Why Is the White House Against Freezing Foreclosures in the Face of Rampant Fraud?
At first, there was a deafening silence from Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke on the foreclosure front. It was as if they: 1) didn’t read the news; or 2) were afraid someone would notice afresh their incompetence in dealing with the ongoing housing crisis and deteriorating economy, while convincing everyone that the bank bailouts and subsidizations were good for us.
Last week, while Senator Harry Reid, House Speaker Nancy Pelosi and others in Congress were dispensing irate pre-election sound-bites, attorneys general across the country were gearing up for investigations. Banks were reluctantly announcing foreclosure moratoriums because it’s quarterly earnings season and uncertainty is bad for stock prices, and Geithner was defending TARP and mixing it up with China over the dollar. Meanwhile, the Fed was gearing up to buy more Treasuries, like some kind of rapacious alien that eats its progeny, because no one else wants our debt.
But that changed when Geithner came out of hiding yesterday with a stance. (Bernanke is still in hiding, but will support Geithner’s view soon.) Unsurprisingly, Geithner chose to side with the likes of conservatives and CNBC. Thus, his response to Charlie Rose when asked whether he supported banks in declaring a foreclosure moratorium was: “No, I wouldn’t say it that way.”
Why? Geithner’s logic follows the typical blame-the-little-guy-for-taking-on-too-much-debt-to-buy-a-house-he-couldn’t-afford pattern, coupled with old-style fear-mongering: if you wait and analyze what’s really going on, it might be bad for the housing recovery. And, what housing recovery is that? The one in which 25-30 percent of homes being sold are REOs (bank owned real-estate, a.k.a. foreclosed properties). On a trading floor, that’d be considered "churning," not new value.
The free-market, let the banks do what they do mentality was what allowed them to create a $14 trillion mountain of securities backed by precarious mortgages to begin with. Don’t look at what they’re doing, that might hurt the boom. Don’t ask them for anything in return for bailouts -- that might clog the system. Don’t stop them from churning foreclosed properties -- that might stop the recovery.
But the real reason for Geithner’s reluctance about a foreclosure moratorium is that he’s scared stiff about those securities – because even if he won’t admit it, he knows that the bailout wasn’t just about TARP and Bernanke isn’t just an economic savior.
The government owns or is backing trillions of dollars worth of assets predicated on the same or similar suspicious loans that defaulted during the 2008 crisis period, which they did nothing to stop (or force banks to restructure).
Instead, the Fed now owns nearly $1.5 trillion of toxic assets that have no bid (meaning no one but the Fed wants them). They would have less of a bid if there was even more uncertainty about the loans that fill them. The Treasury is directly backing $400 billion of government-sponsored entity (GSE) securities, and is indirectly backing another $6.8 trillion. If foreclosed homes couldn’t be sold because of fraudulent paperwork or had to wait for more detailed inspections, you can imagine how difficult selling assets stuffed with faulty loans might be. If it’s tough to find a title for a foreclosed home, think how tough it is to back the related loan out of a pyramid of securities sitting on top of it.
See, the loan that might be analyzed in a foreclosure situation could be part of a chain connecting the underlying home to 20 or 50 different securitized assets, all depending on it for either the interest payments the loan was supposed to provide, or the value of the foreclosure property if those payments stopped (in Wall Street speak, the "recovery value"). If a foreclosed property isn’t selling, it’s not recovering any money back to any asset waiting for it. Think what that can do to the value of toxic assets living at the Fed and the Treasury Department. Kill it.
The reason TARP and all the other subsidies happened was that Hank Paulson, Ben Bernanke, Tim Geithner (the pillage gang) and the most powerful Wall Street CEOs were scared. Banks had stopped trusting each other (no one cared about the person who couldn’t pay their mortgage, or had their home taken, whatever the reason). When there is no confidence in the market, there is no bid for securities, no matter what the reason.
The banks couldn’t pay for all their leverage and they were facing bankruptcy if the system remained seized up. So the gang paid to keep the securitization market going, by finding a home or back-up home for the assets. They did not propose any remotely effective plan to help individuals at the loan level (a far cheaper solution, as I outlined in It Takes a Pillage). They merely enabled the worst practices and excesses to keep going in the name of saving the country from a greater depression, by shifting them to Washington and providing the illusion of demand for them.
Foreclosure fraud is not new. Many sane people and organizations have been talking about fraud for years -- you don’t manufacture $14 trillion worth of mortgage-backed securities and all their permutations and mega leverage out of $1.4 trillion worth of subprime loans in five years without cutting a lot of corners. Banks knew that. But when the value of their assets plummeted, unlike individual borrowers, they got to dump them on the Fed and the Treasury department, while receiving cash injections and guarantees, and cheap money subsidies in return.
Geithner’s stance is a sad reminder of how much things have resumed to business as usual. Back while he was campaigning for votes, President Barack Obama advocated a foreclosure moratorium, as did Senator John McCain. That notion of halting the ejection of people from their homes seems so – election 2008. When he first won the presidency, Obama continued to advocate for a 90-day moratorium. But, that’s when things were still bad for the banks and the markets. That was before profits, and bonuses and stock prices came chugging back, along with bank power.
The Bank of America didn’t quiver in its federally subsidized boots because Harry Reid asked (not even demanded, because really, he can’t), for a moratorium on foreclosures last week. It capitulated because it owns a bunch of REO properties it wants to dump (and lawsuits are generally time-consuming and messy). It’s not alone. JPM Chase’s REO portfolio last quarter was double in size vs. its earlier quarter and nearly 30 times what it was last year. Wells Fargo’s REO portfolio also nearly doubled, and Citigroup’s REO pool last quarter was up 81 percent over the prior year. The GSEs, Fannie Mae and Freddie Mac are sitting on a record number of REOs on their books they haven’t been able to sell.
Selling REOs to hedge, private equity and asset management funds in bulk is the hot new business. (Small now, but so were CDOs when I first warned about them in my 2004 book, Other People's Money.) Banks aren’t being nice to those deadbeat borrowers who were too dumb to foresee a housing and financial market collapse due to the overzealous fee-seeking attitudes of securitizing and trading banks. No, having gotten a multi-trillion dollar federal life raft, the big banks are prudently trying to salvage a growing business.
Meanwhile, Geithner and Bernanke are helping them, desperately trying to maintain the illusion of recovery and the narrative that their previous efforts worked, amidst the stockpile of crap they own and the slew of ongoing loan-level problems they will steadfastly do nothing to address.