Treasury Makes Shocking Admission: Program for Struggling Homeowners Just a Ploy to Enrich Big Banks

The Treasury Dept.'s mortgage relief program isn't just failing, it's actively funneling money from homeowners to bankers, and Treasury likes it that way.
August 25, 2010

The Treasury Department's plan to help struggling homeowners has been failing miserably for months. The program is poorly designed, has been poorly implemented and only a tiny percentage of borrowers eligible for help have actually received any meaningful assistance. The initiative lowers monthly payments for borrowers, but fails to reduce their overall debt burden, often increasing that burden, funneling money to banks that borrowers could have saved by simply renting a different home. But according to recent startling admissions from top Treasury officials, the mortgage plan was actually not really about helping borrowers at all. Instead, it was simply one element of a broader effort to pump money into big banks and shield them from losses on bad loans. That's right: Treasury openly admitted that its only serious program purporting to help ordinary citizens was actually a cynical move to help Wall Street megabanks.

Treasury Secretary Timothy Geithner has long made it clear his financial repair plan was based on allowing large banks to "earn" their way back to health. By creating conditions where banks could make easy profits, Getithner and top officials at the Federal Reserve hoped to limit the amount of money taxpayers would have to directly inject into the banks. This was never the best strategy for fixing the financial sector, but it wasn't outright predation, either. But now the Treasury Department is making explicit that it was -- and remains -- willing to let those so-called "earnings" come directly at the expense of people hit hardest by the recession: struggling borrowers trying to stay in their homes.

This account comes secondhand from a cadre of bloggers who were invited to speak on "deep background" with a handful of Treasury officials --- meaning that bloggers would get to speak frankly with top-level folks, but not quote them directly, or attribute views to specific people. But the accounts are all generally distressing, particularly this one from economics whiz Steve Waldman:

The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock. I believe these policymakers conflate, in full sincerity, incumbent financial institutions with "the system," "the economy," and "ordinary Americans."

Mike Konczal confirms Waldman's observation, and Felix Salmon also says the program has done little more than delay foreclosures, as does Shahien Nasiripour.

Here's how Geithner's Home Affordability Modification Program (HAMP) works, or rather, doesn't work. Troubled borrowers can apply to their banks for relief on monthly mortgage payments. Banks who agree to participate in HAMP also agree to do a bunch of things to reduce the monthly payments for borrowers, from lowering interest rates to extending the term of the loan. This is good for the bank, because they get to keep accepting payments from borrowers without taking a big loss on the loan.

But the deal is not so good for homeowners. Banks don't actually have to reduce how much borrowers actually owe them-- ;only how much they have to pay out every month. For borrowers who owe tens of thousands of dollars more than their home is worth, the deal just means that they'll be pissing away their money to the bank more slowly than they were before. If a homeowner spends $3,000 a month on her mortgage, HAMP might help her get that payment down to $2,500. But if she still owes $50,000 more than her house is worth, the plan hasn't actually helped her. Even if the borrower gets through HAMP's three-month trial period, the plan has done nothing but convince her to funnel another $7,500 to a bank that doesn't deserve it.

Most borrowers go into the program expecting real relief. After the trial period, most realize that it doesn't actually help them, and end up walking away from the mortgage anyway. These borrowers would have been much better off simply finding a new place to rent without going through the HAMP rigamarole. This example is a good case, one where the bank doesn't jack up the borrower's long-term debt burden in exchange for lowering monthly payments.

But the benefit to banks goes much deeper. On any given mortgage, it's almost always in a bank's best interest to cut a deal with borrowers. Losses from foreclosure are very high, and if a bank agrees to reduce a borrower's debt burden, it will take an upfront hit, but one much lower than what it would ultimately take from foreclosure.

That logic changes dramatically when millions of loans are defaulting at once. Under those circumstances, bank balance sheets are so fragile they literally cannot afford to absorb lots of losses all at once. But if those foreclosures unravel slowly, over time, the bank can still stay afloat, even if it has to bear greater costs further down the line. As former Deutsche Bank executive Raj Date told me all the way back in July 2009:

If management is only seeking to maximize value for their existing shareholders, it's possible that maybe they're doing the right thing. If you're able to let things bleed out slowly over time but still generate some earnings, if it bleeds slow enough, it doesn't matter how long it takes, because you never have to issue more stock and dilute your shareholders. You could make an argument from the point of view of any bank management team that not taking a day-one hit is actually a smart idea.

Date, it should be emphasized, does not condone this strategy. He now heads the Cambridge Winter Center for Financial Institutions Policy, and is a staunch advocate of financial reform.

If, say, Wells Fargo had taken a $20 billion hit on its mortgage book in February 2009, it very well could have failed. But losing a few billion dollars here and there over the course of three or four years means that Wells Fargo can stay in business and keep paying out bonuses, even if it ultimately sees losses of $25 or $30 billion on its bad loans.

So HAMP is doing a great job if all you care about is the solvency of Wall Street banks. But if borrowers know from the get-go they're not going to get a decent deal, they have no incentive to keep paying their mortgage. Instead of tapping out their savings and hitting up relatives for help with monthly payments, borrowers could have saved their money, walked away from the mortgage and found more sensible rental housing. The administration's plan has effectively helped funnel more money to Wall Street at the expense of homeowners. And now the Treasury Department is going around and telling bloggers this is actually a positive feature of the program, since it meant that big banks didn't go out of business.

There were always other options for dealing with the banks and preventing foreclosures. Putting big, faltering banks into receivership --- also known as "nationalization"  --- has been a powerful policy tool used by every administration from Franklin Delano Roosevelt to Ronald Reagan. When the government takes over a bank, it forces it to take those big losses upfront, wiping out shareholders in the process. Investors lose a lot of money (and they should, since they made a lousy investment), but the bank is cleaned up quickly and can start lending again. No silly games with borrowers, and no funky accounting gimmicks.

Most of the blame for the refusal to nationalize failing Wall Street titans lies with the Bush administration, although Obama had the opportunity to make a move early in his tenure, and Obama's Treasury Secretary, Geithner, was a major bailout decision-maker on the Bush team as president of the New York Fed.

But Bush cannot be blamed for the HAMP nightmare, and plenty of other options were available for coping with foreclosure when Obama took office. One of the best solutions was just endorsed by the Cleveland Federal Reserve, in the face of prolonged and fervent opposition from the bank lobby. Unlike every other form of consumer debt, mortgages are immune from renegotiation in bankruptcy. If you file for bankruptcy, a judge literally cannot reduce how much you owe on your mortgage. The only way out of the debt is foreclosure, giving banks tremendous power in negotiations with borrowers.

This exemption is arbitrary and unfair, but the bank lobby contends it keeps mortgage rates lower. It's just not true, as a new paper by Cleveland Fed economists Thomas J. Fitzpatrick IV and James B. Thomson makes clear. Family farms were exempted from bankruptcy until 1986, and bankers bloviated about the same imminent risk of unaffordable farm loans when Congress considered ending that status to prevent farm foreclosures.

When Congress did repeal the exemption, farm loans didn't get any more expensive, and bankruptcy filings didn't even increase very much. Instead, a flood of farmers entered into negotiations with banks to have their debt burden reduced. Banks took losses, but foreclosures were avoided. Society was better off, even if bank investors had to take a hit.

But instead, Treasury is actively encouraging troubled homeowners to subsidize giant banks. What's worse, as Mike Konczal notes, they're hoping to expand the program significantly. There is a flip-side to the current HAMP nightmare, one that borrowers faced with mortgage problems should attend to closely and discuss with financial planners. In many cases, banks don't actually want to foreclose quickly, because doing so entails taking losses right away, and most of them would rather drag those losses out over time. The accounting rules are so loose that banks can actually book phantom "income" on monthly payments that borrowers do not actually make. Some borrowers have been able to benefit from this situation by simply refusing to pay their mortgages. Since banks often want to delay repossessing the house in order to benefit from tricky accounting, borrowers can live rent-free in their homes for a year or more before the bank finally has to lower the hatchet. Of course, you won't hear Treasury encouraging people to stop paying their mortgages. If too many people just stop paying, then banks are out a lot of money fast, sparking big, quick losses for banks -- the exact situation HAMP is trying to avoid.

Borrowers who choose not to pay their mortgages don't even have to feel guilty about it. Refusing to pay is actually modestly good for the economy, since instead of wasting their money on bank payments, borrowers have more cash to spend at other businesses, creating demand and encouraging job growth. By contrast, top-level Treasury officials who have enriched bankers on the backs of troubled borrowers should be looking for other lines of work.


Zach Carter is AlterNet's economics editor. He is a fellow at Campaign for America's Future, writes a weekly blog on the
economy for the Media Consortium and is a frequent contributor to The Nation magazine.
 

I posted this, a reader wrote in: It depends on who holds the mortgage. Our bank is offering a
sign-at-home refinance with no cost to the homeowner . It is available
to certain clients who carry many bank products with them. They are
lowering fixed rate loans from say 6 to 5% while increasing the length
of the loan back to 30 years. It could be a win/win situation for the
homeowner. They get a lower interest rate and if they on afford their
former payments, should be able to pay off their home just as quickly or
faster if they can make higher payments. The bank gets the assurance of
30 years (or whatever) and gets away from the people who have a variable
rate loan and are currently paying 2 percent on their loan. It is
designed so you sign at home and wave your right to an assessment. Many
banks are again offering 100% up to 125% loans like they did 10 years
ago so they know your home is not likely to be upside down. The
combination of lowering interest and increasing the length of the loan
would decrease the monthly payment by about $200 on a moderately priced
single-family home. I don't want to get into a political discussion but
I do think it is part of the a recent stimulus package. There are a lot
of homeowner qualifications that have to come together perfectly.
 
 
*     *  *     *      *   *     *     *     *      *   *     *     *     *      *   *     *     *     *

Our POSTER is ANITA SANDS HERNANDEZ, Los Angeles Writer, Futurist and Astrologer. Catch up with her websites  TRUTHS GOV WILL HIDE & NEVER TELL YOU, also The  FUTURE, WHAT'S COMIN' AT YA! FRUGAL LIFE STYLE TIPS,  HOW TO SURVIVE the COMING GREAT DEPRESSION, and Secrets of Nature, HOLISTIC, AFFORDABLE HEALING. Also ARTISANRY FOR EXPORT, EARN EUROS....* Anita is at astrology@earthlink.net ). Get a 15$ natal horoscope "my money/future life" reading now + copy horoscope as a Gif file graphic! No smarter, more accurate career reading out there!

<=== BACK TO TRACKING THE ECONOMY, an INDEX PAGE

<===BACK TO MONEY SECRETS ONLY THE EXPERTS KNOW

<=== BACK TO SECRETS THE GOV DOES NOT WANT YOU TO KNOW

<===BACK TO THE SECRETS OF THE OLIGARCHS, THE EMPIRE INDEX PAGE

<=== SHOW ME THE FIX INDEX PAGE.

 <==  SHOW ME THE HAPPY R)EVOLUTION PAGE

<===  BACK TO "GUERILLA CAPITALISM" -- THE SOLUTION!

<==== BACK TO THE "VITAL SIGNS OF A DYING ECONOMY" the "FUTURE" WEBPAGE

<==== BACK TO THE WALL STREET MELTDOWN WEBSITE,  with "WHAT TO DO TO SURVIVE" TIPS

<=== BACK TO ENRON PLANET, the DOOMSDAY SCENARIO!

<====BACK TO THE HOLISTIC GOURMET, BON MARCHE

<=== BACK TO THE FRUGAL ARTISAN IMPORT/ EXPORT TYCOON AND HIS "STUFF"

<===  BACK TO THE GLEENERS PAGE

<=== HOW EVEN A POOR PERSON CAN BUY REAL ESTATE

<==  BACK TO THE FUTURE INDEX PAGE

<=== BACK TO THE GENTLEMAN FARMER'S GARDEN INDEX

<=== INVESTIGATE DOING DRIP IRRIGATE- LINES in PUBLIC GARDENS as a CHARITY

<=== BACK TO "DONE WELL,  ACTIVISM IS A DELIGHT  and IT CREATES CAREERS for YOU as well as PLANETARY EVOLUTION"

<=== BACK TO THE MALTHUSIAN INDEX PAGE

<===BACK TO THE PHILOSOPHY INDEX PAGE

<=== BACK TO THE LUCK IN LOVE WEBSITE

<== BACK TO THE PROPAGANDA STUDIES WEBSITE, HOW GOV LIES TO YOU

<=== BACK TO ALL POINTS OF THE COMPASS POLITICAL PHILOSOPHY TUTORIAL (5 min flat U learn it all!)

<=== BACK TO JERRY'S REFRIGERATOR & the Tin Foil Hat Collection of CONSPIRACY THEORIES!

<====BACK TO THE FREE MONEY WEBSITE

<==== BACK TO THE HARD TIMES WEBSITE

<===== BACK TO THE POVERTY INDEX PAGE

<==== BACK TO THE "TIPS to SURVIVE THE FUTURE" INDEX PAGE
BACK TO THE "FIX YOUR FLAGGING AMBITION" SEMINAR

<== BACK TO THE  SNOOKERED INDEX PAGE

<===BACK TO THE REALITY 101 SEMINAR FOR TEENS

<==== BACK TO THE SHOW BUSINESS PAGE, ARCHIVE, SEMINAR, WHATEVER YA WANNA CALL IT

<====HOW TO TINKER WITH OTHER PEOPLE's BRAINS

<====BACK TO THE NEW AGE EMPOWERING INDEX

<===BACK TO "HOW TO MERCHANDISE YOURSELF" INDEX

<===BACK TO THE ALL ABOUT TAXES INDEX PAGE

         <=== BACK TO THE FRUGAL TIPS and CHEAPO  LIFESTYLE WEBPAGE

         <=== MEET ANITA SANDS WHO WRITES ALL THESE ARTICLES

        <=== TAKE ME TO THE HOLISTIC PET, HOW NEVER TO NEED a VET

       <===== TAKE ME TO THE SALMONELLA TIMES, HOW TO SAVE THE CHICKEN

       <=== BACK TO THE TRUTHS ABOUT DENTISTRY THAT WILL SAVE YOU 100 THOUSAND!

        <=== BACK TO THE SNOOKERED WEBPAGE, HOAXES WE HAVE ALL KNOWN

        <===BACK TO EVERYTHING YOU NEED TO KNOW ABOUT WEB STUFF (for dummies)

      <===BEAUTIES, HOW TO MARRY A BILLIONAIRE AND SAVE THE WORLD