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Congress to Homeowners: Drop Dead

posted by Adam Levitin

A draft of the bailout plan is out. And it contains nothing substantive for financially distressed homeowners.

The plan directs the Treasury Department to engage in reasonable modifications for residential mortgage loans it controls and to encourage servicers to do so for loans it doesn't control. As I've explained in numerous posts (here and here, e.g.), Treasury is unlikely to end up controlling many distressed residential mortgage loans directly. And Treasury has been encouraging servicers to do loan modifications since last fall, but with very limited success. There is no reason to think that the bailout suddenly changes anything. In short, Congress enacted some show provisions about consumer relief, but nothing of substance. This is the same move Congress pulled when it enacted the HOPE for Homeowners Act in July. All sizzle, no steak.

This is particularly troubling, for continued foreclosures will only further depress the housing market, which is pulling down the entire economy. What's worse is now it will be the Treasury (and hence taxpayers), who will bear the cost.

[The one possible glimmer of hope is this language: "In addition, the Secretary may use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures." Whether on not this will help will depend heavily upon (1) whether the bill is read as authorizing the Treasury to deal with securitization trusts (are they "financial institutions"?) and (2) whether a trustee can accept this sort of guarantee or credit enhancement in keeping with its fiduciary duties. The answer, I think, is maybe in both cases, but this seems to be such an afterthought in the bill that I am not optimistic of it having much effect. Hopefully I'm mistaken.]

Sadly, in this bill Congress focused on politically popular, but really meaningless issues like executive compensation. (Any the provisions they passed aren't super meaningful--they appear only to apply to the top 5 employees, when there are a host of lower-ranking, but high-earning people who worked with MBS--and only impose tax penalties that just aren't that big of a deal to a financial institution.) I don't like the idea of lousy financial institution executives getting rich off of taxpayer dollars, but far better to lose a hundred million even there and to prevent a lot of foreclosures. The net social welfare benefit from the later far outweighs the former.

Also, some of the oversight provisions are really empty shells. For example, Treasury is directed to enact conflict of interest regulations (although the TARP program can start up without these regs in place). The key isn't in having conflict of interest regulations; the key is what those regulations will look like. This type of directive from Congress is so vague as to be meaningless. (The exclusion of the FDIC, which has been the only semi-effective regulator in this mess, from the oversight board is also troubling).

There's a lot more to say about this bill, and I suspect I'll be writing more about it, but bottom line for consumers: nothing for you.

Comments

I was recently asked for my opinion of the bailout - my answer was based on the original Paulson TARP plan but I don't think it would differ much given what I understand of the latest version.

http://www.unionleader.com/article.aspx?headline=Mixed+outlook+for+homeowners&articleId=b63c4a4c-e085-48d4-9923-4e9ea76d89ce

"Mike Dillon of Manchester has been fighting his mortgage servicer for more than seven years, and has filed a lawsuit against several financial institutions involved with his loan. He thinks the bailout plan is only going to help the financial giants, not the little people. "The homeowners are still going to be struggling," he said.

Even if what he calls a "$700 billion boondoggle" could actually solve the financial crisis, Dillon said he's against it. "Allowing financial institutions to reap financial rewards through irresponsible and grossly negligent lending and investment practices simply is not a good long-term economic strategy," he said."

I think it's a mistake to say that continued foreclosures are what's pulling down the economy.

In my humble opinion that line of thinking masks the fact that we never should have been where we are in terms of housing prices, houses built, and ownership levels, in the first place.

If it is given that we are over leveraged, then it is the contraction of leverage that is pulling down the economy, not continued foreclosures.

Seeing it that way perhaps we could go further in saying that in fact the economy itself is not being pulled down, but rather, we're actually being asked to pay our tabs, or a margin call if you will.

So while the mortgage failures may have triggered the margin call, they are more indicators of a problem, rather than the problem itself.

lets explore that comment, shall we. What is to become of the people who are in the unfortunate position of foreclosure, with lending servicers who refuse to work any kind of a meaningful modification out with the homeowners. I have a home on 5 acres that I have been on for 10 years until we got sidetracked into the sub-prime thanks to US Bank's puffery and deceptive ways over to Litton. We were not irresponsible or living beyond our means, we were 'screwed', plain and simple. We now face an auction date of 10/21 on a home that started out at 290,000 and now thanks to Litton's penalties and fees is up to over 350k on a home valued at 420k and now is valued at 190k.

That affects my neighbors home values and drags them down as well, not to mention other homes in the area that are allready boarded up and sitting vacant. The more that foreclosures continue to happen the more home values are going to sink, deeper and deeper.

Trust me, foreclosures are pulling down the economy. STOP THE FORECLOSURES, that is the key to recovery, not paying the crooks that created the mess

Maybe bankruptcy reform, giving home owners fighting foreclosures the same rights as vacation home owners, duplex owners, and commercial real estate owners, would provide an incentive for more democrats to back the bailout.

The current bill - dead or alive - does nothing for homeowners facing foreclosure. Nothing.

Call me a dreamer, but you know - providing some fundamental fairness in the midst of a Wall Stree bailout COULD make a difference.

Ken, take a gander at Mortgage Servicing Fraud in your favorite search engine.

As the servicing industry referred to it for awhile, it is possible that you may be being "Fairbanksed". Get yourself a good CPA/CFE or forensic accountant and a good consumer protection atty if at all possible. You're nowhere near the *only" one with a Litton story. Unfortunately, I have to go here http://www.websitetoolbox.com/tool/post/ssgoldstar/vpost?id=2405666&highlight=nadine+knowles for the article as WTSP seems to have removed the story from their website....

If you end up having to go the Ch 13 route see if you can find one of Atty Max Gardner's "Bankruptcy Bootcamp" graduates locally. Feel free to drop me a line if you need more info in general...

Hang in there....

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