given as a main purpose of its Hamp programme, the idea being that this would give the housing market more time to settle down. Now, we have Geithner issuing warnings of Armageddon if a foreclosure moratorium slows down the foreclosure process.
It doesn't make sense to both push a policy intended to slow the foreclosure process and then oppose a policy precisely because it would slow the process. While this is clearly inconsistent, there has been a consistent pattern to Geithner's positions throughout this crisis.
Support for the Tarp, support for Hamp and opposition to a foreclosure moratorium are all positions that benefit the Wall Street banks. I'm just saying.
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18 October 2010 11:09PM
Support for the Tarp, support for Hamp and opposition to a foreclosure moratorium are all positions that benefit the Wall Street banks. I'm just saying.
You're not the only one, Dean.
18 October 2010 11:09PM
Geitner shows his favour towards Wall Street because Wall Street is in charge - This stuff happens in a plutocracy.
18 October 2010 11:23PM
I would be among the last people to carry water for Mr. Geithner, but in this case he is right.
To say that "there have been several outstanding stories in the media" and spin stories of mistakes, fees, etc... into a moratorium is a huge self-serving exaggeration. For example, what is the % of loans that have been identified as having errors? How many actual cases of abuse? Dozen, hundreds? In any case, with 4 million plus foreclosures, just by the the law of large numbers, there will some strange cases. Probably both ways, there are some who should be foreclosed on because they are not paying, but they will not be.
Moratorium amounts to a selective forgivness of debt rewarding mostly the more irresponsble home buyers. The real estate prices rose to stratospheric levels - partially because of the eagerness and stupidity of the people who are now be foreclosed. They have dropped but nowhere close to sustainable levels.
The solution is to let the market find its balance. My guess is that is still a lot lower than today, even with the huge subsidies with very low interest rates and other gimmicks. The only other way out of the mess is with substantial inflation (especially for incomes) or with a form of socialism where some are given subsidized housing because the government deems them deserving.
Another huge tax and attack on the younger generation. Geithner is right, even a broken watch is right at least twice a day.
18 October 2010 11:27PM
Some cities in the United States have a huge oversupply of housing for sale, especially in light of often shrinking populations due to moves into the exurbs. Detroit is one prime example of such a city; its population has decreased by nearly half since the 1950s. There are thousands of homes slated for demolition over the next 3 years in an attempt to clean up abandoned homes that cannot be sold because they are now worthless. Here's a summary of the issues facing one American city:
http://tinyurl.com/2dbukmn
18 October 2010 11:35PM
Dean
good piece. Until the Federal Reserve is scrapped and replaced with a 'peoples' banking system designed to benefit the whole country not just the Wall Street elites,the decline of the US will continue. Why not confiscate the wealth of individuals above say a billion dollars, why could anyone need any more than this obscene amount. Funds raised could compensate the victims of the elites running the country. There are enough victims over there to start their own party with this policy as its main objective, they could 'wipe the floor' with any opposition, win any election and regain control of the country for the American people.
18 October 2010 11:47PM
Curing the Mortgage Mess The Take This National Mortgage Crisis Test
Here's a test. After reading this article and its second part companion, ask yourself how this plan would affect:
home values today _____current mortgage delinquencies_____most middle-class homeowners ______existing legal status of mortgages_______the foreclosure problem _______economic stimulus________the federal deficit_________the general economy_______the threat of deflation_______our monetary base ________ A certain dialogue making its way in discussions today is:"FDR's spending and programs didn't work. He didn't pull us out of the economic morass. It took WW II to get our economy back on track."?
The reality is that FDR did not go far enough. Yes, the $1 trillion deficit built up from WW II ($10 trillion in today's dollars) got our economy going. How? WW II G.I's got their pay checks 3 meals and a "bed"?, so they saved their pay. Back home, women and men hit the workforce, riveting, sewing, driving steam shovels. It was full employment with spouses working, and that $1 trillion went to the pay checks of the people. After the war, the "little people"? spent their money, bought cars and homes, and it was a "bottoms up"? not "top down"? trickle effect economic rehabilitation. It started a population swell, which are healthy stimuli for economic activity.
We again need this collective capitalism to spur this economy and heal major wounds within the context of the lives of the people.
We have the basis to do this, and more than just the basis. We are neck deep in the basis already. We are the (proud?) owners of Fannie Mae's and Freddie Mac's obligations to all the mortgage poolholders who own the Fannie Mae and Freddie Mac pass-through mortgage pools. We the people currently have 100% default (creditor) risk on virtually 100% of the residential mortgages in the U.S. (Sure, take out the sub-prime loans still remaining which are now minimal, and jumbos, and then its 95% of virtually all residential mortgages in the U.S.) By the way, we (you and I) by virtue of our government, also have guaranteed all principal and interest on the FHA and VA loans, none of which we own. Those are 100% sold into AAA+ mortgage pools also. We just have the obligation to make sure investors take no loss.
We need to first understand the position that we are in. We cannot solve anything unless we truly appreciate our current position as it exists right now. Currently, without doubt, we the people right now guarantee all the Fannie Mae, Freddie Mac, FHA , VA, and residential USDA (rural) home loans in the U.S.Thats's why all these mortgage pools (all of them, delinquent or otherwise) trade currently todayas AAA+ rated securities. The banks do not own this paper. It is not the banks who will suffer from property loss, foreclosure halts, etc. The banks are purely servicers of the loans with no ownership interest in them. That is a common fact among bankers, Wall Street, and anybody making $100,000 or more in the financial industries. Banks basically own very, very few mortgages. They act as servicers (collect payments for Fannie Mae, etc.) for most of the mortgages. The banks actually are making money as servicers from the foreclosures because it raises their servicing fees to manage the foreclosure process. This is a fee bonanza to the banks.
Almost all these mortgages have been sold in their entirety to a wide variety of investors who rely upon us, the United States of America, to make good on their investment. We, as a country, have guaranteed the performance on all these mortgages.
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