As Clusterstock noted, the fall of Enron occurred back in 2001 — but it’s still making news.

If Enron is any indication, we’ll be hearing about the collapsed businesses of the financial crisis for years to come.  The Enron bankruptcy seems like eons ago, but the fallout never ends.

Maybe. But where’s the legal fallout from the current financial crisis?

As we mentioned on Monday, save for Bernard Madoff, there haven’t been any high-profile prosecutions over the subprime mortgage market mess. Wouldn’t backdating financial reports to mask a bank’s failing situation, as apparently was the case with IndyMac, qualify as criminal? Enron failed after all the accounting tricks it used for years couldn’t hide its real situation anymore. Courts have found the actions of its top executives worthy of jail terms. When will we hear about bankers going to jail?

Enron’s bankruptcy should be small change, compared to a global financial crisis. Let’s see how far the fallout goes, this time around.

Homeowners who were hoping for lower payments are discovering to their dismay that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one. That is one reason that many reworked mortgages are sliding back into default.

Yep. There’s a big difference between writing down the loan balance on a house, and merely setting up an “extend and pretend” repayment plan. If you can’t afford the house now, you’re probably not going to be able to afford it later, especially with all the new fees added on.

The problem is the same one that has plagued loan modifications from the start: Lenders don’t want to write down loan balances. There’s no cramdown provision in bankruptcy court to force them to do so, thanks to opposition in Congress and inaction by the Obama administration.

Yet, as loan modifications fail to stem the foreclosure crisis, the government continues to offer financial incentives to servicers and calls them to Washington occasionally to give them a hard time about not doing more loan mods.

And in the end, here’s what we’re left with, according to USA Today:

“Payments have gone up …. (and) the payment relief can last for the first few years and then go up (again),” says Alan White, assistant professor of law at the Valparaiso University School of Law in Valparaiso, Ind. He has studied the subprime mortgage situation for 10 years. “(The lenders) focus on today and not on the future.” Even under the Obama plan, they don’t focus on permanent debt reduction, White says.

The majority of borrowers who’ve gotten mortgage modifications have seen their overall principal balance go up, according to an analysis by CreditSights and ICP of about 660,000 mortgages modified this year. In about 90% of the modifications, the principal balance after a modification was larger, CreditSights said.

If you’ve ever wondered why the foreclosure crisis doesn’t seem to be easing, despite the government’s vow to help homeowners, loan mods that actually increase a borrower’s monthly payment are an obvious reason why.

In response to discussion today in the House Financial Services Committee raising the possibility that a regulatory reform bill could include provisions allowing bankruptcy judges to modify mortgages on primary residences, MBA Chairman David Kittle issued the following statement.

“Allowing judges to retroactively modify borrowers’ mortgage balances will destabilize a mortgage market that desperately needs stability right now.

“Treasury officials today reported that the Obama administration’s Home Affordable Modification Program – HAMP – is on target to reach its stated goal of 500,000 trial loan modifications by November 1.  We ought to let that program, still in its early stages, continue to take hold, rather than rushing to try to pass a measure that will do more harm than good.

“We hope that proponents of cram down will recognize the successes that the industry is making through HAMP and other means to help keep borrowers in their homes.  Loan modifications cannot happen overnight.  But as today’s report from Treasury shows, servicers are making significant progress.”

Calling the progress on loan modifications “significant” is stretching it, since only about 12 percent of eligible borrowers have signed up for trial loan workouts under the $75 billion Making Home Affordable plan. It shows how far apart the two sides are on this issue – and gives a glimpse of the tough fight ahead for any kind of financial regulatory reform.

Matthew Padilla at Mortgage Insider offers a possible solution:

A simple compromise is to allow cramdowns but pass a bill that says they will only apply to loans made starting in 2010. That will give the industry some months to adjust.

Cramdowns could be one key factor in avoiding another housing bubble and financial meltdown.

But not if the Mortgage Bankers  Association and all the other powerful financial groups that continue to oppose cramdown get their way, once again.

]]> http://washingtonindependent.com/58602/financial-services-industry-wastes-no-time-fighting-cramdown/feed 7 http://washingtonindependent.com/58435/treasury-says-cramdown-is-still-off-the-table-though-loan-modifications-arent-working http://washingtonindependent.com/58435/treasury-says-cramdown-is-still-off-the-table-though-loan-modifications-arent-working#comments Thu, 10 Sep 2009 15:37:45 +0000 Mary Kane http://washingtonindependent.com/?p=58435 As Mike pointed out today, the slow pace of loan modification progress has prompted some lawmakers to once again call for mortgage cramdown legislation that would allow bankruptcy judges to modify loans and keep borrowers in their homes.

But the Obama administration is signaling clearly that while it may be open to some new tactics, cramdown is not one of them.

Assistant Treasury Secretary Michael Barr told reporters on Wednesday that “Bankruptcy reform is an additional tool, but it’s not the focus of our efforts to keep people in their homes,”  The Wall Street Journal reported. In plain English, that basically means the administration isn’t going to support any renewed efforts to get a cramdown bill passed.

And Barr’s comments came after Treasury released a report noting that only 12 percent of eligible borrowers have started trial loan modifications under the $75 billion mortgage foreclosure prevention plan.

Supporters of cramdown say it’s necessary as a backstop to force servicers to try harder to complete loan modifications. Incentive payments to servicers for reworking loans are the carrot, and cramdown is supposed to be the stick. The administration in not only dropping the stick, but it’s increasing the carrot part of the plan. Treasury also plans this month to announce it will offer additional financial incentives to servicers to complete short sales, in which a homeowner as a last resort sells his property for less than is owed on the mortgage, and the bank accepts the discount, American Banker reported.

Under the Treasury proposal, servicers will get a $1,000 “success fee” for each short sale they are able to compete, according to American Banker.

The problem with short sales is that they have been notoriously difficult to complete, with complaints growing that banks are deliberately dragging their feet on them. Also, as Mortgage Insider blogger Matthew Padilla explains, a homeowner’s credit still can get stung by a short sale. But Treasury probably is pushing the idea because its loan modification plan clearly isn’t reaching enough troubled homeowners, Padilla said.

All this points to a simpler, quicker, and more effective solution — cramdown. But the administration clearly isn’t willing to go there. Until then, maybe some homeowners will benefit from a short sale. Maybe some more will get their loan modifications. But no doubt many will simply go on to lose their homes — something that might have been prevented by a bankruptcy judge. The administration has the power to push Congress toward cramdown, but has chosen not to. And that’s something to keep in mind each time Treasury or the White House talks about how much the government wants to help homeowners in trouble.

As we noted, the time is ripe to try new tactics to combat foreclosures, including encouraging ways to rent foreclosed homes back to former owners. Fixing tax laws that are slowing down some loan modifications might help. Even direct loans to homeowners could be a strategy.

Surowiecki agreed:

If we really want to keep people in their homes, then, nudges and renegotiations probably aren’t going to do it. We need more direct action. One option, which the banking lobby killed earlier this year, would be to allow “cramdowns”: let bankruptcy judges reduce the principal on homeowners’ mortgages. Another, even more direct option is simply to give aid to homeowners: one proposal would have the government make low-interest loans, or even grants, to people who have suffered a steep decline in income and have negative equity in their homes. That would target the aid at the people who need it most: as another Boston Fed paper shows, defaults are most likely to happen not just because interest payments are set too high but because of income shocks (usually after the loss of a job) and plummeting house prices.

Surowiecki pointed out, as we did, that forceful actions to help homeowners might not be popular; no one wants to pay off their neighbor’s mortgage. But as foreclosures continue, the spillover effects on surrounding neighborhoods will become more severe, which may change that attitude.

But in the end, Sur0wiecki says, the Obama administration will have to come to a conclusion it hasn’t reached yet: Fixing the roots of the crisis is going to be costly. The government seems to be in denial on this. The current view is that “we’ll just keep muddling through with the current approach, which offers us the sense that we can get quite a lot without spending much,” Surowiecki said.

Maybe it’ll work. But the housing bubble was very expensive. It’ll be surprising if we can deal with its consequences on the cheap.

More reasons why it’s time for the government and the lending industry to quit trying to just muddle through the crisis and really rethink foreclosure strategies.

“It frustrates me when I see the government looking to the servicer for the solution, because it will never ever happen,” said Margery Golant, a Florida lawyer who defends homeowners against foreclosure and who worked in the law department of a major mortgage company, Ocwen Financial. “I don’t think they’re motivated to do modifications at all. They keep hitting the loan all the way through for junk fees. It’s a license to do whatever they want.”

As I explain in my story today about loan modifications, servicers are also still including waivers that require borrowers to sign some of their legal rights away in order to obtain a loan modification — a practice that lawmakers, including Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told them to get rid of more than a year ago.

Frank apparently is so fed up with the slow process of loan modifications that he’s now threatening to bring back legislation to allow federal judges to cramdown, or modify, the terms of a mortgage for a borrower in bankruptcy.

At The Atlantic, Daniel Indiviglio points out how little this means:

Democrats have an easy time passing pretty much whatever they want in the House. Not so for the Senate. In fact, when cramdown legislation was offered in the Senate last spring, it failed miserably. Only 45 Senators voted in favor — no where near the 60 necessary. In other words, the Senate would have at least as difficult a time passing cramdowns as passing national health care reform and cap and trade.

But the climate for passing cramdown legislation has changed: now it’s even less likely. Unlike last spring, the economy and housing market are showing signs of stabilization. That should make moderate Senators even more unlikely to change their votes in favor. These days, the Senate has all the power. Frank can threaten all he wants, but unless he knows of some way to sway moderate Senators, those threats may fall on deaf ears.

Frank’s threats aren’t the only ones to carry little weight. As any five-year-old knows, there isn’t much incentive to change your behavior if there aren’t any consequences for bad behavior. Servicers may get summoned to Washington for a public flogging about their lack of progress in modifying loans — but so what? There are no real financial penalties, or retribution, for failing to rework the loans — or for creating non-compliant modification agreements, like the ones with legal waivers. Housing counselors might catch some problems and try to correct them,  but they can’t do much about the incentive of junk fees that make foreclosure a more profitable option. So nothing really changes.

The Treasury Department could do more. It could treat servicers as government contractors, spot check contracts and quit paying firms that violate the program’s guidelines. It could levy penalties. It could get serious about cleaning up the sloppiness in its signature foreclosure prevention program. In short, it could do what it hasn’t done, up until now: Make loan modifications a priority.

And there are other options. If real efforts to promote loan modifications don’t pay off, then it’s time to rethink foreclosure strategies. The White House could actually put its clout behind cramdown this time around. It could push innovative rental policies to ease foreclosures. But whatever it does, the lesson here is to apply the fundamentals to any reforms, especially those involving a lending industry that continues to prey on troubled borrowers. If things don’t get done, there should be consequences.

The lack of progress in getting loan modifications completed has highlighted why the failure of cramdown was so disastrous for foreclosure prevention. Cramdown was the veiled threat, the end of the line if lenders didn’t modify loans. Now there’s nothing to deter them, except for the occasional lecture from administration officials or lawmakers. The business of making money from foreclosures just goes on as usual, long after the news cycle ends.

Durbin’s new initiative is raising the hopes of cramdown proponents. At Creditslips, University of Illinois law professor and credit expert Robert Lawless called Durbin’s revival “hopefully an indication there may be some interest in moving the legislation forward.”

There have been increasing reports (e.g., here) recently that lenders are not doing voluntary mortgage modifications in the numbers that need to happen. Yeah, I know — who could have possibly foreseen the possibility that a solely voluntary system would not work? There need to be carrots that encourage lenders to do the modifications. The change in the bankruptcy law is the missing piece — the stick that makes the program work.

A renewed interest in cramdown may have less to do with a sudden acknowledgement of its merits than the shortfalls of Making Home Affordable, the Obama administration’s program to encourage loan modifications. The goal of that program is to rework loans for 3 to 4 million borrowers. But a new report by the General Accounting Office calls that estimate too optimistic. It also says the administration needs to do more to make sure servicers are equipped to participate – and that they follow the rules, CNN Money reports.

The GAO also critiqued the administration for not having the controls in place to properly monitor the program. Specifically, the agency is concerned that Treasury is not evaluating servicers’ capacity to meet the plan’s requirements and guidelines. Also, the agency has failed to fully staff the Homeownership Preservation Office, which is responsible for overseeing the modification program.

And, though Treasury has hired Freddie Mac to review servicers’ performance, it has not put established procedures to address those servicers who don’t comply.

Already, reports have surfaced that financial institutions are not adhering to the program’s rules. At a Senate Banking Committee hearing last week, a consumer advocate said some servicers are violating the guidelines by demanding upfront payments, denying borrowers not in default and initiating foreclosures while borrowers’ applications are being reviewed. Senator Christopher Dodd, D-Conn., has asked the administration to look into these allegations.

Given those drawbacks, it’s little wonder that tactics like cramdown are being revived. The Obama administration plans to meet with servicers July 28, to pressure them to modify more loans. But with rising unemployment contributing to a record 1.5 million foreclosures just in the first half of this year,  a strategy that involves more than just a carrot may be called for. The Obama administration stood on the sidelines before, as cramdown failed, and has openly abandoned the idea. But unless it can get servicers to not only write down loans but to reduce loan balances as well — something that hasn’t happened so far –  it may be forced to rethink that decision and take a second look at cramdown, the missing stick in its strategy so far.

Sen. Richard Durbin (D-Ill.) (WDCpix)

Roughly three months after Senate lawmakers killed legislation empowering homeowners to escape foreclosure through bankruptcy, some upper-chamber Democrats are looking to revive the corpse. They hope to pressure the White House into spending valuable political capital on a cause fallen by the wayside.

Up to now, policymakers have relied on programs that subsidize lenders and mortgage servicers who volunteer to alter loans to keep homeowners afloat. Yet those voluntary modifications lag far behind the rising tide of foreclosures. Indeed, only 160,000 homes have been propped up this year under the largest such program — a figure dwarfed by the more than 1.5 million foreclosure filings since January. With unemployment on the rise, the gap is only projected to expand. The dark trends have slowly prodded lawmakers to return to mortgage bankruptcy reform as the possible missing link to addressing the foreclosure crisis — the stick to accompany the financial carrots that have thus far failed to stabilize the housing market.

Illustration by: Matt Mahurin

“After two years of efforts that rely on banks to volunteer to rework mortgages, it is time to admit that the programs that have been put in place thus far to ease the crisis are clearly not working,” Sen. Richard Durbin (D-Ill.), sponsor of the Senate’s bankruptcy reform bill, said Thursday during a foreclosure hearing in the Senate Judiciary Subcommittee on Administrative Oversight and the Courts. “With a simple change to the bankruptcy code … over 1.8 million families could save their homes in this country between now and the end of 2012, if the Senate could only muster the courage to help them.”

Under Durbin’s proposal, bankruptcy judges could reduce, or “cramdown,” the terms of mortgages, including interest rates and principal balances, to make the loans more affordable for struggling homeowners — a power judges have over loans for vacation homes, jewelry and other material assets, but not over primary mortgages.

Yet Durbin represents a somewhat lonely crowd. Not only is the bankruptcy-reform proposal anathema to Republicans, but the Obama administration, once a cheerleader for the change, has abandoned the legislation altogether. Without the active backing of the White House, a cramdown bill that passed the House in March was shot down in the Senate less than two months later. Still, Durbin has vowed to bring it back to the Senate floor this year. But, faced with a crowded legislative calendar, including sweeping health care and climate change reform, he’s running out of opportunities.

That erosion of White House backing, according to housing and consumer advocates, spells bad news for the nation’s homeowners, who are drowning in debt in larger and larger numbers. Indeed, more than 1.5 million homes have filed for foreclosure this year, according to RealtyTrac, an online foreclosure database. The figure represents a 15 percent jump from 2008. And the numbers are rising. In May, roughly 321,000 foreclosures were filed nationwide, RealtyTrac found. In June, the figure was more than 336,000.

The difficulty in addressing the housing crisis can be attributed largely to the shifting causes of mortgage defaults. What began as a problem limited largely to homeowners with risky, variable-rate, low-equity loans, has evolved to plague even those borrowers who took out more stable, fixed-rate mortgages with significant down payments. Rising unemployment has only exacerbated the trouble.

To tackle the crisis, the Obama administration in February rolled out its Making Home Affordable Program, which supplied $75 billion to entice servicers to tamp down mortgage payments to 31 percent of monthly income for homeowners struggling to stay afloat. The White House said at the time that the program would help between 3 million and 4 million families stay in their homes.

Yet, last week, White House officials told a Senate panel that just 325,000 modifications have yet been offered under the program. Of those offers, 160,000 are in a three-month trial modification stage — modifications that will become permanant if the homeowners can meet the new payment terms over that span.

Not only are those number insufficient to address the rising tide of foreclosures, Adam Levitin, housing expert at the Georgetown University Law Center, told lawmakers Thursday, but of the mortgage modifications that are being made, almost none involve reducing the principal balance of the loan. With the housing market falling — precipitously in some regions — even homeowners who can afford to pay their mortgages will begin to walk away if they aren’t building equity, Levitin warned.

“None of the current loan modification or refinancing efforts attempt to deal with the negative equity problem in a way that offers a long-term solution,” Levitin said.

There remains some disagreement among finance experts over why lenders and servicers have been so reluctant to modify loans, even when foreclosures are often the more expensive option. One theory posits that the servicers will be paid more from foreclosures, even if the owners of the loans will lose out.

“As long as servicers profit because homeowners are in default, they’re not going to volunteer to take a hit,” Alys Cohen, an attorney with the National Consumer Law Center, testified Thursday.

But that confusion, according to cramdown supporters, is just another reason to pass the bill. “Whatever the factors may be that are inhibiting voluntary and government-subsidized loan modifications, they are immaterial if a mortgage loan can be modified in bankruptcy,” said Levitin.

Standing in the way of the legislation are not only the banks but the banks’ supporters on Capitol Hill. Conservatives argue that empowering judges to modify mortgages would make banks more reluctant to lend money, thus exacerbating the credit freeze.

Encapsulating the GOP argument, Sen. Jeff Sessions (Ala.), senior Republican on the Judiciary subpanel, warned Thursday that the cramdown bill would raise rates on everyone. A contract’s a contract, Sessions said, and homeowners who agreed to the terms of a mortgage loan should be held accountable for the payments. “There’s no free lunch here,” he said.

Not that Washington policymakers are unaware that the voluntary efforts aren’t working as planned. The Obama administration this month has already sent letters to servicers urging increased participation in the voluntary modification program.

In another concessionary move, the Treasury this month expanded a program allowing homeowners with mortgages backed by Freddie or Fannie to refinance those loans if the outstanding balance doesn’t exceed 125 percent of the home’s appraised value. Originally, the value cap for such refinancings was set at 105 percent. The change was made in recognition of the increasing number of homeowners who are underwater as home values have plummetted. Indeed, Levitin estimates that 30 percent of all families who bought homes in the last five years currently owe more than their homes are worth.

Lawmakers and advocates alike are warning that, unless Congress steps in to address the housing crisis — which, after all, was the root of the economic downturn — the result will be a spiral of foreclosures leading to more foreclosures, and a prolonging of the larger recession.

“If we fail to act,” said Sen. Sheldon Whitehouse (D-R.I.), chairman of the courts subpanel, “I fear that we put ourselves at risk: that a vicious cycle of foreclosures, falling home values, and declining tax revenues will keep us in recession for years to come.”

Witnesses included the obligatory consumer advocates, a conservative think-tanker and a university professor. But the Treasury Department, although asked to send a representative of its own, declined to do so.

A Democratic aide said the agency was simply too slammed this week with other hearings to meet the request (and the Treasury didn’t respond to requests for comment), but the pattern is getting suspicious.

President Obama campaigned in support of cramdown last year, and endorsed it again in February when he unveiled the administration’s foreclosure mitigation plan. But since then, the White House has done very little to ensure the bill’s success. In April, for example, Treasury Secretary Tim Geithner was hardly enthusiastic when asked if bankruptcy changes were a vital element of the administration’s plan to stem foreclosures.

More recently, the White House watched in silence as the cramdown bill was obliterated in the Senate, where 12 Democrats voted against it. Some Democrats said later that they interpreted the president’s silence to mean they were free to oppose the measure.

And now here’s the Treasury, in the middle of the continued foreclosure crisis, saying it’s too busy to talk with Congress about ways to keep folks in their homes?

Are we missing something?

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The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60bn than to buy GM? The funds would be better spent helping the Midwest diversify away from cars. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60bn to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

Beyond GM, an even bigger worry should be the continuing long loss of well-paying, middle-class jobs that once allowed significant numbers of Americans to share in the country’s prosperity, Reich said. The government bailout of GM, he wrote, will do little to address that problem — in fact, it will only worsen as the automaker cuts jobs to stay afloat for as long as possible. In this new economy, GM’s old adage has been turned upside down, according to Reich. What’s bad for GM these days is what’s bad for America as well.