More Wealth Re-Distribution: Taxpayers to Banks

[EJ]

iTulip just got off a call sponsored by the Center for American Progress. Today they issued a report titled "Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures" (pdf) by CAP's Almas Sayeed. Old news on the housing market for iTulip readers, but the part quoted below aligns well with our long standing prediction that ultimately taxpayers are going to pay to clean up the Risk Pollution left by banks who have externalized the risk of bad loans by dumping it into the financial markets, thus making the business of selling high risk loans profitable.

The most toxic risk pollutants are the first to seep up, related to sub-prime loans, but soon enough risk pollution will spraying out of every fissure in the financial system.

Let's guess how this is going to go: The Wall Street Investment banks and commercial banks that sold the mortgage backed securities get to keep the fees they earned, the drug addicts and old ladies the lenders went after as borrowers get stuck with loans they can't pay–not to mention Joe and Jane home owner who got talked into a badly structured loan because it was more profitable for the lender–and as with the S&L Crisis of the early 1990s, the tax payer gets stuck with the tab.

While policymakers examine the causes of the current crisis and consider legislative and policy-based solutions to prevent such a trend in the future, it is also critically important to consider ways to stem this rising tide of foreclosures. Given the crisis that may affect communities, policymakers should consider swiftly strengthening state and federal programs that help prevent home foreclosures.

While all states have homeownership and foreclosure prevention counseling, only a handful of states sponsor mortgage assistance programs that help qualifying families in danger of falling too far behind on their mortgage payments due to a sudden loss of income, illness or death in the family. Increased federal assistance could expand these programs and enhance those foreclosure prevention programs that do not provide loans. Among the steps policymakers should consider are:

• Federal grants to expand and enhance current mortgage assistance and foreclosure prevention programs and low-interest mortgage assistance to eligible borrowers.
• Federal funds to target key cities and states facing the highest risk of mass foreclosure.
• Provisions to ensure federal agencies assess the effectiveness of each program every three years.
• Strengthen programs that aid families while their mortgage contracts are renegotiated or the property is sold on the market so that the homeowners’ credit ratings are salvaged, allowing for the possibility of future homeownership.

This paper details why the steps briefly outlined above would help ameliorate the current rise in foreclosures. The paper will first examine the causes of the crisis and then look at the structure of state-funded foreclosure prevention programs to illustrate how cost-effective federal support for these programs—particularly in key states—could help families facing foreclosure stay in their homes.

While foreclosures are sometimes unavoidable, it is in the best interests of our communities and overall economy to support those who have embraced homeownership and work to prevent foreclosure. After all, homeownership is an important step in the creation of stable and secure communities. Yet, homeownership is also a step that is especially difficult to take for those without access to traditional home lending products. When assets and wealth are better distributed and families are more financially secure, this, in turn, enhances opportunities for everyone and contributes to the country’s overall economic security.

AntiSpin: In other words, taxes and more taxes and more Federal debt. The folks over at CAP have their hearts in the right place, but the approach of using taxpayer money to solve the foreclosure problem is misguided. That only encourages the banks to do it again. I have a better idea. How about this time Goldman Sachs, J.P Morgan, Merrill Lynch, Citibank, BoA, et al, clean up their own mess and pay for the bailout instead of taxpayers? Sure, the cost might put some of these banks out of business, but who cares? Other better run banks will take their place.

The other news organizations on the call were New York Times, LA Times, etc. Judging by the questions, the MSM seems symapethic to the taxpayer bailout approach. Looks like iTulip and a few others are going to have to lead the charge to make sure the Risk Polluters pay their fair share.

Otherwise, get ready for a lot more of this:

Senate Weighs Aid to 2.2 Million Subprime Borrowers
March 13, 2007 (Bloomberg)

U.S. lawmakers will have to consider providing aid to about 2.2 million subprime mortgage borrowers who are at risk of defaulting and losing their homes, Senate Banking Committee Chairman Christopher Dodd said today.

"The impact of losing 2.2 million homes I suspect will be in a lot of areas of our cities and towns that are already pretty hard hit, so we clearly want to look at that and legislate,'' Dodd, a Democrat from Connecticut, told reporters in Washington after a speech to the National League of Cities.

[snip]

Federal aid "would come at a cost,'' said Douglas Duncan, chief economist at the Mortgage Bankers Association. ``It has to be paid for and the question is would the 34 percent of homeowners who have no mortgage be willing to pay taxes to support the bailout of people who traditionally have not managed credit well?''

Again, the issue is framed the wrong way. The problem is not one set of taxpayers bailing out another, it's taxpayers bailing out the banks that made money selling the loans.

[jk]

Re: More Wealth Re-Distribution: Taxpayers to Banks

1. what does anyone know about put provisions allowing the purchasers of mbs to require the originator to take back non-performing paper? obviously, the purchasers of new century paper are going to be stuck, but are the goldmans, citis and morgans of the world on the hook at all here?

2. eric, were you able to raise your point about "the boyz" on the call? if so, what was the reaction?

[EJ]

Re: More Wealth Re-Distribution: Taxpayers to Banks

1. what does anyone know about put provisions allowing the purchasers of mbs to require the originator to take back non-performing paper? obviously, the purchasers of new century paper are going to be stuck, but are the goldmans, citis and morgans of the world on the hook at all here?

2. eric, were you able to raise your point about "the boyz" on the call? if so, what was the reaction?

Not much point. The New York Times trades as NYT and Dow Jones company as DJ.

[jk]

Re: More Wealth Re-Distribution: Taxpayers to Banks

as you say, not much point. the problem with trying to get the perpetrators and accessories to pay is that they're rich! i.e. they are big contributors to both parties, with lots of political muscle. meanwhile the politicians can grandstand on their heartfelt sympathy with people who got over their head, sacrifice a few peripheral institutions like new century, et al, and answer the question: "how do you spell relief?" P-R-I-N-T! and generate fees of some kind, i'm sure, for goldman, citi and morgan. [i don't believe in conspiracy theories, but sometimes i'm not sure what difference it would make.]

[fraserjr]

Re: More Wealth Re-Distribution: Taxpayers to Banks

I actually wrote a Senator an email today for the first time in my life. I am not sure what good it will do, but seeing as Senator Dodd from CT wants to provide funding for the estimated 2.2 Million people who are going to foreclose on thier homes and put on the backs of other like myself is ver disturbing. I am curious to see what one of his interns will write me as a response, if I get any at all.

The gist of the email was that while I am 26 and with a combined income with my girlfriend could have walked into any subprime lender in Northern Virginia and walked out with a 500k loan, I probably would not have qualified for anything over 300k through a traditional 30 year 20% down traditional. So rather than conforming to the irrational exuberance exhibited over the last 5-10 years, I sat the market out waiting for prices to return to the historical mean. Now however, I will pay the tax burden of other who were unfortunate enough to get a subprime loan, get a homeowners taxbreak, and maybe even take out a HELOC, while I "wasted" my money renting.

All while the government and administration looked the other way as the lenders were allowed to give out these risky loans to basically anyone who wanted one. Thats what I get for not joining the "homeowners society".

I guess it pays more to just do as all the other sheep and let the government bail me out. Foolish me.


P.S. Sorry about the rant. :mad:

[miju]

Re: More Wealth Re-Distribution: Taxpayers to Banks

hey guys, do not confuse your correct analysis of the situation with your desire or revenge.
1) if you do not liketmarket pratices, when they come to exageration, vote and change your political leaders to bring a new way of managing the economy
2) GS, ML and so on ..have contributed to the economy thanks to taxes they had to pay on their record profits
3) Do not worry, CDO's failure and loose lending to Hedge funds will affect directly their PxL soon and their shares will drop as well. The market punishes the poor unfortunately but punishes the rich as well when they became crazy

[don]

Re: More Wealth Re-Distribution: Taxpayers to Banks

The scenario we're supposed to swallow goes something like this: The fed had no idea chain sawing down interest rates would feed a housing bubble. Lenders, not knowing the consequences, began offering increasingly impossible loans to increasingly unqualified borrowers. Just by chance, the quasi-public mortgage repositories of Freddy Mac and Fanny Mae encouraged those lenders to toss their mortgage cowpies into F&F's open arms. We now seem to be at that time of the dance to begin hearing our favorite ice cream truck ditty of too-big-to-fail, which we've been hearing since the S&L scam. Who says that music hits don't last like they used to.

[grapejelly]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Is there *any* question that the banks will be bailed out?

Is there *any* question that GSEs will be bailed out?

C'mon. The real question is how these bailouts will affect other assets including the US$, treasury bonds, stocks...the macroeconomic consequences.

[EJ]

Re: More Wealth Re-Distribution: Taxpayers to Banks

hey guys, do not confuse your correct analysis of the situation with your desire or revenge.
1) if you do not liketmarket pratices, when they come to exageration, vote and change your political leaders to bring a new way of managing the economy
2) GS, ML and so on ..have contributed to the economy thanks to taxes they had to pay on their record profits
3) Do not worry, CDO's failure and loose lending to Hedge funds will affect directly their PxL soon and their shares will drop as well. The market punishes the poor unfortunately but punishes the rich as well when they became crazy

miju, Nothing to do with revenge. It's a matter of free market principles. As capitalists, we do not believe that Socialism for banks works. Banks should not be protected from their folly by taxpayers and government largess. They should be held to account for the risks they take, just like any other business. If they screw up, they should allowed to fail.

Of course, they will not be allowed to fail. No one has the political will to raise taxes, so the federal deficit wil simply grow some more. We can hope that Paulsen & Co. can head back to Asia and the Saudis again and say, "Put it on my tab!" and they say, "Ok" again.

Also, from a political standpoint, when the rich are punished, they become less rich. When the middle class is punished, they become poor. Seems unlikely to me that millions of baby boomers are going to take being poor lying down. They will demand a retirement in the lifestyle to which they have become accustomed.

jk, I asked the Senior Economist Christian Weller on the call if he agreed with the Shiller/Case estimate of a 15% - 30% decline in housing prices in major markets over the next 5 years and he replied that decline is consistent with their models.

[DemonD]

Re: More Wealth Re-Distribution: Taxpayers to Banks

hey guys, do not confuse your correct analysis of the situation with your desire or revenge.
1) if you do not liketmarket pratices, when they come to exageration, vote and change your political leaders to bring a new way of managing the economy
2) GS, ML and so on ..have contributed to the economy thanks to taxes they had to pay on their record profits
3) Do not worry, CDO's failure and loose lending to Hedge funds will affect directly their PxL soon and their shares will drop as well. The market punishes the poor unfortunately but punishes the rich as well when they became crazy

As to point 1:

South Park has it right. Every election you are basically voting for either a Giant Douche or Turd Sandwich. Except those lucky few who get to vote for Ron Paul. As bad as Bush is, everyone I know who voted for Bush was like "Well, I didn't like Bush, but c'mon - John Kerry?" And I have to admit, they have a point, and although I do think our country would be better off with Kerry, it just kind of goes to show how unorganized the Dems were to lose that election by not having a better candidate and/or not marketing him well enough.

Point 2:

Their record profits which were built upon the backs of many millions of wage earners who deal with ever rising prices without commensurate rises in wages, or out and out losing their jobs to outsourcing, mergers, and shady LBO's. Raise the lower and middle classes and you generate a lot more wealth creation and therefore tax basis than just a few rich people who are probably good at taking that money, spending it on a lamborghini, and claiming that as a tax deduction.

Point 3:

Many of "the rich" have set up offshore accounts and avoid the loss of wealth that happens to the average American, and further what EJ said about the rich becoming slightly less rich and the middle class becoming poor.

Is there any possible way we can do something to convince our congress to not bail out these effed borrowers and effed lenders? It sickens me to think that our taxpayer money or currency devaluation will go to help these people. Talk about entitlements. Ugh.

[SSmith]

Re: More Wealth Re-Distribution: Taxpayers to Banks

As I understand it, most subprime borrowers have low incomes, and many are minorities. I think the government aid they'll get probably will resemble the aid to the similarly situated victims of Hurricane Katrina--nothing--except the subprime borrowers will also have to endure sanctimonious harangues about getting in over their heads financially and perhaps misrepresenting their incomes and assets. It seems pretty clear that many, if not most, of them were lured into this position by a remarkably corrupt system. Keep in mind that many of these borrowers are not financially sophisticated. My mom has been a social worker for years, with many clients from lower socioeconomic strata. Many of them think that they receive credit-card solicitations because someone has made an informed, honest judgment that they can afford the debt. It seems hard to believe, but we all have our weaknesses. And from Alan Greenspan down to the people they got their loans from, these borrowers were told that they were doing the right thing, joining the "ownership society" with a piece of the American dream. These people are victims, and they're not going to get help from the government or anyone else.

[grapejelly]

Re: More Wealth Re-Distribution: Taxpayers to Banks

As I understand it, most subprime borrowers have low incomes, and many are minorities. I think the government aid they'll get probably will resemble the aid to the similarly situated victims of Hurricane Katrina--nothing--except the subprime borrowers will also have to endure sanctimonious harangues about getting in over their heads financially and perhaps misrepresenting their incomes and assets. It seems pretty clear that many, if not most, of them were lured into this position by a remarkably corrupt system. Keep in mind that many of these borrowers are not financially sophisticated. My mom has been a social worker for years, with many clients from lower socioeconomic strata. Many of them think that they receive credit-card solicitations because someone has made an informed, honest judgment that they can afford the debt. It seems hard to believe, but we all have our weaknesses. And from Alan Greenspan down to the people they got their loans from, these borrowers were told that they were doing the right thing, joining the "ownership society" with a piece of the American dream. These people are victims, and they're not going to get help from the government or anyone else.

I think you may have missed the point. The subject of the thread is "More Wealth Re-Distribution: Taxpayers to Banks" (bold added). It's a bank bailout, silly. Uncle $am doesn't care about the poor schlemiel who is in over his head. Unk gets very concerned about banks' profits though

[SSmith]

Re: More Wealth Re-Distribution: Taxpayers to Banks

The Center for American Progress has a proposal for "Helping Families," and Christopher Dodd's bill is to bail out the subprime borrowers themselves. I understand that this might benefit the banks, too, but the original post presented these plans to help the home "owners" as a threat to taxpayers. My first point is that subprime borrowers are not going to see any of that aid in the end, just like the Katrina victims. I would not be surprised to see the banks get some help, but it will probably cut out the middleman. My second point responds to one or two of the later posts, which seem a little hostile toward the borrowers. Whether or not these subprime borrowers should receive aid from the government, they deserve some sympathy, because they have been used, and now they are going to get thrown aside to pick up the wreckage of their financial lives on their own. They don't deserve that. Besides, there are enough other people who really deserve the venom.

I'm usually not this humorless--well, sometimes I'm not this humorless--and I appreciate your point. And I would love to see the banks put on the hook for what they've done to these people, although I expect to find myself on the hook for what the banks have done to themselves. But it's very frustrating.

[Joe1987]

Re: More Wealth Re-Distribution: Taxpayers to Banks

Personal responsibility. I know it might sound like a tired theme, but please, its worth mentioning.

The banks made bad loans. Hopefully, they will be forced to book the losses and not receive some sort of "relief". They allowed liars to take out loans with no way to hold them accountable. Why is the outcome a surprise to anyone?

Borrowers signed up for loans they couldn't afford. Many of those borrowers were not downtrodden individuals manipulated by the evil mortgage brokers who took advantage of their innocent nature.

No, greedy, impractical, educated white-collar workers in their 20s and 30s would not accept a modest home with a reasonable mortgage. They had to have several thousand square feet, 5 bedrooms and 3 baths for their spouse and dog. They insisted on vaulted ceilings and jacuzzi bathtubs. In order to get these things they knowing took a poorly calculated risk, with little thought, that they could finance 100% or more of the value of the home and come out ahead.

Nobody should look to their blackjack dealer for moral or financial guidance.

EJ said: "Seems unlikely to me that millions of baby boomers are going to take being poor lying down. They will demand a retirement in the lifestyle to which they have become accustomed."

This, to me, is the most scary thought. I have heard more times than I can count, ". . . in a country as wealthy as ours, nobody should have to [fill in the blank]" What wealth? We have already refinanced our country's mortgage and a few Asian countries, among others, are holding the bank note. According to the GAO, the first wave of boomers are eligible for social security benefits early next year. I am not looking forward to David Crosby singing about the plight of his recently retired brothers.

Like fraserjr, I also apologize for ranting, but in my defense, I've been saving up, unlike the average american (pun intended).

[miju]

Re: More Wealth Re-Distribution: Taxpayers to Banks

correct on point 3. buton point 2 do not forget that a lot of people beneficiate from the good results of the big Inv banks. And do not forget that shareholders have beneficiated as well. Who are shareholders ? you, me, pension funds ....