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    The Power Of The President

    By Michael Maiello on Fri, 09/24/2010 - 8:45am |

    In this week's "New Yorker" former Vice President Walter Mondale, who has a book out, draws comparisons between Obama and Carter (ultimately concluding that Obama has many political strengths Carter lacked) and says something interesting (paraphrase): "When people lose their jobs or can't keep their house they become irrational.  They lash out. They expect the president to do something." The whole, short article is here.

    This argument about the limits of the president's power and capabilities is pretty common.  The president isn't a wizard.  An American president is just one part of a purposefully dysfunctional government.  There are limits.  Sure.

    But Obama has a lot more power to do something foreclosures (not necessarily jobs) than he's chosen to use.  The U.S. government is the majority shareholder of Fannie Mae, Freddie Mac and Ally Financial (formerly GMAC).  These three companies are involved, in one way or another, in a vast amount of current foreclosures.  The public's control of these companies could, in effect, bring almost all foreclosures to a screaming halt and force lenders to renegotiate principal amounts or risk everything.  Heck, in cases where one of these companies is the lender, loan holder or servicer, they could even offer principal writedowns.  The attitude can be "What can we do to make your home affordable for you?"

    Who would suffer?  Some hedge funds.  Some creditors to these companies.  Entities who basically made investments and should, by definition, have capital at risk.

    Why hasn't this been done?  I can only suspect that in our very unforgiving economic culture, that voters who are current on their mortgages and debt payments will cry foul.  We have somehow failed to communicate to the public that borrowers and lenders have equal moral standing. 

    Weak banks will complain about revaluing their mortgage securities at realistic levels (though the move would cause the short-term pain it would actually give the a shot at generating long-term asset growth, though). 

    Strong banks and hedge funds will complain the most though.  When homes go into foreclosure, these guys get pennies on the dollar.  You'd think that would make them want to negotiate, but it doesn't.  Strong banks would rather take the loss now and move on than start over with a borrower.

    But the President can act over all of these complaints.  He certainly has the power.  That makes Mondale's statement about the irrationality of people who have suffered losses and want the president to do something about it wrong.  In this case, the president has the power and no government entity could stop them.  Some loan holders might sue but Obama could get around that by having Fannie and Freddie buy loans at a discount in the open market and then negotiate the principal down.  Heck, Fannie and Freddie could even break even on some of those transactions.  If they buy a loan for 60 cents on the dollar they could writedown the principal 40% and experience no loss.

    By the way, I checked this assetion with a Federal Reserve Board economist and he admits to me that it's absolutely true that the Fed could step in, with an unlimited checkbook, buy these mortgages and write them down as I've described.  It doesn't want to, but it could.

    We're not in the throes of a problem that nobody can do anything about.  It's just that solution is unprecedented and novel and it would face political but not structural opposition.  Because of that, good people suffer ewven though we have an answer.

     

     

    Comments

    There was a segment on NPR yesterday morning about GMAC not only increasing its number of foreclosures but explaining one despicable reason why. To wit: so few people within GMAC are assigned to review individual mortgage files that "robotsigners" are now rubber-stamping implementation of foreclosure proceedings because they "do not have time to review files that can contain up to 100 documents." One robotsigner was quoted; according to him, he is "signing from 8000-10,000 foreclosure proceedings PER MONTH -- what else can I do? I don't have time to review 50 plus documents per file before making a decision..."

    The result, and the point of the NPR segment, is the fact that not only legitimate foreclosures, but also QUESTIONABLE and PRECIPITOUS foreclosure proceedings are being approved, hour after hour, day after day.

    Has the government begun aping corporate policy by laying off vast numbers of personnel who do the actual work? However tedious? 


    by wws on Fri, 09/24/2010 - 9:19am

    Yeah, I wasn't going to even get into that but a lot of these foreclosures are missing crucial documents like... the loan agreement, which nobody can find and which nobody has claimed ownership of.  But there are judges out there who are saying "look, these documents are basically all the same anyway so each one doesn't have to be read."  And it's our government that owns the controlling stakes in these companies that's allowing this.  We're foreclosing on loans that nobody can prove ownership of!

    Maybe out of work white collar Americans with experience could be employed to clean up the entire mortgage and consumer debt situation by tracking, identifying, and verifying the claim of every lender because I think there are lenders out there claiming and collecting on debts that they really have no ownership of.


    by Michael Maiello on Fri, 09/24/2010 - 9:36am

    The problem is that not all foreclosures are created equal.  The President can't just put out a blanket directive to stop all foreclosures and renegotiate them.  Forcing the lenders to renegotiate a mortage on someone's second home or the family who bought a McMansion when a 14-year old could have told them they can't afford it is political suicide at the very least.

    What is needed are the parameters by which someone can legitimately seek government intervention on their behalf,  Then we can have a targetted messaging campaign at the WH and others in DC to make it a reality. 


    by Elusive Trope on Fri, 09/24/2010 - 9:34am

    Just restrict it to primary residences and leave it at that.  I'm not so concerned about people keeping their McMansions and I'll tell you why -- the lender knew, when it made the loan, was asset was securing the loan.  The lender also had all the appraisers, experts and analysts it could want to judge whether or not that asset was overvalued at the time of purchase or would keep its value over time.  So while you say "a 14 year old could have told you," I'll go with, "the banks knew or should have known they were lending against an asset with inflated value" and thus the bank, not the borrower, should take the writedown.

    The issue isn't how big or small the house is, it's about who should take the hit.  I say let the financial professionals take the hit.  It was up to them to say "we won't loan you the money because the house isn't worth that and don't even bother seeking another lender because you'll wind up losing your shirt."


    by Michael Maiello on Fri, 09/24/2010 - 9:41am

    Personally I agree with you, but the issue is, especially with impending election, how do counter the media optics of the big bad socialist government intervening and telling the lenders that they have to be the ones to take the hit when the public in their superficial loyalty to the free market economy watch the image of the McMansion fill their tv screen.  Sometimes it's hard to think one has to develop some intense communications plan for what seems to be a no-brainer.


    by Elusive Trope on Fri, 09/24/2010 - 10:42am

    This is where I don't have an answer.  Obviously it will be all over the news:  "These two stock brokers who should have known better got to keep their 4 bedroom palace and are going jet skiing this weekend!"

    I don't know how we tell the other, more common stories about families who get to keep their houses, stay together, send their kids to college, etc.  The story about the neighborhood that wasn't blighted will be tough to tell visually.


    by Michael Maiello on Fri, 09/24/2010 - 11:02am

    The problem is that not all foreclosures are created equal. The President can't just put out a blanket directive to stop all foreclosures and renegotiate them.

    Yes he can.

    Forcing the lenders to renegotiate a mortage on someone's second home or the family who bought a McMansion when a 14-year old could have told them they can't afford it is political suicide at the very least.

    The "problem" is just this kind of thinking in this country!

    How 'bout we talk instead about ILLEGAL PREDATORY LENDING, particularly to women and minorities? 'K? Can we talk about the legal part of this issue instead of a nonproblem? Anybody? Hello? Ever hear of fraud?


    by Anonymous (not verified) on Fri, 09/24/2010 - 10:43am

    Of course technically he can.  When I said he can't, I meant he can't without having political blowback that would undermine the overall agenda, which is what I meant by "political suicide" in the second sentence.  This is the part that is being ignored. by many of those who yelling for the president to just do it for everyone.  Just in the cicle of liberals I've talked to here in Indiana, the majority of them don't support this kind of blanket bail out and would see such a move as being fiscally irresponsible, punishing those who had dealt with their financial obligations and rewarding those individuals who had acted irresponsible.  Regardless of where the truth lies in such a viewpoint, the fact is that it is out there and there are consequences for ignoring.

    And while some illegal activity took place, from what I have seen, and I haven't fully done a in-depth investigation, what most of the lenders did was highly unethical and immoral, but stayed on this side of the law.  Just like so many in the derrivatives market and other unethical and immoral Wall Street practices.

    But if you have a link to other information that would counter that, I am willing to read it.

    In the end both the lenders and the borrowers are responsible for what happened.  In some cases the issue is the down economy, that is the individual bought a home within their means given the job that they had at the time, but then due to the economy, lost that job.  Or there are cases where the medical insurance company used some loophole to deny coverage and the medical bills put the family or individual into such a financial hole that they faced foreclosure.

    The kind of thinking that is the problem is to try to tie the problem to one single "bad guy."  There are too many different scenarios, where who is to blame or should be held responsible shifts from one to the other to all concerned to forces out of everybody's control.

     


    by Elusive Trope on Fri, 09/24/2010 - 11:14am

    I  wondered why the Home Owners Loan Corporation (HOLC) has not been reactivated as part of a federal stimulus but eventually concluded that the people in government now could not pull it off due to mass cognitive capture by both Wall and Main Streets.

    Anyway, thought the following FRB study (pdf) would be on topic:

    The Federal Response to Home Mortgage Distress: Lessons from the Great Depression by David C. Wheelock from the St. Louis Federal Reserve Bank REVIEW, May-June 2008 

    Note its date. It may have been updated.  I didn't look.


    by EmmaZahn on Fri, 09/24/2010 - 12:01pm

    I've read this thread with interest (no pun intended) though with a Munch scream rising in my throat.

    I realize the subject is intended to cover what has happened in the mortgage market throughout the country. Yet. Not one of you has addressed, or even imagined that segment of those who were foreclosed, or who are currently being foreclosed who were put in that situation, not by having eyes bigger than their pursestrings, nor by signing up for ARMs, nor even by unemployment. 

    I'm talking about t the hundreds of thousands of people on the Gulf coast, from 2004 to the present. People who were responsible to their banks for paying their mortgages -- and did pay them -- when Hurricanes Ivan (2004) and Katrina (2005) gutted those houses, so that their houses were no longer inhabitable ..... but the mortgage payments were due, no matter what? Homeowners who were required to pay DOUBLE LIVING EXPENSES for over a year and a half -- because the insurance companies (all of them) delayed and delayed paying out on fully-paid policies .... because they could.

    These are the people who somehow paid their bills -- using up all their savings, perhaps making up the shortfall, thereafter, with credit cards and/or emergency loans -- but who paid their mortgages, if you'll pardon the pun, come hell or high water ..... only to find, after the fact, that the general crash of housing values put them upside down in a market in which resale was a dream due to the vast number of properties for sale ..... but who persevered, anyway ...... only to face .....this year, the BP OIL SPILL and its final, irretrievable negative impact on housing values all along the Gulf coast.

    Are there people in America who bought houses unwisely? Of course. Are there others who fell for ARMS when they should have insisted on fixed rates? Yes. But the percentage of those people is very small compared to those who, as a matter of timing, bought too late in the bubble, or who lost their jobs, or who, like people on the Gulf coast, who have faced A PERFECT STORM of natural disaster, economic downturn, devaluation of property, insurance malfeasance and corporate arrogance.

    When I hear some of you talking with condescension about help for people in foreclosure being equivalent to enabling childish behavior, then I wonder who the children really are.

     


    by wws on Fri, 09/24/2010 - 7:36pm

    A thoughtful, informative, nuanced discussion. Why dagblog rocks.


    by acanuck on Sat, 09/25/2010 - 3:57am

    And polite. I forgot polite.


    by acanuck on Sat, 09/25/2010 - 3:57am

    We're getting a taste of this foreclosure problem in our family. My son and his wife bought a home at a time they were both working, and although it was a bit of a stretch for them, it wasn't a huge one. We thought we were close to the bottom of the housing market and supported their decision to buy. They put 10% down and documented their income. Theirs was not one of those no-money-down-no-job purchases.

    They had a baby, then decided he would quit his fairly low-paying job and finish up his degree. Using his GI Bill, he was able to keep up with his payments. He graduated, and now cannot find a job. They put the house up for sale and had just a few people look at it.

    They absolutely qualify for the program to adjust their mortgage. They owe more on it than they can sell it for, and are stuck. They don't let you file if you have more than 3 months expenses in the bank, so as soon as they reached that point, they applied, being told it would be 30-45 days to get the paper work done. B of A dragged their feet, calling them regularly to say this piece of paper or that was missing (completely untrue.) When they called to see what was happening, they were told "we're really busy, but it's under review." Once they hit the 2 month mark, they let B of A know they would no longer be able to make their payments. The 1st day they were late, they began getting calls (sometimes as many as 5 a day) from B of A wanting to know where their money was (interesting that they have plenty of people to call looking for their money, but not enough to deal with all the requests for modifications.)

    They are now 6 months into the process, and crickets (except for the daily calls for money.) They are prepared to walk away from the house, but are still hoping B of A will work with them. In normal times, he would have been able to find a job, or sell the house, but this double whammy has them in a fix. It is an extremely frustrating situation, and one that is being lived out by a whole bunch of people.

    Fortunately, they still have an income, and family support that will keep them from being homeless, but not everyone does.


    by stillidealistic on Sun, 09/26/2010 - 11:22pm