a good thing US Treasury Secretary Henry "Hank" Paulson wasn't
around in 1929 or we'd all be hawking apples on a street-corner.
Paulson is currently on a losing streak that would have been the
envy of Marvelous "Marv" Thorneberry and the '67 Mets.
In the last three months he's put together three new programs
to deal with the subprime crisis which have fizzled out in a matter
of weeks. First, he tried to entice struggling investment banks
to put their mortgage-backed bonds in a Super SIV (structured
investment vehicle) to see if it would help off-load billions
of dollars of down-graded junk onto unsuspecting investors.
Then he brokered "Hope Now" (1-888-995-HOPE) which was designed
to help the banks and homeowners work out the details for a rate
freeze on mortgage resets. Paulson assured the public that 500,000
homeowners would take advantage of the program, which would dramatically
reduce rate of foreclosures.
So far, the Hope Now hotline has provided counseling to just 36,000
borrowers. Representatives have suggested loan workouts for fewer
than 10,000 of them, a small fraction of borrowers in need." (Earlier
Subprime Rescue Falters; Wall Street Journal) "Only 10,000 homeowners;
and Paulson promised 500,000? Another slight miscalculation.
12, 2008, Paulson announced another new program, "Project Lifeline",
which targets homeowners who are delinquent 90 days or more on
their mortgages. Here's a run-down of how it works: (thanks to
Lifeline involves servicers sending letters to borrowers - prime,
Alt-A, or subprime, we're past pretense on that part - who are
very seriously delinquent (90 days or three payments down or more).
The letter says that if the borrower contacts the servicer within
ten days, agrees to homeowner counseling, and provides sufficient
financial documentation that the servicer can consider a case-by-case,
deep-analysis style modification of the mortgage terms, the servicer
will agree to put the foreclosure process on hold for 30 days
while the workout is considered. If the borrower fails to respond
to the letter, foreclosure proceeds."
At the very
best, the program just buys a little more time for the homeowner
to pick out a nice rental where he and his family can live after
the bank repos his home.
only real solution to the problem is renegotiating the mortgages
with the lenders so that people with negative equity have
an incentive to continue making their monthly payments.
far, all of Paulson's solutions have been nothing more than "business-friendly"
band-aids which fail to address the core issues of rising foreclosures,
falling home prices, skyrocketing inventory, and tumbling sales.
at a press conference in Washington, Paulson made this shocking
admission in response to a reporter's question:
"Sir, is the worst over, yet? Will 2008 have fewer foreclosures?"
of the Treasury Paulson: "In terms of sub-prime and the resets,
the worst isn't over. The worst is just beginning... There's close
to 2 million adjustable rate mortgages where the rate is going
to be reset over the next couple of years. These loans are of
a vintage where there was the most lax underwriting. So, this
is the biggest challenge and this is why this is so important."
is right; it is important. So, why is he wasting time with these
bogus public relations gambits when he should be making serious
so called "mortgage modifications" just don't cut it. They're
pointless. They just put off foreclosure until a later date. The
only real solution to the problem is renegotiating the mortgages
with the lenders so that people with negative equity have an incentive
to continue making their monthly payments. Otherwise, the number
of "walkaways" will mushroom and wreak havoc on the entire industry.
housing stats from California illustrate how desperate the situation
really is. DataQuick Information Systems said Wednesday a total
of 9,983 homes were sold in Los Angeles, Orange, San Diego, Riverside,
San Bernardino and Ventura counties last month, a drop of nearly
50 per cent from January last year.
50 per cent.
That is unprecedented. California is in a housing depression.
Is a 30-day grace period really the best that Paulson can come
California is a vital part of the US economy. In fact, California
and Florida combined represent two-fifths of the nations' GDP.
Is Paulson planning to let California go the way of New Orleans?
spending is down (excluding food and fuel) and consumer
confidence is falling at the fastest pace since the 1990-91
the last four months, housing sales in California have plummeted
40 per cent (year over year). At the same time, prices in Southern
California have dipped 16.7 per cent. The market is freefalling.
So far, the only analyst to come up with a reasonable solution
is Professor Nouriel Roubini who suggests a three-year rate-freeze
and a reduction of the face value of the mortgages by the banks.
Of course the banks will scream bloody murder, but it's the only
way to stem the tide of foreclosures and prevent a crisis that
could suck the rest of the economy down a black hole.
those who still doubt that a collapse in housing will batter the
broader economy, listen to Yale economist Robert Schiller. He
predicted the dotcom bust in 2000 and is widely respected for
his analysis of the real estate bubble.
in a historic housing bust comparable to that of the Great Depression.
Prior to the Depression housing prices only rose 19 per cent (between
1921 to 1925) and then fell 30 per cent. The cycle we are going
through now is a unique cycle; it will go down as the subprime
cycle. The excitement in housing was unprecedented and the unraveling
of that (bubble) will have unpredictable consequences... Real
estate owned by households is roughly US$20 trillion and we've
already seen an 8 per cent decline which means a loss of $2 trillion.
That has a powerful impact on the economy... The losses are throwing
peoples' balance sheets off. So now household balance sheets are
in bad shape. People who used to be able to borrow against their
house are facing new constraints. This is an ongoing thing that
will last for more than a year. So we have unfolding problems
to forward to.
be thankful that we have Ben Bernanke, who is an expert about
the Great Depression at the helm. I don't think he will make the
same mistakes that the Fed made that last time around... On the
other hand, it (the bubble) is a major misalignment and cutting
rates - when homes prices have doubled in the last decade - won't
change that. The correction (in home prices) is not going to be
stopped by the Fed."
isn't handled right, this could be a serious recession."
Schiller dismisses inflation as a major concern and emphasizes
the potential dangers of a deflationary downturn. It's clear that
he would prefer to see Bush increase the $168 billion than face
an economy that is stuck in neutral. In other words, he anticipates
a collapse in consumer spending.
a big believer that 'confidence matters'. What is happening now,
is that people are getting a succession of scare stories and personal
savings are down... If you look at what happened before the Great
Depression... there was evidence of a sudden and sharp drop in
consumer confidence and people pulled back and stopped spending.
And we are seeing consumer confidence falling and I expect that
it could take a much bigger tumble if we don't do something."
Are you listening,
Yale economist Robert Schiller said is taking place right
now. So, where's the political leadership? Does anyone in
Washington even have a game plan?
spending is down (excluding food and fuel) and consumer confidence
is falling at the fastest pace since the 1990-91 recession. Also,
$2 trillion has been wiped out from falling home prices and another
$600 billion will vanish this year from mortgage equity withdrawals
(MEWs). Traffic to the shopping malls has slowed to a crawl and
retail shops had their worst January on record. Homeowners are
hoarding their earnings to cover basic expenses and to make up
for their lack of personal savings. The spending spigot has been
turned off. America's consumer culture is in full-retreat.
Schiller said is taking place right now. So, where's the political
leadership? Does anyone in Washington even have a game plan?
the fourth quarter of 2007, new foreclosures averaged 2,939 a
day, double the pace of a year earlier. Business inventories are
on the rise. Last week's release of the Institute for Supply Management's
Non-Manufacturing Index (ISM) showed steep declines in all areas
of the nation's service sector - including banks, travel companies,
contractors, retail stores etc. The Business Activity Index, the
New Orders Index, the Employment Index, and the Supplier Delivery
Index have all contracted at a historic pace.
the classic signs of overproduction. The next shoe to drop will
be rising unemployment. Layoff notices have already gone out in
new construction, retail, car manufacturing and financial services.
This is all the predictable outcome of low interest bubble-making.
It invariably ends in a painful deflationary spiral.
matters," Schiller warns.
Yes, it does.
But the American people lost confidence in their leaders long
ago. So - like Paulson says - the worst is probably just beginning.
Mike Whitney is a well respected freelance writer living in Washington
state, interested in politics and economics from a libertarian
perspective. He can be reached at firstname.lastname@example.org.
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