If you aren’t depressed enough by the coming collapse of social programs for Californians as the budget nightmare drags on, consider that there will soon be more need for social services and less revenue available, as we segue into the rarely-remarked upon second wave of foreclosures in the Alt-A market.
A new wave of foreclosures is building in Sonoma County, one that echoes the subprime crisis that flooded the region’s housing market with distressed properties.
The tide of troubled loans, which first struck high-risk borrowers who did not qualify for conventional mortgages, is now spreading to people with good credit who purchased more expensive homes.
This time, it involves borrowers who took out mortgages known as Alt-A loans. Like the subprime loans that began imploding in 2006, these loans offered seductively low introductory payments that enabled many borrowers to buy or refinance homes that were pricier than they could otherwise afford.
Now, those borrowers increasingly are discovering the true cost of their loans. When the introductory period ends, monthly payments can jump 50 percent or more on the typical Alt-A loan, far higher than many borrowers can afford.
There are hundreds of thousands of these loans in California just waiting to recast. In the context of Sonoma County, 18% of all housing loans are Alt-A, most of them purchased between 2004 and 2006. Two-thirds of them will see rapid jumps in their payments in the next two years.
I spoke with Asm. Ted Lieu this weekend, who didn’t even want to describe these as foreclosure waves. “It feels like they never stop.” He hopes that the latest government program to try and fix the foreclosure crisis, which can allow new mortgages to be issued at 96.5% of current value, will actually make an impact, but we’re talking about a whole new class of borrowers getting into trouble because of these rate recasts. This of course adds to the properties on the market, bringing down prices, adding to a whole new wave of tax reassessments, and on, and on, and on.
You can almost set aside the unemployment crisis, and the feedback loop of decreased government spending leading to reduced consumer spending and more unemployment. Just this continuing housing crisis is enough to permanently disable any solutions to economic recovery.
…I should note that AB260 passed the Assembly today, forward-looking legislation which would prohibit lenders from steering borrowers into bad loans, prohibit lenders from reaping financial advantages (called yield spread premiums) from that steerage, ban negative amortization loans and regulate subprime lending. The Governor vetoed similar legislation last year. This is an impressive reform, but too late. The crisis has spread into prime loans by now.
I think the general consensus on the economy from the grand poohbahs of the establishment is that we’re contracting less slowly, that we’re easing toward the bottom and will be able to improve as the year goes on. This optimism depends on no further “unforeseen” downturns in key economic sectors. But that just doesn’t seem plausible. Zillow.com’s estimates show that over 20% of all homeowners owe more on their mortgages than their homes are worth, as prices continue to decline. Considering that 24,000 homes and apartments are vacant in Sacramento, for example, up 40% year over year, the glut of supply suggests that those prices have further to fall. And thus we will not see much of a rebound in equity in the short term. Keep in mind that many of these homeowners who are underwater will experience recasts to their mortgage rates in the coming year, further straining their ability to make payments.
Now we have compelling evidence that a second foreclousre wave is starting to rumble through California once again, which could trigger the very same spiral that brought the nation’s economy to its knees last year.
Here’s another sign that California’s foreclosures could jump in 2009: Delinquencies on dues owed to homeowner associations have risen sharply.
The homeowner association delinquency rate can serve as a leading indicator of sorts because homeowners usually stop paying dues before they stop paying their mortgage. The 90-day delinquency rate on dues for the 260 homeowner associations in California managed by Merit Property Management jumped to 5.3% in March from 2.8% last June. Delinquencies first spiked to 2.6% in December 2007 from 0.8% in March 2007.
The Journal looked at how banks were beginning to ramp up foreclosures after holding off for several months. Pre-foreclosure notices in California spiked in March after a state law had suppressed foreclosures at the beginning of the year.
Pre-foreclosure notices are where this begins, and those notices rose by 80% in the first quarter of 2009 from the previous quarter. As the article notes, the moratorium on foreclosures has been lifted, which will put more pressure on homeowners. We all understand that bad loans caused this crisis in the first place, right? Well, a lot of bad loans are still out there. At particular risk are those mortgages purchased at the height of the bubble in 2005 and 2006. Loans made in 2006 have an 8.5% default rate statewide. These are the worst liar loans, NINJA loans, many of them due to recast to higher interest rates. And this includes jumbo loans.
The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, Calif., show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.
If you think this is over, particularly in California, duck.
When the Obama Administration’s plan to mitigate foreclosures came out, it was clear that it would be insufficient to deal with the particular challenges faced in California. Initially, the plan would only modify loans where the amount owed was 105% of the home’s true value. Given that home prices have collapsed here, this would have helped almost nobody in California. State lawmakers, in particular the Democratic point person on mortgages and foreclosures Asm. Ted Lieu, went to Washington to lobby for changes. And today, faced with a sluggish mortgage rescue program attracting few lenders or homeowners, the Administration expanded the plan.
The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Under the administration’s new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor […]
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home’s current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home’s value. The change would also reduce the program’s high fees, which turned off many troubled borrowers.
Loan servicers get a fair bit of cash incentives for participating in the program, which I don’t totally support, but if we have to bribe lenders in order to keep people in their homes, that makes more sense than spending the same amount of money on the fallout from a foreclosure. And lenders do take a haircut in the Hope for Homeowners program, the first loss to my knowledge that lenders have been forced to take.
Asm. Lieu responded with this release (flip it):
“I am very pleased the Obama Administration today acted on the concerns raised by states such as California and took two steps to expand refinance and foreclosure assistance to distressed homeowners.
First, the Administration announced it would incorporate the Federal Housing Administration’s (FHA) Hope for Homeowners program into the existing Making Home Affordable Program. This is significant because currently, the Making Home Affordable Program has a 105% underwater refinancing cap, which shuts out many Californian homeowners. The Hope for Homeowners program does not have that limitation; instead, the Hope for Homeowners program states that lenders will take a loss on the difference between the existing loan amount and the new refinanced loan, which is set at 96.5% of the appraised loan value.
For example, under the existing Making Home Affordable program, a homeowner whose home is valued at $100,000 but owes $120,000 on the existing loan balance would not qualify for refinancing under the program because the loan is 120% underwater. However, under the Hope for Homeowners program, the homeowner could qualify and the new refinanced loan would be $96,500. The lender would take the loss of $23,500. The Obama Administration would increase the number of lenders participating in the Hope for Homeowners program by offering financial incentives to the lenders.
Second, the Administration announced steps to address the second lien problem. Many distressed mortgages have two liens and often the second lien holder does not want to modify the loan. The Obama Administration will provide financial incentives to allow the second lien to be reduced or extinguished.
These two critical actions will expand assistance to distressed homeowners in states such as California, where many loans are more than 105% underwater or have second liens.”
This is decent news. Unfortunately, the tool that homeowners really need to stave off foreclosure, the ability for bankruptcy judges to cram down the principal of a loan on a primary residence, appears poised for what amounts to defeat in the Senate, a testament to the continued power of the nation’s biggest banks.
In order to garner the support of conservative Democrats and a few Republicans, the proposal has been watered down. The bankruptcy legislation will still allow homeowners to renegotiate mortgages in bankruptcy – the so-called cram down provision – but only under strict conditions. The banking industry has lobbied fiercely against cram down, but Durbin said on the Senate floor Monday night that the compromise was supported by Citigroup, which has been at the negotiating table.
“In the past, some of my colleagues understood the need for action but have been uncomfortable with the original language. Let me be clear: this amendment is different,” said Durbin. “The amendment I’m going to offer will make a modest change in the bankruptcy code with a lot of conditions. It won’t apply across the board. This amendment limits assistance in bankruptcy to situations where lenders are so intransigent that they are unwilling to cooperate with the foreclosure prevention efforts already underway – Obama’s homeowner assistance and stability plan and the Congressionally-created HOPE For Homeowners, which this bill will greatly improve.” […]
Meanwhile, the banking lobbyists are furiously lobbying against it and Durbin acknowledges it will be difficult to “muster the votes, although I know it will be hard.”
It is “hard to imagine that today the mortgage bankers would have clout in this chamber but they do,” said Durbin. “They have a lot of friends still here. They’re still big players on the American political scene and they have said to their friends, stay away from this legislation.”
We will be in a better position with foreclosures by the end of the week than we were at the beginning, but not where we need to be.
Late last week, Democrats temporarily shelved a bill that would allow bankruptcy judges to modify the terms of mortgages on primary residences (also known as “cram-down”). Moderates who put the hold on this legislation, particularly former Wall Street investor Ellen Tauscher, crowed about it to the media.
This hardly amounts to a breakthrough win for party moderates – or a major concession by the speaker. But it was a consequential moment in the minds of moderate leaders who often find themselves marginalized in a caucus dominated by liberals.
“It shows we have bench strength, and it shows we can flex,” said California Rep. Ellen O. Tauscher, who chairs the New Democrat Coalition and played a central role in negotiations over the bankruptcy bill […]
Moderates worry Pelosi is routinely staking very liberal positions to push House versions of big bills as far to the left as possible to enhance their standing in negotiations with the historically centrist Senate. This might be a smart tactic, but it often hurts Democrats who rely on Republican votes to win reelection. Put bluntly, it makes them look too liberal […]
That prompted lawmakers, like Tauscher, to limit the scope of the bankruptcy bill as much as possible, even though this measure is only loosely related to the president’s broader proposal.
Tauscher’s New Democrat Coalition teamed with their natural allies in the Blue Dog Coalition to impose 10 significant changes, including requirements that bankruptcy judges use federal guidelines to determine the fair market value of a home and that modified loans must be “unaffordable and not just underwater” to prevent wealthy homeowners from taking advantage of the process, according to a widely distributed e-mail from Adam Pase, executive director of the New Democrat Coalition.
This, of course, angered some liberals. “The New Dems’ position is the banks’ position,” a senior Democratic aide involved in the bankruptcy negotiations complained on Friday. “New Democrats are shills for the banks.”
It’s confounding that any New Democrat thinks their constituents give a ring-a-ding about banking industry concerns, and are not in fact the very people struggling to keep their homes that this legislation would help.
More, including Tauscher staffers lying to bloggers, on the flip…
When Chris Bowers used Tauscher as the face of the moderate backlash against working people facing foreclosure, her office responded by saying they supported the rule on the bill (HR 1106), and that their changes would “strengthen” the bill, and that they didn’t meet with anyone in the financial services industry about it. But David Waldman explains why that, simply put, is a crock – she voted for the rule because it incorporated the changes she wanted to make. And if that was the only hurdle, why didn’t the legislation get a vote last week?
Now, that amendment was approved by the Rules Committee last Wednesday night, the 25th of February, and the rule was adopted on Thursday morning, the 26th. That locked in place that the voting on the bill would include a vote on an amendment incorporating Tauscher’s list of changes.
So why, if she supports the bill, would work on it be suspended on the afternoon of Thursday, the 26th? She “supports the bill,” and voted for the rule that locked in a shot at making the changes she proposed to the Judiciary Committee, and yet here we are, waiting over the weekend for… what, exactly?
Ellen Tauscher supported the rule because it made an amendment in order that would incorporate her list of demands. That’s all. But she must clearly want more changes, because even after winning these concessions, the bill is still stalled, and the news reports on the stall have Tauscher’s name all over them.
Jane Hamsher has a lot more on Tauscher, who is clearly putting banking industry interests ahead of her constituents’. She doesn’t have to necessarily talk to anyone in the financial services industry personally, because Adam Pase, the chairman of the New Dmocrats, works out of her office:
Pase was also the senior policy adviser for Dennis Moore when Moore organized Blue Dogs to oppose mortgage write-downs on behalf of the banking industry in 2007, and he is evidently the one driving policy on this one for the New Dems. But one has to wonder — what is Tauscher thinking? Her district is one of the hardest hit by the mortgage crisis, as you can see from the map. Why is she trying to limit mortgage write-downs to subprime loans only, on behalf of banks, when every foreclosure brings down the value of all houses in a neighborhood? Her claim to care so very much about people still struggling to pay their mortgages rings hollow.
Shaun Donovan, the HUD Secretary, is headed to the House today to whip support for the bill. This legislation would save perhaps 800,000 families from foreclosure without one penny of cost to the taxpayer. All the bill would do is give leverage to homeowners who have been screwed by their lenders at practically every step of this process.
Write a letter to the editor of your local papers (just enter your zip code) saying you expect your Member of Congress to represent you, not the banks, and you’ll be watching to see if they oppose Tauscher and her bank lobbyist cronies.
Sign a petition to Nancy Pelosi telling her not to “buckle” to pressure from bank lobbyists working through greedy corporatist Members of Congress, and to act swiftly to give judges the authority they need to write down mortgages. The banks must take responsibility for their own bad judgment; taxpayers shouldn’t be expected to pick up the tab.
These same people killed efforts in 2007 to allow bankruptcy judges to write down mortgages at that time, which could have helped us from ever getting to this place. It’s time they stop pretending that they care about their constituents when they’re only being tools of the banking lobby.
I think it’s more about telling Pelosi we’ll have her back if she stands up to these cretins. You know what to do.
Democratic legislative leaders are in Washington today arguing for increased stimulus money for California. I’ve been arguing that this is required for some time, and hopefully it will be done in such a way that a) it can be applied to the General Fund deficit (so far Arnold has not asked for budget relief in that way) and b) it can be used without up-front money that will be matched, because the cash crisis limits our ability to do that.
However, there is something else that the Obama Administration can do right away to help the bottom line of the state and its citizens, and that is deal with the crisis in the housing market here. It’s no secret that California is one of the hardest-hit states by foreclosures; in Stanislaus County, for example, 9 percent of all houses and condos in the county have been foreclosed upon, a staggering figure. That’s almost $4 billion dollars worth of foreclosures in Stanislaus alone. In larger counties like San Bernardino and Riverside, you can see how this foreclosure crisis affects new housing starts (there are a glut of cheaper foreclosed homes on the market) and thusly unemployment figures.
Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California’s economic powerhouse, accounting for more than a fifth of the state’s new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit’s as the highest of any major metropolitan area in the U.S.
Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire […]
With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to almost 10%. Is it any surprise that jobless rate in the Inland Empire matches Detroit’s as the highest of any major metropolitan area in the U.S.?
Nobody is calling on the federal government to prop up a sick housing market that will not see a broad recovery for a while. But foreclosures have a disruptive effect on the greater economy. They hurt property values, they hurt banks, and they hurt employment. The crisis is only slated to grow if nothing is done, with homeowners of every income class affected. And so foreclosure aid would be a major boost to California, and it can be done both quickly and effectively. By pledging that $100 billion from the TARP program will go to limit foreclosures, Obama has already begun this effort. Ted Lieu thinks that the Obama Administration understands the nature of the problem. (over)
Time is of the essence. I commend the incoming Obama Administration for pledging up to $100 billion from the Troubled Assets Relief Program (TARP) to help distressed homeowners stay in their homes. In California, which has the highest number of foreclosures in the nation, we experience one foreclosure filing every 30 seconds to 1 minute. The TARP funds, which the U.S. Senate recently released, should be immediately put to use to rescue homeowners from foreclosure. Our economic recovery will not begin until we slow down the astronomical rate of foreclosures and stabilize the housing market.
Strategic direction is of the essence. The haphazard strategy of the Bush Administration’s use of the initial $350 billion in TARP funds resulted in the following: more foreclosures, less market confidence, and zero benefits for the ordinary citizen. How does giving yet another $20 billion to Bank of America so it can complete its purchase of Merrill Lynch’s brokerage arm help anyone on Main Street? Answer: it doesn’t. The only people this TARP money under the Bush Administration has been helping have been Wall Street firms. It is time for change and January 20th cannot come soon enough.
State efforts are of the essence. Helping our economy recover will require the combined efforts of both state and federal resources. In California, I introduced the California Foreclosure Prevention Act to provide immediate foreclosure relief. This Act imposes a foreclosure moratorium, but allows lenders to avoid the moratorium if they have a comprehensive loan modification program designed to keep people in their homes. Swift passage of this Act will complement and enhance proposed federal efforts. We need action and we need it now.”
However, more needs to be done. Earlier this month, Democratic Senators got Citigroup on board for what is known as “cramdown” legislation, which would allow bankruptcy judges to restructure mortgages that would give homeowners the ability to pay them. The lenders take a haircut but it’s a better situation for them than foreclosure, and those who get to keep their homes can continue to contribute to the economy. It’s a great idea and a major step toward reforming the hideous 2005 bankruptcy bill. Yet despite supporting it, Obama’s team doesn’t want to include this reform in the economic recovery package, which I think is a mistake.
President-elect Obama and his advisers are resisting attempts to include a provision in the economic stimulus bill backed by congressional Democrats that would allow bankruptcy judges to shrink mortgages.
In a hastily convened Democratic Caucus meeting last week, Obama economics adviser Jason Furman made it clear to lawmakers that Obama thinks the so-called “cramdown” provision would cost GOP votes and endanger bipartisan support in the Senate.
He committed to dealing with the issue after the bill passes, as did House Speaker Nancy Pelosi (D-Calif.).
Lead supporters of the cramdown provision say the time to deal with the issue is now. Rep. Jerrold Nadler (D-N.Y.) said it’s worth losing some Republican support to help homeowners.
“I would take that risk,” Nadler said. “I don’t think you’re going to get a lot of Republican votes anyway.”
This is absolutely correct by Nadler, and risking a few votes on the margins is no reason not to limit foreclosures now. There is an urgency here, because each foreclosure hurts the housing market more and makes it less liable to recover quickly. We cannot wait a few months for the sake of political expediency. Cramdown needs to happen fast, particularly for us in California.
(Assemblyman Lieu has been a leader on the foreclosure issue. Welcome him to Calitics. – promoted by David Dayen)
Albert Einstein once said that insanity is doing the same thing over and over again and expecting a different result. Wall Street and Treasury Secretary Henry Paulson have continued to ignore the home foreclosure problem, despite clear and urgent warnings from consumer groups, legislators, and regulators. Virtually none of the $8.5 trillion in federal taxpayer bailout commitments is directed towards helping reduce foreclosures. So it should come as no surprise that new data from the Mortgage Bankers Association shows that foreclosures have increased 76% compared to a year ago to hit yet another record high, with a record 1 in 10 Americans now experiencing mortgage trouble.
The problem is particularly acute in California, which accounts for one-third of the nation’s foreclosures. California alone has 54 percent of all foreclosure filings on adjustable rate loans.
Despite the massive foreclosure meltdown, Wall Street and Treasury Secretary Paulson continue to believe a top-down solution of injecting taxpayer bailout money to private Wall Street companies will somehow help our economy. How does giving hundreds of billions of dollars to large banks so that they can gobble up other smaller banks help homeowners? How does injecting AIG with $150 billion of taxpayer funds help keep distressed homeowners in their homes? The answer is those solutions do nothing to address the core problem of unmitigated foreclosures.
It is precisely the record number of home loan defaults that is causing the current credit and liquidity crisis. AIG and numerous other Wall Street institutions collapsed because of rising home loan defaults, not the other way around. It is insane to keep pouring federal taxpayer money down the Wall Street sinkhole while doing nothing to help reduce foreclosures. None of Treasury Paulson’s solutions to benefit Wall Street have helped the problem; his solutions have only made our economy worse off. We cannot keep doing the same thing expecting a different result.
It is time for Treasury Secretary Paulson to listen to Federal Reserve Chair Ben Bernanke and FDIC Chairwoman Sheila Bair, both of whom are calling for loan modifications to keep people in their homes. Bernanke and Bair have been far more prescient, insightful, and rational than Paulson has been. Until we change our policies, home foreclosures will continue to rise, Wall Street firms will continue to collapse, and our economy will continue to suffer.
Wall Street banks should also be ashamed of themselves for not only opposing past attempts to reform the mortgage market, but also current attempts to help alleviate the foreclosure crisis. The California Foreclosure Prevention Act sets a 90 day foreclosure moratorium unless the lender has a comprehensive loan modification program designed to keep people in their homes. Wall Street should not only stop opposing this bill, they should embrace it because this is one of the solutions that might actually keep them from going out of business.
Ted W. Lieu is Chair of the Assembly Rules Committee and author of the California Foreclosure Prevention Act
• Arnold has hired his chiropractor, his dentist and now his nanny to various state boards. Good thing this guy is nothing like George Bush or we would expect these people to be unqualified!
• The Supreme Court has now stepped into the battle between the Navy and environmentalists, ruling that the Navy can engage in sonar exercises off the California coast that may endanger dolphins, whales and sea lions. Why courts are arbitrating this case instead of the science is one of the neat little quirks of our system. But sure, why should the Navy be inconvenienced by moving a few miles off the coast? Not in the public interest, you see.
• Mountain House, California, particularly Prosperity Street in Mountain House, offers a cautionary tale about how screwed the housing market is:
This town, 59 feet above sea level, is the most underwater community in America.
This week, a real estate office in Tracy, Calif., near Mountain House, was advertising foreclosure sales.
Because of plunging home values, almost 90 percent of homeowners here owe more on their mortgages than their houses are worth, according to figures released Monday. That is the highest percentage in the country. The average homeowner in Mountain House is “underwater,” as it is known, by $122,000.
That is really worse than anyone’s projections. This is going to be a brutal downturn, and the recently upgraded homeowner relief looks to be insufficient.
• DiFi, who may be made chair of the Senate Intelligence Committee, is striking hard at the most important, festering problem at the soul of our society today – scalped tickets for the inauguration. But I’m sure that if we were committing torture or illegally wiretapping on Americans or indefinitely detaining prisoners without charges, she’d be all over that, too.
• Gary Miller has been caught with some pretty shady campaign practices again. Well, I take that back, this goes beyond shady:
apparently Congressman Miller paid his “bigger development construction company” a series of 5 payments which equaled $47,360. All this came from his re-election campaign, and when this is taken into perspective, it amounts to his largest campaign expenditure, 22% of the $218,368 that he raised.(LiberalOC)
• Dan Weintraub, hero of High Broderism. I love this line: “Will (redistricting) change the world? No.” The better question is “Will it change anything?” I love how these guys never look at the actual registration statistics, with all these seats that have changed between 6-8% in party affiliation, when they intone that legislators pick their voters. Do they pick who changes their registration, who dies and who moves, too?
• Finally, CREDO Mobile is trying to whip legislators to remove John Dingell from the chair of the House Energy Committee and replace him with Henry Waxman. Which is great, and they personalize the message so that each person receiving their email gets the name of their Congressman on it. Only, my Congressman is Henry Waxman. And so my message said “Will you tell Henry Waxman to vote for Henry Waxman for Energy Committee chair?”
Over the weekend, Assembly Democrats were very firm in their desire to see significant mortgage reform as part of any special session in the Legislature in November. This is a crisis for the state that has a large impact on the greater economy. At a recent speech I attended, Bill Clinton estimated that each foreclosure costs the economy $250,000 in lowered property values, maintenance and opportunity costs. So demanding real mortgage reform is keenly sought. The Assembly has been screaming for this since September 2007, and the unholy alliance between the governor and mortgage banking interests has squashed any real reform. And in the meantime, foreclosures have skyrocketed in the state. One in three homes experiencing foreclosure in August was in California, affecting over 101,000 homes (or one every thirty seconds). The news got better in September, but only because of the one meager law that the governor allowed to get through, which included a 30-day waiting period where banks must contact the borrower in question before introducing foreclosure filings. That’s a stopgap measure, and if nothing further is done, October and November will show a spike.
We understand you are considering calling a special session to address the state budget. Four billion dollars of last year’s budget deficit is attributable to the foreclosure crisis and billions more will be lost this year if nothing is done to address the crisis. The special session would be an appropriate time to address California’s mortgage system.
Stabilizing the mortgage mess doesn’t just make economic sense, it’s a moral imperative. Unless you want Arnoldville tent cities popping up throughout the state, something must be done and as soon as possible. And while this is best determined at the federal level, we have the ability to go to great lengths to fix this, as other states like North Carolina and New York have done.
Arnold vetoed AB 1830 and consigned homeowners to a pretty cruel fate. He needs to be pinned with that failure and pressured to change course. I’m glad that Democrats in the Assembly are making it a priority.
This past week, Naomi Klein bravely stepped into the lion’s den this week and addressed the University of Chicago, protesting their bid to name an economic research center after Milton Friedman. It was a bravura speech where she made the argument that the current financial crisis is the final repudiation of Friedman’s twisted theories of unregulated capitalism.
More than that, what we are seeing with the crash on Wall Street, I believe, should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology. It cannot simply be written off as corruption or greed, because what we have been living, since Reagan, is a policy of liberating the forces of greed to discard the idea of the government as regulator, of protecting citizens and consumers from the detrimental impact of greed, ideas that, of course, gained great currency after the market crash of 1929, but that really what we have been living is a liberation movement, indeed the most successful liberation movement of our time, which is the movement by capital to liberate itself from all constraints on its accumulation.
So, as we say that this ideology is failing, I beg to differ. I actually believe it has been enormously successful, enormously successful, just not on the terms that we learn about in University of Chicago textbooks, that I don’t think the project actually has been the development of the world and the elimination of poverty. I think this has been a class war waged by the rich against the poor, and I think that they won. And I think the poor are fighting back. This should be an indictment of an ideology. Ideas have consequences.
Now, people are enormously loyal to Milton Friedman, for a variety of reasons and from a variety of sectors. You know, in my cynical moments, I say Milton Friedman had a knack for thinking profitable thoughts. He did. His thoughts were enormously profitable. And he was rewarded. His work was rewarded. I don’t mean personally greedy. I mean that his work was supported at the university, at think tanks, in the production of a ten-part documentary series called Freedom to Choose, sponsored by FedEx and Pepsi; that the corporate world has been good to Milton Friedman, because his ideas were good for them.
But he also was clearly a tremendously inspiring teacher, and he had a gift, like all great teachers do, to help his students fall in love with the material. But he also had a gift that many ideologues have, many staunch ideologues have-and I would even use the word “fundamentalists” have-which is the ability to help people fall in love with a perfect imagined system, a system that seems perfect, utopian, in the classroom, in the basement workshop, when all the numbers work out. And he was, of course, a brilliant mathematician, which made that all the more seductive, which made those models all the more seductive, this perfect, elegant, all-encompassing system, the dream of the perfect utopian market.
Klein mentions the Free To Choose series, and later on she highlights something I forgot – the man who introduced one of those series on PBS:
“Being free to choose means being free to make your own decisions. Free to live your own life, pursue your own goals, chase your own rainbow without the government breathing down your neck or standing on your shoes. For me it meant coming to America, because I came from a socialistic country where the government controls the economy.”
That was Arnold Schwarzenegger in 1990, spouting free market fundamentalism in a corporate-sponsored documentary which mainstreamed ideas that today have brought us to the brink of economic failure. It’s important to know what altar at which Schwarzenegger worships. It’s important to know how he was, for a long time, the glitzy front man for Friedmanism, the showy snake oil salesman that got Joe Six-Pack to think that corporate behemoths eliminating rules for themselves was in the best interests of the common man. If Friedman was P.T. Barnum, then Arnold was the star attraction in the center ring of the circus. And he clearly believes, or at least is willing to front, that these ideas, about “free enterprise and free people,” are immutable, hard science, incapable of being wrong.
Except we are now at a moment when, as governor, Schwarzenegger is bearing the brunt of the worst effects of unbridled capitalism. His state is caught up in the credit market freeze, with no money to pay the bills. He is begging the state’s citizens to buy bonds and bail the government out, an approach taken so clumsily that he got Wall Street shaken at the precise time when he has to go into the market to borrow money. The state’s public infrastructure is crumbling on his watch and even that won’t be enough to make up the revenue shortfall.
A lot of people would let Schwarzenegger off the hook for this. The national economy went bad, and the financial markets failed as a result of the housing bubble bursting, and surely the governor of California can’t be held responsible for that. Except he is such a devotee of Friedmanism, and in fact one of its key pitchmen, that of course he is guilty. Guilty of the same faith in capitalists not to be driven by greed. Guilty of stripping regulation and empowering corporate America to live in a tax-free and restraint-free bubble. And as the current cesspool of deregulation, where market forces run wild and greed becomes virtue, gets a reckoning due to the carnage it has caused, so too must the man who introduced Free To Choose all those years ago. He was wrong then, and he’s doubly wrong now. To quote Naomi Klein:
Ideas have consequences. And when you leave the safety of academia and start actually issuing policy prescriptions, which was Milton Friedman’s other life-he wasn’t just an academic. He was a popular writer. He met with world leaders around the world-China, Chile, everywhere, the United States. His memoirs are a “who’s who.” So, when you leave that safety and you start issuing policy prescriptions, when you start advising heads of state, you no longer have the luxury of only being judged on how you think your ideas will affect the world. You begin having to contend with how they actually affect the world, even when that reality contradicts all of your utopian theories. So, to quote Friedman’s great intellectual nemesis, John Kenneth Galbraith, “Milton Friedman’s misfortune is that his policies have been tried.”
It’s the ideological blinders that caused this crisis that must be taken off if we’re ever going to get out. Schwarzenegger is somehow seen as the “good cop” Republican in the mix of California, wanting ever so to do the right thing. But the one area of jurisdiction, the one part of this crisis where the California governor could have had a hand in stopping the bleeding, when he could have imposed regulations to help stop predatory lending and rein in the runaway mortgage market in one of the biggest bubble states in the country, Arnold not only decided to do nothing then, but has continued to do so. Laissez-faire remains his core philosophy, the failed philosophy of conservative economics.
I guess the banks and the lenders need to be free to choose.
It would be irresponsible for state Democrats not to remind the public that the pain and anxiety they are seeing today is a cause of the insane embrace of Friedmanism, and that the man at least in large part responsible is the muscle-bound Governator who was willing to put a smiley face on the shock doctrine.
Yesterday, Bank of America announced that they would settle their lawsuit with a parade of states Attorneys General that began before BofA bought out the defendant, Countrywide Financial. The initial suit alleged that Countrywide engaged “in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.” At the time I thought it would be difficult to hold Countrywide responsible for what the mortgage market is intended to do, but I suppose they didn’t want to face a jury at a time when the financial industry is melting down.
This settlement, which could provide up to $8.68 billion dollars for as many as 400,000 homeowners nationwide (and up to $3.5 billion in California), has some very laudable parts to it:
Under the terms of the settlement, eligible subprime and pay-option mortgage borrowers with loans from Countrywide will be able to avoid foreclosure by obtaining modified and affordable loans. Here is the information released by Brown’s office:
The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America’s foreclosure crisis. Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers as follows:
• Suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications;
• Loan modifications valued at up to $3.4 billion worth of reduced interest payments and, for certain borrowers, reduction of their principal balances;
• Waiver of late fees of up to $33.6 million;
• Waiver of prepayment penalties of up to $25.6 million for borrowers who receive modifications, pay off, or refinance their loans;
• $27.9 million in payments to borrowers who are 120 or more days delinquent or whose homes have already been foreclosed; and
• Approximately $25.2 million in additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure.
This is exactly what should have been in the bailout bill – a large-scale workout for homeowners on the brink of foreclosure to modify their loans and stay in their homes. It’s arguably costlier to the bank at this point for the mortgages to go completely bust and to deal with the foreclosure. In addition, BofA is SUSPENDING subprime loans and negative amortization loans as well as loans with little or no documentation from the borrower, which is in a way more significant because that’s at the root of the financial crisis.
These are also the kind of steps that Ted Lieu sought in his AB 1830 which was vetoed by the Governor – banning predatory lending and unsustainable mortgage loans. Ultimately, Attorney General Brown was forced to seek remedy in the courts because the regulatory structure had broken down and the Congress was unable or, more likely, unwilling to give struggling homeowners a hand.
This shouldn’t be Jerry Brown’s job, but the systemic failure fell to him, and he performed brilliantly. And he’s not done:
And this is not the end of this chapter. The settlement does not include Angelo Mozilo, the former Chairman and Chief Executive of Countrywide Financial Corporation or David Sambol, formerly the President of Countrywide Home Loans and the President and Chief Operating Officer of Countrywide Financial Corporation. Brown will continue to prosecute separately his case against Mozilo and Sambol.
Lawmakers like Dianne Feinstein and others should be a little ashamed that they were able to do so little in the wake of this crisis while Jerry Brown did so much more.
