The bad news from the foreclosure crisis keeps rolling in with the government all but paralyzed in its efforts to clean up the mess.
The Congressional Oversight Panel created to oversee TARP issued a scathing report last week blasting the Treasury Department’s management of the program, which has only used about a quarter of the $45 billion set aside to help troubled homeowners.
“If current trends hold, HAMP will prevent only 700,000 to 800,000 foreclosures – far fewer than the 3 to 4 million foreclosures that Treasury initially aimed to stop, and vastly fewer than the 8 to 13 million foreclosures expected by 2012,” the report said. With the government’s ability to restructure HAMP ended, “the program’s prospects are unlikely to improve substantially in the future.”
Tim Massad, Treasury's acting assistant secretary for financial stability, called the report's criticisms "somewhat unfair."
Foreclosures, which depress surrounding home values, remain one of the major factors dragging down the housing market, which in turn is holding back the rest of the economy. Home values are still plummeting in most areas of the country, with only 31 of 129 markets posting overall increases in value in 2010, according to Zillow Real Estate Market Research.
The firm also reported last week that U.S. home values declined by a staggering $1.7 trillion this year, 63 percent more than 2009. Nearly one in four mortgages are now underwater, which means their owners owe more than the value of the home.
The foreclosure crisis began in 2007 when banks began resetting the short-term teaser rates that out-of-control banks and mortgage originators had sold to sub-prime borrowers to buy or refinance homes. In the fall of 2008, the collapse of the mortgage-backed securities and derivatives based on those junk bonds paralyzed credit markets and triggered the Great Recession. Now, the high unemployment caused by the financial collapse has emerged as the major factor driving sky-high foreclosure rates.
New foreclosures spiked to 250,000 a month in the third quarter, nearly as high as they were at the peak of the crisis in early 2009. The number of delinquent loans – a leading indicator of foreclosure – is still above 8 percent of all mortgages, twice the pre-crisis level.
Last week, while testifying before the oversight panel, Treasury Secretary Timothy Geithner brushed aside concerns that the government wasn’t doing enough to help out troubled homeowners. He was more concerned that expanding the reach of the loan modification program could wind up bailing out investors who bought second homes or people who can’t afford homes under any circumstances.
Such an expansion “would not be a good use of government funds,” he said. “The most important thing that is going to affect home prices . . . is what the government can do to get unemployment down.”
That didn’t sit well with some members of the committee, who fear the banks that received TARP funds are refusing to work with troubled homeowners in order to avoid marking down the value of the home loans on their books. The November report from the oversight panel, which covered the robo-signing scandal, noted that litigation citing illegal paperwork has been filed by bondholders who suffered huge losses on mortgage-backed securities. If those suits are successful, it could sharply reduce bank capital and trigger the need for another TARP, which panel member Kenneth Troske, a University of Kentucky economics professor, called “one of the most vilified pieces of legislation ever enacted.”
“There’s $1 trillion in mortgages on their books,” said panel member J. Mark McWatters, an attorney and certified public accountant. “If (those loans were) marked to market, would banks fail?”
“The major banks in this country have the capacity to manage the remaining assets on their balance sheets,” Geithner replied. The reason why more homeowners facing foreclosure aren’t taking advantage of HAMP “is principally about how we define eligibility and not the incentive structure of the banks.”
Panel member Richard Neiman, superintendent of banks in New York, pointed out that 75 percent of all loan modifications are now being done without accessing TARP funds. Yet the government has no data on who those homeowners are or what conditions have been put on the new loans. There are no federal regulations governing bank behavior during mortgage loan workouts, he complained.
The Dodd-Frank financial services reform legislation empowered the new Consumer Financial Protection Bureau, which is supposed to be up and running by July, to write those rules. “I’m not sure how early (the rules) will come,” Geithner said. “But it will be an important priority. We got this terribly wrong as a country. We want to make sure that we get this right as we build a system that will be durable down the road.”
Taking the long view is not a luxury that millions of Americans can afford. “Because our financial crisis involves home mortgages, the decision to make preserving the banks’ capital structure our highest policy goals has meant not just a weak economy, but the unprecedented human tragedy of millions of foreclosures,” said oversight panel member Damon Silver, special counsel to the AFL-CIO.
More than a half million families will lose their homes to foreclosure between now and next July. Given the molasses-like process of writing federal regulations, millions more will lose theirs before the new rules of the road are written.
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