foreclosures

I remember when Paris Hilton was the poster child of why we couldn't eliminate the death tax. Certaintly essential government services were more deserving of the Hilton fortune that a vapid party girl.  (The vapid party girl seemed to be adding to the family fortune herself and granddad plans to give most of his money to charities , but why lets facts get in the way of class warfare; ) 

Well, we now have a "face" of those poor downtrodden people facing foreclosure as a result of the economic crisis.

Victoria Gotti is about to lose her palatial Long Island mansion.  

GARDEN CITY, N.Y. (AP) -- Growing up Gotti never included the threat of foreclosure — until now.

That's just what Victoria Gotti, daughter of the "Dapper Don," faces as the latest member of the infamous family to be called into court......

Now, Victoria Gotti is in another court, fighting the threat of foreclosure on her Long Island mansion, the same house used in the "Growing Up Gotti" reality show.

"I'm never going to lose the house — trust me," the 46-year-old author-turned-reality TV star told reporters this week after a federal court hearing......

Now, an appeals court has ruled that JP Morgan Chase Bank should be allowed to seize the property because of nonpayment of a $700,000 loan.

Hey, Victoria, there's a term for this. It's just business.

We can't have celebrities renting fixer-upper's in Levitttown, now can we?

While the Gotti heiress may be an extreme example, there's no doubt that hundreds of thousands of high livers around the country are eagerly awaiting federal intervention to avoid giving up their mansions, vacation homes and McMansions.

And the highly touted foreclosure prevention efforts have, hmm, gotten off to a slow start.

There's $75 billion floating around out there for this and when it's all said and done, I suspect way more of it will be used to keep affluent and profligate people out of foreclosure than the needy who fell upon hard time. Of course, what do expect when the President himself was a middle aged Harvard law grad who maxed out his credit cards. 

And why is I think that Chris Dodd, owner of three separate marquee properties, is going to have a warm heart for poor distressed millionaires like Ms. Gotti.

It's time for some "ethical populism" in American soceity. Which means who don't tax the working stiff (or saddle him with government debt) to bail out the beautiful people who can't balance a checkbook.

It's past time for those sorts of people to experience a more authentic "reality show" of living within one's means. 

The U.S. House tonight voted to approve a "mortgage relief" act which now permits a new form of bank robbery.

It's called the "mortgage cramdown".

You see, if the value of the your house has declined in value, now you will be able to file bankruptcy and reduce the principal amount of the debt down to the present, beaten down value.

Then in a few years, when inflation rears its ugly head and the nominal value of homes rises guess what?  The mortgage principal is permanently reduced. And our profligate borrower cashes in on a windfall, while his lender is stuck the removed principal, never to see this money again..

Now, ok , well maybe some poor downtrodden folks deserve some good luck. But, my friends, the U.S. House actually voted to let people who lied on their mortgage application get this relief.  

Writing off mortgage principal to a consenting adult who borrowed more than he should have is simply a bad idea.  It rewards bad behavior. It will only encourage another housing bubble.

I understand the desire to slow the wave of foreclosures and space out the readjustment in the housing markets. And yes, their are honest  folks who can make a go of it. But reduce their interest rates to current market; stretch the loan term; turn the arrearages into a zero interest bullet at maturity. Jeez, there are plenty of fair ways to help a borrower. (not that the servicers for investors like Countrywide try them very often) And that do not cause the borrower to renounce the basic obligation to either pay back the loan or give up the house.

Minnesota's Michelle Bachmann said this bill was   “a tax on all the responsible homeowners. This is the last thing homeowners and our economy need.”   

Let's hope her attitude goes into overdrive in the Senate. We need to find 41 members with non wobbly knees to either fix this bill so it does not reward greedy borrowers or to send the thing back to Barney Frank with a strong message attached.

Anytime you hear someone say that the way to fix the “foreclosure crisis” is to “modify loans,” what you are really hearing is a desire for the government to destroy the concept of contracts.

People, for good or bad, made voluntary decisions to sign mortgage contracts which they, for whatever reason, cannot afford.  If such a contract was obtained by fraud, there is already a mechanism in place to address this; it's called suing the crap out of them.

If, however, people voluntarily jumped in over their head, then they do not deserve the drastic action being contemplated by people like Rep. Conyers.

Why do I say drastic?  Because the entire concept of contracts will be potentially voided by a move like this.

Chris Dodd and his friends are at it again. Evidently the new silver bullet to the irresponsible mortgage lending over the past decade they promoted is to allow borrowers to stiff creditors in the bankruptcy courts.

http://finance.yahoo.com/news/Citi-reaches-deal-with-apf-14010721.html

Now, I'm not familiar with all the details herein. The bill is not final.  But the larger point is that Congress about thirty years ago decided first mortgages should be made inviolate in bankruptcy. The reason was to guarantee the other creditors bore the brunt of the borrower's misfortune. By placing first mortgages in a superior position, lenders could charge less on interest rates and points since they had a greater chance at asset recovery. See the Supreme Court's take on this

Now we see decades of good policy that benefited a generation of honest homebuyers thrown away to reward the profligate and inept. The worst of this is that the courts needn't get involved here.  After a bankruptcy filing, the bank and borrower can do a  "reaffirmation agreement" to preserve the old mortgage. At that point, the interest rates can be reduced and arrearages deferred until the property is sold or refinanced.  Mutual benefit for bank and borrower.

But now we will have a judge present to impose terms. And in this environment, expect banks to be perceived as the fall guy. This can take the form of interest rate reductions     (not so bad; especially when predatory lenders gouge) and elimination of some of the principal balance (a/k/a "lien stripping")   which is absolutely horrible and inequitable.

Why?  Well it rewards people who borrowed too much money, that's why.  Let's say I borrow $200,000 and default, and my house is now only worth $150,000. If I can "cram down" the mortgage to the current, depressed principal value and the value of the house goes back up to $200,000, I can sell the place, pocket $50,000, and stiff the bank for the $50,000 the bankruptcy judge took off the mortgage.

This has been the bane in some jurisdictions of lenders on 2-4 family homes where courts did not follow Nobelman.    I speak from experience defaulted borrowers walked away with windfalls...espcially if they got the judge to buy a lowball appraisal.

So, a new law that penalizes thrift, rewards defaults, and gives some people sweetheart deals. Can you say "moral hazard" ?

Perhaps the biggest irony here is Chris Dodd wants the bankruptcy courts to give a windfall to people who bought McMansions they couldn't afford     but refused to sign off on a proposal that would allow bankruptcy courts to save GM 

When it comes to the subject of bankrupcty, perhaps Senator Dodd is an expert.

UPDATE:  Evidently the Banking industry in general (much if which is NOT Wall Street) is NOT aboard this plan, and is blasting Citigroup as kowtowing to the DC politicians who bailed them out.

I suppose this is what happens when Dick Durbin and Chris Dodd become the executive committee of a money center bank

Bank industry slams lawmaker-Citi mortgage dealWASHINGTON/NEW YORK (Reuters) - A top bank industry group said on Friday that it opposes an agreement between Citigroup Inc and Democratic senators that would rewrite U.S. bankruptcy law to help troubled mortgage borrowers avoid foreclosure, saying it could make home loans more expensive

 http://www.washingtonpost.com/wp-dyn/content/article/2009/01/09/AR2009010901646.html

Early this year Senator Dodd thought he had the answer to the foreclosure crisis. Right after he returned from his miserable failure of a presidential campaign, Banking Chairman Dodd proposed the "Hope for Homeowners" plan.

  http://dodd.senate.gov/index.php?q=node/4324

Senator Chris Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing, and Urban Affairs, today announced his intention to introduce legislation that will create a new program within the Federal Housing Administration (FHA) to provide aid to distressed borrowers currently trapped in mortgages they cannot afford.  Under the “HOPE for Homeowners Act of 2008," new mortgages that are offered by FHA-approved lenders will refinance abusive loans at a significant discount for homeowners facing difficulty meeting their mortgage payments

My problem at the time this was introduced was to promised to relieve imprudent lenders of much of the loss they should have eaten for bad lending decisions. Well, we've gotten way beyond that , having thrown a TARP over the whole blinkin banking sector. The new problem with Dodd's masterpiece----it isn;t helping homeowners.

Secretary of Housing and Urban Development Steve Preston said the centerpiece of the federal government's effort to help struggling homeowners has been a failure and he's blaming Congress....

The three-year program was supposed to help 400,000 borrowers avoid foreclosure. But it has attracted only 312 applications since its October launch because it is too expensive and onerous for lenders and borrowers alike, Preston said in an interview.

"What most people don't understand is that this program was designed to the detail by Congress," Preston said. "Congress dotted the i's and crossed the t's for us, and unfortunately it has made this program tough to use."

http://www.washingtonpost.com/wp-dyn/content/article/2008/12/16/AR2008121603177.html?hpid=topnews

Nice job Chairman Dodd. The Wall Street bankers all are keeping their multiple houses and your expensive rescue plan for ordinary folks over their head is dysfunctional.

Well, maybe the new HUD secretary will throw enough money at this problem to make it look like someone is getting helped.    He went to the "right school"  but I'm not sure a background in NYC is all that relevant http://www.latimes.com/business/la-na-hud-obama14-2008dec14,0,5865966.story .  There's hardly any owner-occupied housing in the city, which suffers from a chronic housing shortage   http://www.nysun.com/real-estate/shortage-of-housing-threatens-city-institutions/73748/ and  the debiltating effect of decades of rent control. http://en.wikipedia.org/wiki/Rent_control_in_New_York. Not exactly the background to deal with plummeting single family home values, in my book.

But it's certainly better credentials than Dodd's credentials to fix the auto business, as he felt compelled to kibitz http://dodd.senate.gov/index.php?q=node/4685  after the President jumped in to clean up the mess Dodd made of the bailout bill  http://thenextright.com/ironman/step-away-from-the-vehicle-senator-dodd    Dodd is now upset about worker concessions; well, given the stock price of GM the investors already took their hit.  http://finance.yahoo.com/echarts?s=GM#symbol=GM;range=1y Everyone who has looked at this knows the Corker plan is the only way to create a viable business model, but no doubt the Obama team will try and create "American Leyland" http://thenextright.com/ironman/can-hope-change-a-spark-plug to appease the Greens and UAW. 

Just so you know Santa knows who is naughty and nice, the Q poll came out and Dodd did rather poorly for a long time Democratic incumbent in the era of Obama ascendancy in the Blue States . Artful Doddger did a rather thorough write -up on the impact of the Q Poll in his blog   http://theartfuldoddger.blogspot.com/2008/12/new-poll-shows-dodds-vulnerability-in.html highlighting Dodd's vulnerability.

Let me add a couple of points here as to Dodd's winter of discontent.

a) He has an empty war chest at the moment and many of his old benefactors have entered a new chapter of their financial life. He may not be able to replenish at will like prior campaigns.

b) the "hard" opposition vote is larger than ever. Only 13% of CT voters will defintely re-elect Dodd, 27% will defintely vote to remove him.  We've seen what happened when there's an intensity deficit for a candidate. Dodd has this in spades; and unlike the war driven 2006 election or the Obamania of 2008, it's hard to see Democratic turnout in CT being quite as high in 2010.

If anything drives 2010 turnout it will be anger over the economy. Bad time to be chairman of the Senate Banking Committee, eh? 

Well, Chris, just remember your gift from Angelo Mozilo came early. Enjoy what you have.