Bailout Fatigue Sets In

attorneygeneral.utah.gov

Just as troubled borrowers are poised to become the next likely recipients of government help, bailout fatigue seems to have set in.

Since the government began inching toward offering homeowners more help — calling for a holiday foreclosure suspension and launching a plan to streamline mortgage-loan modifications — the anger over bailing out borrowers has been growing. Taxpayers are expressing their frustrations in the blogosphere and in casual conversations.

Illustration by: Matt Mahurin

“Many people are upset,” said Alex Pollock, a former banking industry executive and resident fellow at the pro-business American Enterprise Institute. “They’re saying, ‘I didn’t buy a house I couldn’t afford. I didn’t take out a home equity loan to go on a vacation. Not only am I supposed to struggle to keep paying my mortgage, I’m also expected to pay other people’s mortgages too.’”

Pollock frequently hears such sentiments, despite the record number of homeowners losing their homes because they can’t pay the bills. After The Washington Independent ran a story last week on the eviction of Manassas resident Julio Angulo, whose home had been foreclosed on, a comment on the site complained that Angulo effectively got five and half months of free rent because he refused to move after receiving the eviction notice in July. Why did he buy a house in the first place, the commentator asked. And could he read?

That sort of anger will likely rise as President-elect Barack Obama and some lawmakers push more aggressively to help distressed homeowners.

On “Meet the Press” on Sunday, Obama went further than he has in the past to push for government help, criticizing what he called a lack of urgency by the administration.

“I’m disappointed that we haven’t seen quicker movement on this issue by the administration,” Obama said. “We have said publicly and privately that we want to see a package that helps homeowners not just because it’s good for that particular homeowner; it’s good for the community.”

But that doesn’t necessarily mean such assistance would going over well among most taxpayers. As Pollock noted, polls show taxpayers oppose government bailouts in general, whether for the banking sector or the auto industry. The taxpayers question whether government should take on that kind of responsibility. They’re not likely to feel much differently about homeowners.

That means the Obama administration will need to sell any new assistance plan by emphasizing how rescuing troubled borrowers will help everyone whose retirement packages are shrinking and whose home values are falling.

That won’t be easy. The influential mortgage blog Housing Wire has been swamped by taxpayer resentment toward helping borrowers who aren’t always perceived as deserving of the aid. When Fannie Mae and Freddie Mac announced their foreclosure halt in November, Housing Wire said, emotions bubbled over:

The decision to halt foreclosures also isn’t silencing a growing number of critics who say they’re angry at all of the resources and attention being given to troubled borrowers. At [Housing Wire] in the past few days, we’ve been buried under feedback from lenders and servicers — and even employees at both GSEs [government-sponsored enterprises] too — that have largely expressed frustration at what they see as a bailout of irresponsible borrowers at the expense of responsible ones.

The anger goes beyond industry insiders. Some people who pay their mortgages on time are wondering if they should continue to do so. In the Washington Post, real estate writer Kenneth Harney quoted Rob Chrisman, senior vice president and director of capital markets for Residential Pacific Mortgage in Walnut Creek. Chrisman said he talked with one loan agent who commented that, “All I have to do is stop making mortgage payments, and I can get a 3 percent rate? Sweet! Who needs a mortgage broker?”

The emotion was summed up perfectly by San Francisco columnist Kathleen Pender, who asked, “Are You an Idiot to Keep Paying Your Mortgage?”

As the Obama administration works to put together a package to stem foreclosures and help troubled homeowners, the kind of resentment pinpointed by Pender might fester into the kind of anger that was directed at the Big Three auto industry executives who flew into Washington on private jets to beg for bailout money. No one wants to help out someone who seems to have gamed the system. On Monday, the nation’s top bank regulator, Comptroller of the Currency John Dugan, said new data show that more than half of all recent loan modifications have fallen delinquent again, raising more questions about the wisdom of bailing out borrowers.

Dugan, however, also acknowledged he couldn’t judge the quality of the loan modifications — whether they substantially reduced loan amounts or just strung borrowers out on repayment plans.

Housing advocates have argued that loan modifications can work if they reduce the borrower’s overall debt and bring monthly payments to more affordable levels.

Despite all the obstacles, the public still could get behind a rescue package, housing advocates insist. It all depends on how it’s sold.

On its website, the Center for Responsible Lending measured the spillover effect from foreclosures: An additional 41 million families in surrounding neighborhoods would see ee home prices fall an average of $8,667, for a total loss of $352 billion.

And even that figure “doesn’t count the decreased buying power that [number] represents, and the suppressing impact that has on consumer demand,” said senior policy counsel Kathleen Keest.

She noted that Credit Suisse on Monday predicted a surprisingly high 8.1 million foreclosures by the end of 2012, or 16 percent of all households with mortgages. Increasingly, Credit Suisse said, those mortgage failures are moving beyond subprime loans to prime and more upscale borrowers.

Mark Zandi, chief economist at Moody’s Economy.com, told a housing industry forum Monday that he thinks the public will be more sympathetic to the idea of helping homeowners than it might have been in the past, because the link between foreclosures and wider economic pain is becoming more evident. In addition, banks that were bailed out by the government but still refuse to lend have added to public anger.

Angulo’s case serves as an example. He tried to talk to his lender, he said, but he got nowhere. He said he called the lender after he learned his loan payment would rise from $1,400 to $2,600 a month, which he couldn’t afford. The lender told him it couldn’t help, because he wasn’t behind in his mortgage payments. So, Angulo said, he stopped paying them.

Angulo’s lender was Aurora Loan Services, which also serviced the loan. Aurora is a subsidiary of a financial institution with a familiar name: Lehman Bros. The failure of Lehman ignited the Wall Street meltdown that led to the $700 billion rescue package.

The Village Voice last month published a long expose on Aurora, which specialized in selling Alt-A and interest-only mortgages to people with decent credit. The loans usually required no income documentation or downpayment. The Voice characterized Aurora as “the sleazy Lehman Brothers subsidiary” and noted that bad loans originated by Aurora partly led to Lehman’s downfall.

From the Voice:

Thomas Martin, the head of a Washington, D.C.–based company that does investment analysis and has been monitoring Lehman and Aurora over the past three years, says he has received more than 400 consumer complaints from around the country about the two firms.

“To us, it may have been a criminal enterprise from the get-go,” says Martin, whose group is called America’s Watchdog. “They collect fees from the pension funds, which buy these mortgage-backed securities, and then gouge the consumer on the back end. I think Aurora should be put out of business, and they weren’t the only loan servicer doing this stuff.”

Martin says Aurora does a series of questionable things, which result in unfair payments and push consumers toward foreclosure.

The reason a white-shoe firm like Lehman worked with Aurora was simple: Profit.

Again, from the Voice:

Loan companies — especially the shadier ones — were issuing home loans to people who really couldn’t afford them, or under terms that basically guaranteed the buyer would default once the interest rates soared.

Like most streetwise dealers, Lehman took a cut of just about every piece of the transaction all the way down the line. It [and other Wall Street firms] ended up pushing its loan companies to stretch even their flimsy standards and issue weak loans.

But going after lenders won’t be enough. To get the public behind a rescue package, the government needs to put together a loan modification program that heads off the problem before a homeowner falls behind, and doesn’t offer a perverse incentive to stop paying on a mortgage. Any rescue package or loan modification attempt must aim at keeping people in their homes for the long term — not just something that kicks the problem down the road. It’s also well worth exploring ways to offer more rental assistance and housing to people who won’t be able to afford their homes even with a break on their mortgage.

To win wider support, advocates will have to acknowledge the unfairness inherent in any rescue plan. Obama moved in this direction Sunday, explaining that “If my neighbor’s house is on fire, even if they were smoking in the bedroom or leaving the stove on, right now my main incentive is to put out that fire so that it doesn’t spread to my house.”

Everyone pays for foreclosures. The path from the front steps of Angulo’s former townhouse in the working-class complex of Georgetown South in suburban Virginia winds up leading directly to a diminishing 401 (k) plan. A foreclosed house in a neighborhood becomes the cause of that community’s collapsing home values.

There’s plenty of reason for resentment in any rescue plan. Some people who don’t deserve help will get it. People who paid their mortgages on time might feel punished for it. But, as the argument goes, we’re not really bailing out people like Angulo. We’re saving ourselves.