Flickr: Stallio

As a credit squeeze continues, calls to beef up financial literacy among America’s consumers are taking on a new urgency.

In Massachusetts, Democratic Senate candidate Stephen Pagliuca is pushing for a national financial literacy campaign, saying it would help avoid a repeat of the financial system collapse last fall. In Miami, which recently introduced citywide financial literacy programs, a top official called financial literacy “the new civil-rights problem of our century.” In the blogosphere, basketball superstar Magic Johnson is under fire for doing national commercials for Rent-A-Center, a leading firm in the costly rent to own business, and Jackson Hewitt, which offers high-rate tax refund anticipation loans. Critics contend Johnson is endorsing products that exploit a lack of financial sophistication among some low-income consumers.

Image by: Matt Mahurin

But despite that obvious need, most of the nation’s financial literacy efforts aren’t exactly up to the job. As credit expanded in past years, corporations threw money at financial literacy programs even as they continued marketing higher-rate credit cards and loans. Consumer credit and debt counseling agencies expanded into a $7 billion industry that now includes everything from legitimate organizations that help a consumer fix his finances to flim-flam outfits that charge high frees and leave a borrower in worse shape than before. Subprime lenders created “consumer advocacy” organizations and offered financial literacy advice.

The situation has become so troubled that some credit experts no longer believe many financial literacy efforts are even effective. Between complicated credit card agreements that trip up even law students to payday lenders providing financial education, they say, most of the attempts to educate consumers on their finances are either hopelessly tainted or simply don’t make a difference.

“If you’re a consumer in financial distress, there’s really no trustworthy guide for pointing you to the right solution – almost everyone has a stake in the game,” said Adam Levitin, a Georgetown University law school professor who specializes in bankruptcy and credit. “The problem goes deeper, though, as all sorts of consumer credit counseling organizations are funded indirectly by various credit industry players. I’m frankly more comfortable with openly for-profit debt settlement agencies (they negotiate debt reductions in exchange for taking a percentage for themselves) than with the faux not-for-profit players.”

Irene Leech, former president of the Consumer Federation of America and a Virginia Tech University professor who focuses on consumer issues, agreed.

“All education offered by the businesses that sell the product they’re educating on is subject to bias,” she said. “These companies don’t dare hit the points that need to be hit hard enough – or they’d lose business – so their efforts are at best disingenuous and at worst, fraud.”

As TWI has reported, the nation’s leading financial literacy effort, the JumpStart Coalition for Personal Financial Literacy, includes as one of its corporate partners CompuCredit, a subprime lender that offers high-rate credit cards and payday loans. Last year, CompuCredit reached a $114 million settlement with the Federal Deposit Insurance Corporation and the Federal Trade Commission, which had charged CompuCredit and two partner banks with deceiving hundreds of thousands of customers by failing to properly disclose upfront fees and credit limits on their cards.

In addition, JumpStart’s Southeast Regional Director, William Cheeks, a paid consultant, also does consulting work for CompuCredit.

JumpStart Executive Director Laura Levine told TWI that no one had previously brought these issues to JumpStart’s attention, and that the organization’s staff would investigate them. Last week, Levine said the organization plans to introduce a conflict of interest policy for staff and for consultants, in the wake of the story. The coalition’s governance committee also “is going to look further into CompuCredit in particular,” she said, and “we’re going to continue to deal with issues regarding the suitability of partners on a case by case basis.”

Like CompuCredit, other subprime lenders also aligned themselves in recent years with financial literacy efforts, or moved to portray themselves as good corporate citizens, by donating to local minority groups or sponsoring events in minority communities. In a campaign that particularly irked Leech, payday lenders ran an advertising campaign on Washington metro system, touting payday loans as a sound financial alternative.

Other high-rate lenders also are using similar tactics.
Ray Forgue, a retired University of Kentucky professor who taught personal finance, and who has written personal finance books and a textbook, now lives in South Carolina. Car title lenders “are everywhere,” he said, featuring advertisements that show consumers being allegedly financially savvy by taking out car title loans to pay for dental care. Car title lenders make loans using a borrower’s car as collateral, with interest rates that can approach 400 percent. Borrowers who can’t keep up with the high payments lose their cars, and then, in many cases, their jobs as well.

These kinds of tactics present a huge challenge for financial literacy efforts, Forgue said. Any financial literacy program has to both battle the saturation of subprime products that have made their way into the mainstream, and help consumers understand newer and more complex financial issues, from insurance to retirement planning.

“The products are far more complicated, both on the consumer credit and the investment side,” Forgue said. “Financial literacy definitely is much more important than it ever has been before.”

Leech, for her part, said the problem with financial literacy in recent years has been that funding for unbiased, professional counselors has been replaced by corporate dollars. One fix might be for the government to reinvest in the nation’s Cooperative Extension System, a national educational network supported by the U.S. Department of Agriculture that provides consumers with experts and research on many topics, including financial literacy. The cooperative system was created by Congress in 1914, and uses the resources of land grant colleges and universities to offer its non-formal, non-credit programs to the public. The system has offices in every state and a website with financial research and information, from budgeting during lean times to an “ask an expert” feature, with questions like how much allowance a child should get at a certain age.

Leech also supports the America Saves campaign, a nationwide effort run by the Consumer Federation of America to encourage low and moderate income households to change their financial behaviors, build up savings, and pay down debt. The campaign, the nation’s largest savings initiative, also sponsors an annual “America Saves Week” that encourages people to review their finances and improve their savings habits.

And the human resources departments of corporations and businesses are increasingly getting involved in financial literacy efforts, Leech added, since employees with financial troubles can be distracted or forced to miss work due to legal battles over debts.

But any financial literacy attempt faces an uphill fight. The attorneys general of 40 states recently asked the Federal Trade Commission to tighten regulation of companies offering debt relief services to consumers, saying the firms require customers to pay thousands of dollars in upfront fees, and then fail to renegotiate payments with creditors. The FTC will hear testimony this week on proposals for reform, as the battle over consumers and their money decisions continues, and the credit squeeze tightens further.

Illustration by: Matt Mahurin

The time may be ripe for a shift in strategy as the foreclosure machine grinds on, and new foreclosure notices reach the troubling milestone of 10,000 per day.

A weak economy has added job losses and falling home values to the mix of toxic loans that prompted the crisis two years ago, making an already difficult situation even more severe. Government measures from foreclosure freezes to loan modifications have only served, so far, to stall the inevitable – and to create an ominous backlog of millions of pending foreclosures. Plus, more than one in five homeowners now owe more on their mortgages than their homes are worth, according to the real estate website Zillow.com. No one can predict with assurance whether those underwater homeowners will keep paying on their loans, or take a walk.

Illustration by: Matt Mahurin

And as bad as things may seem now, there’s still a long period of pain to come: A steady drumbeat of foreclosures, and a stagnant housing market, for the next several years ahead, at a minimum. Some experts see an even more dire picture: Five to 10 years, in California alone, of record high foreclosures. No significant home prices increases nationwide on the horizon in the next year. Or the year after. Or for as long as the next five years. Some 9 million foreclosures are expected by 2012.

While economists search for signs of green shoots, “no one’s really saying anything about this,” noted Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md. publication that covers the lending industry. “There’s really no good news out there, other than we can’t possibly get in much worse shape than we already are.”

Given this bleak scenario, some say it’s finally time for more forceful action. Congress and the Obama administration need to move boldly to stop foreclosures, requiring lenders to go beyond what Calculated Risk dubs “extend and pretend” repayment plans, and actually write down loan balances. And the Obama administration should move quickly to bring more players to the table to pick up the pace of those loan modifications – including the Internal Revenue Service. Servicers might be more aggressive about writing down loans if they’re sure it won’t create tax liabilities for trusts they represent, an impediment that currently stands in the way of getting more mortgages modified, said Kathleen Engel, a Cleveland State University law professor who studies mortgage securitizations.

There’s more to be done, Engel said: Expand the benefits of the homebuyer tax credit up the income ladder, offering it to move up buyers with existing homes as well as first time purchasers. Even direct government loans to borrowers, to keep them in their homes, shouldn’t be dismissed.

“Now is the time to do something,” Engel said. “There are a lot of things to be very concerned about right now. There are people underwater who aren’t making good on their home equity loans. With job losses increasing, more people aren’t able to make their mortgage payments at all. And REOs (Real Estate Owned properties) are driving down home prices. We really need to be trying some new things.”

Engel’s view was echoed by the Obama administration, which recently chastised lenders for their lack in progress in modifying loans. “We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share,” Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan said in the letter, which was sent to to 25 mortgage-servicing firms.
Only about 270,000 borrowers have been offered loan modifications under Obama’s Making Home Affordable program, the Treasury Department says — a far cry from its much more ambitious goal of helping 4 to 5 million homeowners rework their loans.

Geither and Donovan weren’t the only ones speaking out. As TWI reported, a small band of House Democrats last week urged for more action beyond voluntary loan foreclosures. Senate Finance Committee Chairman Chris Dodd (D-Conn.) and 19 other Senators also petitioned Geithner to adopt a more aggressive strategy for loan modifications specifically for homeowners with option adjustable rate mortgages scheduled to reset to higher payments over the next four years. In addition, the Washington Post reported the Treasury Department also is putting together a “Plan C” – a new strategy – to head off defaults in commercial real estate and to tackle delinquencies tied to job losses.

It seems like a full frontal assault. But it may not be enough.

SLOWING DOWN THE INEVITABLE

In reality, there’s little political will to force lenders to write down loan balances. Congress defeated mortgage “cramdown” legislation, which would have allowed bankruptcy judges to cramdown, or reduce, the terms of a mortgage to keep a borrower in his home. The Obama administration stood by as the measure failed. Only that small group of House Democrats still wants to revive it. Bailing out homeowners still runs smack into the wall of moral hazard, in the public’s mind, and even the worsening crisis hasn’t changed that. “I don’t know why this is still true, but people are willing to roll over and give billions of dollars to banks, and they get pissed off about the idea of their next door neighbor getting a break,” said Sean O’Toole, president and founder of ForeclosureRadar.com,which compiles foreclosure data for the California market.

Instead of pressing for more loan modifications, it may be time to conclude that all the programs thrown at the mortgage problem haven’t done much to fix it. The most infamous, Hope for Homeowners, intended to help 400,000 borrowers, resulted in just 25 loan closings. Various state and voluntary foreclosure freezes only gave a pause to foreclosures. And most foreclosure prevention programs were created two years ago, when subprime loans were the major cause of foreclosures, not unemployment and a faltering economy.

These days, if you can’t afford your mortgage payment because you just lost your job, it really doesn’t matter whether you have a toxic Option ARM or a standard 30-year fixed loan. You’re still in default.

“The bad economy is what’s driving foreclosures right now,” Cecala said. “Even if there were no Pay Option ARMs out there, many homeowners would still be in deep trouble.”

Foreclosure prevention efforts, at this point, are “just slowing down the inevitable,” he added. “You can take a look at any one of these programs and you won’t find a lot of value in it.”

The Obama Administration, for example, recently expanded the refinancing options available under Making Home Affordable, to include borrowers who are more deeply underwater on their loans. It sounds good -  but it’s unlikely to pan out, Cecala said. Borrowers may not qualify for refinancings, under new underwriting guidelines from Fannie Mae or Freddie Mac that are far stricter than when they originally applied for their loans. Or borrowers may have to pay such high fees or rates that it won’t make the refinancing worthwhile. In places like California and Florida, some homeowners are so far underwater they still won’t qualify.

THE NUCLEAR OPTION

The big question, as Cecala notes, is whether foreclosures can be stopped at all. Which brings up the nuclear option: Unleash the pent up foreclosures and get the pain over with. Consider the backlog in California alone. More than 3 million households are expected to end up underwater eventually, according to O’Toole. As of now, some 851,000 households are delinquent on their mortgages. Of those, 264,977 already have received a foreclosure notice – but their properties have yet to be sold at auction. Only 22,245 foreclosures were completed in June, Foreclosure.com said.

Given that possibility that half of the the 3 million underwater homeowners or more also will eventually lose their homes, that means that working through the entire backlog could involve between five to 10 years of record high foreclosure levels, O’Toole said.
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Nationwide, the picture isn’t much better. After hitting a high point of about 900,000 in November 2008, REO inventory, or bank-owned foreclosures, slowly decreased over the last six months, down to about 770,000 in May, according to RealtyTrac, an online foreclosure database.

But don’t get your hopes up just yet.

“We believe the reason for that decline is largely due to the various foreclosure moratoria and state laws extending the foreclosure process that have been in effect in recent months,” said Daren Blomquist, a RealtyTrac spokesman. “As some of those moratoria were lifted in March and April we saw a substantial spike in initial foreclosure notices and we believe that will translate into a spike in REOs as well over the next several months.”

The bad news continues:  “In addition, we believe there is still a pent-up supply of delinquent loans that have not even hit the foreclosure process yet because banks are taking longer to start the foreclosure process after a loan goes delinquent – probably partly because they are overwhelmed with the volume of delinquent loans and partly because they are more aggressively trying to modify or refinance loans rather than foreclose.”

Blomquist added that the “twin threats” of risky loans and high unemployment will ensure a steady drumbeat of high foreclosure activity, for at least the remainder of this year.

The radical approach would be to stop staving all this off, take the pain, push the foreclosures through the system without delay, and get to the bottom. In California, at least, that could clear out the foreclosure backlog in about two years, O’Toole estimated.

“I’m not necessarily advocating that we should simply dump all the foreclosures at once – I actually think that could be disastrous,” he said. “But I think dragging them out over the next 5 to 10 years is an equally bad choice.”

But if there’s little political will to bail out homeowners, there’s even less stomach for announcing a strategy to bail on them entirely. It’s not the sort of thing that can be said in pubic. Even if there’s some logic to it.

AN ENTIRELY NEW DIRECTION

And that opens the door for a third way.

Alan Mallach, a senior fellow at the National Housing Institute and the Brookings Institution, took a close look at the housing market in Phoenix, where prices have declined by as much as 60 percent in the past few years.  Houses that sold for a quarter-million dollars now go for $90,000 or so in the booming REO market. Buyers – both investors and individuals – are realizing that at those prices, they have options, if they are willing to be patient. They can hold on to those homes for six or eight years, rent them out until they earn their money back, and wait until they can possibly sell them at a profit.

Most importantly, the new owners often are more than willing to rent back the homes to their former owners, a situation that benefits both sides. Borrowers can stay in their homes, with rent payments they can afford. The homes don’t sit vacant, abandoned, or vulnerable to vandalism, which can drive down surrounding property values. “You don’t kick the person out,” Mallach said. “And many of the investors say it’s an advantage not to have to look for a new tenant.” The situation, he said, provides evidence of “the beginning of some sort of leveling off that’s going on” in neighborhoods hit with foreclosures, at least in Phoenix.

Based in that experience, Mallach these days reminds local governments and neighborhood development groups not all investors are enemies, despite their reputations. Communities can both encourage investors as partners in buying and fixing up bank-owned houses – and warn them they’ll come down hard if they sink too far into speculation. And there are more encouraging signs at the local level. As Philadelphia, and some other cities have found, mandatory face-to-face foreclosure mediation between borrowers and servicers has proven to help avoid foreclosures, without dragging out the process.

A combination of these kinds of ideas – smaller scale, targeted to the needs of particular markets – may a quicker and more effective blueprint for tackling the crisis, especially in the absence of an aggressive government approach.

“Maybe we’re coming to the realization that we can’t loan mod our way out of this,” Mallach said. “There’s no magic solution. There’s no government riding in on a white horse to buy up all the bad assets.”

THE WILD CARD

Congress and the administration, in fact, haven’t exactly come up with anything “radical and bold” yet to tackle the crisis – and it’s unlikely they will turn around and do so now. Instead, Mallach noted, Realtors, the real estate industry, and some economists are spending unnecessary time and energy trying to declare a bottom to the crisis and look for any evidence of good news. It’s a great time to buy a house, they insist.

But there are still 9 million foreclosures expected by 2012, according to the Center for Responsible Lending. Goldman Sachs estimates 13 million foreclosures on all types of loans by 2014. And a continuing decline in home prices for the majority of housing markets is predicted for at least the next two years, says a report by mortgage insurer PMI.

As Malllach noted, policies to encourage renting are one option to counter all this. Even with all their limitations, loan modifications could be another. It’s “a really crucial time” to jumpstart them right now, said Cleveland State’s Kathleen Engel. Servicers finally have gotten fully staffed and up to speed, after a slow start. Clearing away potential tax liabilities for trusts due to aggressive loan modifications could help, she said. So could ratcheting up the pressure on lenders and servicers alike to complete more of them.

But challenges remain. REOs are driving away other sales, keeping downward pressure on home prices, Mallach noted. Stronger markets that have been immune so far to plunging home prices, such as New York City, New Jersey, and the Philadelphia suburbs, still remain at high risk for a downward spiral. Frustration keeps growing over a lack of progress in anything being done to stem foreclosures, creating anger in neighborhoods, and even a movement to put squatters in vacant homes.

Beyond that, underwater homeowners remain a huge wild card, with the chance that a significant number of them will stop paying their mortgages in the near future clouding any hope for a quick recovery.

When it comes to the foreclosure machine, things are probably even worse than they seem. That’s a starting point for any strategy to challenge a housing crisis isn’t ending anytime soon.

The poll was conducted between May 20 and 25 — while President Obama was heaping praise on Dodd for his work authoring the credit card reform bill, signed into law last week.

Dodd must be concerned when the popular president goes to bat for him and he still sees polling numbers like this:

Connecticut Sen. Christopher Dodd is gaining on former U.S. Rep. Rob Simmons, a possible Republican challenger, and now trails 45 – 39 percent in the 2010 Senate race, according to a Quinnipiac University poll released today.

This compares to a 50 – 34 percent Simmons lead in an April 2 poll by the independent Quinnipiac (KWIN-uh-pe-ack) University.

And this:

Connecticut voters disapprove 53 – 38 percent of the job the Democratic incumbent is doing, compared to 58 – 33 percent April 2, his lowest approval rating ever.

And this:

Connecticut voters say 49 – 35 percent that Dodd is not honest and trustworthy and say 47 – 42 percent that he does not care about their needs and problems.

Despite those poor reviews, the pollsters say Dodd “appears to have stopped the bleeding” since news broke that he had inserted a provision in the stimulus bill that paved the way for the AIG bonus scandal, all while being the top recipient of campaign contributions from AIG employees since 1989.

Quinnipiac University Poll Director Douglas Schwartz said he “Dodd is an exceptionally skilled politician, and he has plenty of time. He is lucky to get this early warning more than a year before the election.”

If this is luck, I’m guessing Dodd’s opponents want none of it.

Flickr: respres

A housing program blamed in part for high default rates on government-backed loans, derided as a “scam” by the Internal Revenue Service and targeted for years for elimination by the agency that ran it looked like it finally had reached its end this fall, after Congress finally banned it. But now, in a sign that some lessons of the housing crisis have yet to be learned, a movement is afoot to bring it back.

The program is called seller-funded down payment assistance. When U.S. Department of Housing and Urban Development Secretary Shaun Donovan told Congress last month that dramatic growth in seller-funded down payment assistance programs in recent years had added to high default rates on Federal Housing Administration-backed loans, it might have seemed like the final blow. The programs, initially intended to help low and moderate income people buy homes, had long been under fire, the subject of complaints from HUD, the General Accounting Office, and the IRS. And with FHA default rates threatening to trigger yet another taxpayer bailout, policymakers have plenty of motivation to steer clear of any lending approaches deemed risky or problematic.

Illustration by: Matt Mahurin

But supporters of seller-funded down payment assistance aren’t giving up. Despite Donovan’s stance, they’re still supporting a bill to revive the program – a measure now before the House Financial Services Committee. Sponsored by Rep. Al Green (D-Tex.), the bill has 17 co-sponsors, among them powerful lawmakers such as Rep. Maxine Waters (D-Calif.). Backers include builders and realtor groups, the National Association of Mortgage Bankers, and the Congressional Black Caucus. Committee Chairman Barney Frank, D-Mass., told the Wall Street Journal last year he wants to reform the program, not kill it. And supporters are continuing to pressure HUD to preserve it.

“We do agree there were problems with the previous program,” said David Ledford, senior vice president for housing policy at the National Association of Home Builders. “But we still support the legislation. HUD was somewhat at fault for not properly monitoring it. It can be done more carefully, and with tighter controls. But HUD is just throwing up its hands and saying things turned out badly and we shouldn’t do it at all.”

But Ledford’s views aren’t widely shared by many in the mortgage industry, and they simply don’t reflect reality, according to the program’s numerous critics. FHA’s seller-funded down payment assistance should have ended years ago, given ample evidence of its problems, said Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md. company that covers the lending industry. The GAO concluded that homes purchased using the programs were appraised at and sold for 2 to 3 percent more than comparable homes bought without the assistance. The IRS in 2006 revoked the tax-exempt charitable status of providers of seller-funded down payment assistance – and called the programs “scams.” HUD’s Inspector General and the FHA itself have complained the programs raise home ownership costs and lead to more foreclosures, saying homeowners using the assistance were two to three times more likely to default on payments than other borrowers.

Both the FHA and HUD allow homebuyers to receive downpayment money from third parties, such as relatives, employers, government agencies and independent nonprofits. But unlike much of the rest of the mortgage industry, the FHA also allowed homeowners to get downpayment help from nonprofits or charities funded in part by sellers. And that’s where the problems came in.

In a speech last summer, former FHA Commissioner Brian Montgomery called seller-funded down payment assistance programs “circular financing schemes.” Property sellers often raised the sales price of a home to cover the cost of downpayment “gift,” the GAO noted. The charity or nonprofit that supplied the down payment money was reimbursed by the seller for it, along with service costs and fees, once the deal closed. Borrowers unwittingly paid for it all. Critics contended some charities existed solely to funnel the downpayment money from the seller to the buyer. The program was especially popular with builders.

The Mortgage Lender Implode-O-Meter, an influential financial blog leading a blogosphere campaign against reinstating the downpayment program, explained that buyers qualified for FHA loans using grant letters from the charities as proof of downpayment. As far as the FHA was concerned, the grant was a charitable donation that came from an independent nonprofit, and not the seller.

Suckers!…Of course the losers in this scheme are the FHA (the taxpayer –who actually has to insure these loans), and ultimately the borrower — who is probably already underwater and overextended.

After buyer lawsuits, rising defaults, and other controversies, Congress finally ended the practice as part of the mortgage rescue package approved last summer, and the programs were banned as of Oct. 1. The bill to revive them is a long shot to eventually become law, given the past controversies. But the fact that a campaign even exists means one of the biggest lessons of the financial meltdown – that buying homes with no money down isn’t exactly a great idea – seems to be lost, at least on some.

“It’s a program that HUD doesn’t really want, the mortgage industry doesn’t really want and most community groups don’t really want,” Cecala said. “It’s got such a lousy track record. That anyone would want to resurrect it at all is astonishing.”

Added Cecala: “The fact that Congress would even consider this… are these guys serious? Did they do any research on this at all? It should have a skull and crossbones on it.”

Dean Baker, co-director of the Center for Economic Policy and Research, who warned before the financial crisis of a growing housing bubble, expressed similar sentiments. “I’d say it’s a bad idea that won’t go away,” Baker said. “I think it’s basically crazy. Arguably one of the lessons we were supposed to have learned is that we shouldn’t have been pushing homeownership, everywhere and always.”

“It’s a long shot to become law, but I wouldn’t rule it out. You have some big groups pushing it on the other side.”

Seller-funded down payment programs drew little attention earlier in the decade, when the FHA had a much smaller share of the mortgage market, and when helping low-income borrowers get into homes was an aggressive public policy goal, noted Patricia McCoy, a University of Connecticut law school professor who specializes in banking and securities regulation.

But use of the programs increased sharply, after the subprime meltdown led to an expansion of FHA-backed lending. And last month, HUD Secretary Donovan told Congress that while loans with seller-funded down payment assistance represented only 12 percent of the FHA portfolio at the start of 2008, they accounted for 30 percent of all foreclosures completed that year. He said the end of the program “should substantially reduce FHA losses on new originations in the years ahead.”

Some large down payment assistance providers, however, are countering with a campaign that contends the ban is hurting working class Americans, who want to buy homes but can’t come up with steeper downpayments because of tightened lending standards. A website sponsored by the bill’s supporters refers to the measure as “DPA Reform” and includes a running tally of the number of Americans denied access to homeownership since the programs officially ended.

Ann Ashburn, president of AmeriDream, a Gaithersburg, Md. provider, said in a statement last fall that “eliminating charitable down payment assistance will slam the door on over 100,000 teachers, firefighters, working families and others who rely on these programs annually to become homeowners.”

AmeriDream spokesman Henry Fawell said the company is “cautiously optimistic” about prospects for reviving the program. Helping buyers with downpayments would benefit the economy as a whole and could jump start the housing market, he said. Vacant homes are scarring neighborhoods with blight, but many borrowers can’t come up with downpayments on their own to buy them, he said.

Fawell acknowledge problems with the programs in the past, but said the new bill addresses them by including requirements for higher credit scores, fees for riskier borrowers, and penalties for inflated appraisals. “We have support on both sides of the aisle,” Fawell said.

The bill’s co-sponsors include one Republican, Rep. Gary Miller of California, a former builder.

With the Obama administration busy handling banks stress tests, bailouts and financial regulatory reform, the bill to reinstate seller-funded down payment assistance isn’t facing much active lobbying opposition. And down payment providers and housing lobbyists have a long history of successfully fighting off attempts to end the programs. HUD began trying to do so back in 1999 and again in 2007, when it was successfully sued by AmeriDream and by the Nehemiah Corp. of America, another large provider. Barely 24 hours after Congress approved the ban last summer, Rep. Green introduced a measure to bring it back.

One possibility is that supporters could slip in reinstatement of the program into a larger housing bill. But Cecala, of Inside Mortgage Finance, thinks it’s still a hard sell. Putting people in homes with no money down is a widely discredited idea, he said. Although civil rights groups still support the programs, the thinking has changed regarding the best approach to help minority borrowers.

“The Community Reinvestment Act and other programs are a much more sustainable way to get people into homes as opposed to subprime and no-downpayment FHA loans,” Cecala said. “But they also are a lot more work for both the lenders and borrowers.”

In the meantime, Ledford, of the builders’ association, said his group is working with HUD to see if first-time homebuyers can apply some of the new $8,000 tax credit toward downpayments. HUD is trying to make sure some of the same circular financing problems that plagued the seller-funded down payment assistance program wouldn’t affect that proposal, he said.

It seems that when it comes to seller-funded down payment assistance, the fight never really ends.

Correction: The Mortgage Bankers Association does not support seller-funded downpayments, as was incorrectly reported in the original version of this story . The National Association of Mortgage Bankers does support seller-funded downpayments. We regret the error.

Treasury Secretary Timothy Geithner (WDCpix)

In a sign of how widespread the nation’s financial crisis has become, even the credit unions are getting creamed.

Problems in the credit union system, once considered a largely mom-and-pop operation immune to turmoil, came to light last week, when their regulator seized two of the nation’s largest credit unions, U.S. Central Credit Union in Lenexa, Kanss, and Western Corp. Federal Credit Union in San Dimas, Calif. The two, with combined assets of $57 billion, are in trouble over the same investments in toxic mortgage backed securities that have felled global banks and led to the credit crunch.

Illustration by: Matt Mahurin

Cracks in the credit union system are showing the breadth of the crisis – and raising the possibility of another institution looking to the government for help. In a mirror of the dilemma facing the Federal Deposit Insurance Corp, the insurance fund for credit unions has been depleted by the seizure. Smaller credit unions may have to pony up big fees to replenish it – at the same time economy is hitting them hard, causing depositors to pull out their savings for living expenses. All of it is creating a liquidity squeeze that only threatens to become more severe, said Gerald Hanweck, a finance professor at George Mason University who follows the credit union industry.

“A lot of their membership is becoming unemployed,” Hanweck said. “If the recession keeps getting worse, it’s going to cause a lot of problems for them. More and more credit unions are going to fail.”

The failure of the two large corporate credit unions, which handle investments and other services for the 7,800 traditional retail credit unions, may become a turning point, proving that the industry needs more oversight, Hanweck and others said. The system includes 26 other corporate credit unions, as well as the two that were seized. Yet the credit union industry remains overseen by its own, individual regulator – the National Credit Union Administration, an independent federal agency considered by many as mostly as a cheerleader for the credit union movement, Hanweck said.

All the turmoil could mean that credit unions may become swept up in the Obama administration’s financial regulatory system overhaul, and put under closer supervision by Congress or the FDIC, in addition to requiring a government bailout or some type of federal aid.

“They consider themselves to be a movement, and their regulator doesn’t want to overregulate or be too restrictive,” Hanweck said. “But that’s contributed a considerable degree to their problems. The whole notion of a corporate credit union has to be re-thought. If they’re going to act like a bank, they need to be regulated like a bank.”

Even as the economy worsened, credit unions couldn’t tap Troubled Assets Relief Program money because they don’t issue preferred stock. The government bailout program is limited to institutions that do so. But credit unions are trying to find out whether they will be eligible to participate in the new Treasury Department plan to subsidize the purchase of toxic assets, said John McKechnie, a lobbyist and spokesman for the NCUA. The industry believes it should be eligible but doesn’t have enough information on the program yet, he said.

The industry also may look to Washington for additional money, even as it charges the retail credit unions to replenish the insurance fund. The NCUA estimates that it could cost as much as $5.9 billion to stabilize the corporate credit union system by rebuilding the fund, or more than the industry’s entire profit for last year. That cost could trickle down to customers, in the form of higher fees for loans and other services. The regulator also said total losses to the credit union system due to toxic securities could reach as high as $16 billion.

Treasury Secretary Timothy Geithner may not have had credit unions in mind when he put together his plan to buy up toxic assets, because the industry previously had been considered safe from the difficulties facing other financial services firms. But saying no to any kinds of government aid for credit unions would be a difficult thing to do, said George Overstreet, a professor at University of Virginia’s McIntire School of Commerce who specializes in banking and credit.

“Do you really think Washington wouldn’t bail out the poor old credit unions?” Overstreet said. “If they bailed out that sorry Citigroup and AIG, they’re going to have to bail them out too. At this point, what’s another few billion here and there?”

Credit unions, which are owned and run by their members, and are tax exempt, originated in Germany and became popular in the 1920s in the United States, when workers needed loans to begin buying automobiles and washing machines. The system now counts 90 million Americans as members. The 27 corporate credit unions serve as mini-Federal Reserves for the retail ones, providing loans and making investments on their behalf. Finally, there’s the U.S. Central Credit Union, which serves all the corporate credit unions – and was one of the two seized by the NCUA.

The NCUA website explains that the regulator took over the two corporate credit unions after an independent stress test by the Pimco investment firm found that losses tied to mortgage-backed securities were greater than thought initially, and threatened their viability.

“We were not prepared to let them fail,” McKechnie said. “It could have had a domino effect on the system, and we needed to stabilize the system.”

While times are difficult right now for credit unions, McKechnie said the system overall is still safe and stable. NCUA Chairman Michael Fryzel testified recently before Congress that the credit union system is unique, and requires its own regulator.

But emotions are running high on credit union websites, as members complain about paying to replenish the fund, debate whether mismanagement led to the problems, and contend that it was unfair for credit unions to be shut out of TARP funds.

Mike Moebs, an economist and president of Moebs Services, a financial industry consulting and research firm in Lake Bluff, Ill., said he believes it was a mistake to exclude the credit unions from TARP money, even if it wasn’t done intentionally. “I don’t think they can get out of this problem by themselves,” he said. “The corporate credit unions are the weak link. And they’re one of the weakest links in the whole financial system.”

Moebs said he thinks the credit union system should temporarily borrow money from Treasury to replenish the insurance fund, as the FDIC has done, or seek money from the Federal Reserve. The credit union industry also should pursue more relaxed requirements for the amount of money it needs to cover losses, and for its insurance fund. But credit unions don’t need to be regulated like banks, he said.

“I don’t think it’s time to say, ‘Let’s eliminate the credit unions,’” Moebs said. “I think that would be an injustice. They’ve shown themselves to be of value, a source for the American consumer for auto loans and consumer loans and many other kinds of lending.”

But even before the most recent crisis, complaints had been growing over the corporate credit unions jumping into the global securities market without the required expertise or oversight. In 1995, credit union regulators seized the Capital Corporate Federal Credit Union in Maryland, after it tallied up $100 million in losses in bad mortgage investments.

“The NCUA should have known better, after CapCorp.,” said George Mason’s Hanweck. “And this time around, the corporate credit unions really got caught up in all this.”
Marvin Umholtz, a financial consultant and former lobbyist for the credit unions, said the failures of the two corporate credit unions highlight the problem with “interconnectedness” – meaning troubles at the corporate credit unions infect the entire credit union industry. “The flaws in the system are showing,” Umholtz said.

And those flaws mean one more institution thought to be safe is yet another casualty, in a financial crisis that shows no end to its reach.

Why is that bad news for the Big Three? Because there’s been this line of argument that Ford, General Motors and Chrysler would be performing splendidly right now if only they’d focused more resources on the production of gas-sippers instead of gas-guzzlers. While there’s certainly truth in that criticism, Toyota’s announcement indicates that auto companies are suffering across the board, regardless of what models they’re able to produce. Indeed, Prius sales in November dropped more than 48 percent relative to the same month a year ago.

So even if GM were shooting its plug-in Volt off the assembly line like Pez, it still wouldn’t solve the company’s troubles because the credit crunch and lack of consumer confidence means no one’s buying anyways. That’s a tough message for supporters of the Detroit bailout, who’ve been arguing that the Big Three will be fine if they just get some help retooling their factories to make higher mileage cars.

As David Cole, chairman of the Center for Automotive Research, said just a few minutes ago in what’s probably an understatement, “All automakers are in big trouble right now.”

From Reuters:

Pandit said in the interview that short-sellers, as well as investors worried about Citigroup’s asset quality, were among those who drove the bank’s shares down in recent sessions, and that it was important “that we got control of the situation.”

“I can completely understand how people on Main Street, people who are not close to this industry, would be furious at what’s happened,” he said.

Well, thanks for that, at least. Pandit’s observations follow recent comments by financial analysts pointing to causes like “excessive risk taking” to explain Citi’s problems. It also sounds so…. reasonable. Citigroup, like others, simply got caught up in the complicated market of derivatives and credit default swaps. It could have happened to anybody on Wall Street, and it did. That’s basically the spin, anyway.

And none of it is true.

Citigroup got into its mess all by itself. It’s hardly a victim of circumstance. Over the past decade, it steadily and aggressively built an empire of unsavory subprime companies that targeted and took advantage of vulnerable customers. Even beyond that, Citi proudly led the way for the rest of Wall Street to also look for profits in hidden fees, high interest rates, misleading terms, unnecessary and expensive products like credit insurance, and the rest of the muck that characterized the subprime market at its height. And all the while, Wall Street and the business press applauded its moves.

How do we know this? Just take a glance at “Banking on Misery: Citigroup, Wall Street, and the Fleecing of the South.” It’s an investigative report by Southern Exposure magazine – from 2003. Journalist Michael Hudson traced Citigroup’s rise as it gobbled up shady finance firms and figured out how to make a killing on Wall Street off people with marginal credit and little financial sophistication.

From the story:

In Southern hometowns such as Selma, Ala., Ashland, Ky.,
and Knoxville, Tenn., people complain Citigroup has taken advantage of them in an unglamorous part of its financial empire—personal loans and
mortgages aimed at borrowers with bad credit, bills piling up or, in many instances, simply a trusting nature. Unhappy customers claim the
company manipulated them into paying excessive rates and hidden fees, refinancing at unfavorable terms, signing deals that trapped them into
bankruptcy and foreclosure.

These borrowers are part of the growing “subprime” market for financial services. They are mostly low-income, blue-collar and minority
consumers snubbed by banks and credit card companies. Still others are middle-class consumers who have hit hard times because of layoffs or credit card-fueled overspending. Whatever their circumstances, they pay dearly. Citi’s subprime customers frequently pay double or triple the prices paid by borrowers with Citi credit cards and market-rate mortgages—annual percentage rates (APRs) generally between 19.0 and 40.0 on personal
loans and 8.5 and 21.9 on mortgages. And beyond exorbitant APRs, critics and lawsuits claim, Citi has fleeced customers with slippery salesmanship and falsified paperwork.

As CJR’s Dean Starkman noted in 2007, when the subprime was just beginning to crumble, it took an obscure magazine to uncover what had been right in front of everyone on Wall Street. Starkman explains that Hudson laid out in detail how Citigroup grew into the subprime king, while no one was looking:

Let’s face it, only the likes of Commercial Credit Corp., of Baltimore, would sell 40 percent loans to barely literate residents of Mississippi’s Noxubee and Lowndes* counties, tacking on credit insurance to bring the rate up to 70 percent. (Never mind what credit insurance is. Just don’t buy it.) Or maybe Primerica, of Atlanta, which Tennessee regulators accused of “seeking to deceive and confuse” customers through “a system of deliberate evasion.” Or maybe the truly rancid Associates First Capital Corp., of Irving, Texas, so corrupt that it employed a “designated forger,” an ex-employee told ABC’s Prime Time Live. I mean, who would go near a bunch like that?

Whoops! My bad. Sanford I. Weill, the former chairman and CEO of Citigroup Inc.,Fortune’s third-most admired megabank last year, got his start buying Commercial Credit in 1986, then bought Primerica in 1988 before merging with Citicorp a decade later.

And Associates First Capital? Yup, Citi bought it in 2000. The Citi never sleeps

By 2000, nearly three of every four Citigroup mortgages came from a subprime subsidiary, Hudson found

Saying that Citigroup’s problems came from excessive risk taking is like saying a terrible car accident was caused by a poorly engineered bend in the road. That way you can pretend the driver didn’t exist and ignore the damage left behind. There’s plenty of damage here from what Citigroup did. Borrowers with modest incomes have been dealing with it for years, while Citigroup prospered and its top executives raked in hefty bonuses. Somehow, I doubt Henry Paulson is driving around their neighborhoods these days, writing checks to rescue them.

Don’t buy the story lines from Citigroup and financial experts that the bank simply got caught up in the real estate frenzy, just like your neighbor down the street or your eccentric uncle Harry. That’s not how it happened. Citigroup went full force into lending that bordered on amoral, and set an example for others to follow down the same sleazy but incredibly profitable path.

We deserve nothing less than the truth here. Because we all know how this has turned out, regardless of whatever spin comes from Citigroup. We’re the ones paying for it.

The government basically is creating a lending facility, run by the Federal Reserve, to provide loans to investors who want to put their money into securities backed by this kind of lending. The idea is to get financing and credit moving again to consumers, who have found credit harder to get as banks tighten standards or decline to lend. The program will cost between $25 and $100 billion, with funds coming from the $700 billion rescue plan.

From the Journal:

The program is aimed at making it easier for consumers to borrow money. Government officials, including Mr. Paulson, have grown concerned about “distress” in the consumer finance market, as the availability of household loans has ground to halt amid a broader credit crunch.

While the initial focus will be on consumer loans, the facility could eventually be expanded to cover all manner of assets, including mortgages.

After Citigroup’s big rescue, it’s hard to complain when consumers finally get their turn. I know we need to get credit moving to help the economy. I’m just not sure bailing out consumer spending is the smartest way to do it.

Consumers have spent the last decade piling up debt, taking out equity from their homes to spend as they like, and living off their credit cards. Isn’t that at least part of the reason we’re in the mess we face now? As Bob Lawless of creditslips.org pointed out when Paulson first talked about this idea, maybe it’s not such a great idea to spend our way out of trouble, once again.

Instead of encouraging consumers to take on more debt, maybe someone in the government could actually be straightforward and say what needs to be said. We’ve been living off bubbles in the recent past, first the tech bubble, and then the housing bubble. Our wealth hasn’t necessarily come from things we’ve made or produced. It’s come from spending and debt. And that just can’t continue.

Paulson doesn’t have the credibility to do it, given his hand in all these bailouts. But maybe President-elect Barack Obama, who has been willing to actually utter the word “sacrifices,” should. In all the talk about the stimulus proposals and job creation, maybe Obama could make clear what economists know but politicians won’t say. We’re in for a different standard of living, an era of diminished expectations. There will be no easy money from playing in the stock market or buying a bigger house. If you want to pile up bills on your credit card, you will have to pay them off the old-fashioned way, a paycheck at a time.

Consider Kurt Seastead, the Prince William County homeowner in our TWI story on Monday. He had a dream house, on 10 acres near Virginia’s pristine horse country. When he got in trouble, he traded down, for a house and a mortgage payment half the size. He benefited from someone else’s foreclosure, buying their house at a bargain.

Welcome to the new America. You may need to give up what you have, if you’ve reached for too much. But you’ll be Ok. It’s better, in the long run. You’ll live in a house you can afford. You’ll save for what you need. You won’t feel that artificial sense of being wealthier than you really are, the way you used to, when you thought your house would only go up in price or your stock market investments would only grow at a rapid pace.

Obama still has the good will to do this. Talk to adults as if they are adults, and they’ll listen. But instead of hard truths, we’re getting a government-run effort to increase lending. Maybe we need it, in the short run, to loosen up the credit markets. But in the end, what we really need is a reality check, if there are any politicians out there brave enough to deliver it.

Since the federal government didn’t have authority to regulate the secondary mortgage market, it was up to the big CRA’s, like Moody’s and Standard & Poor’s, to judge if the bonds were investment grade.

But an investigation by the Securities and Exchange Commission this July revealed that the CRA’s didn’t know how to rate credit default swaps. So, partly in order to keep doing business with the subprime lenders and investment banks, the CRA’s between 2002-06 often just rated the securities and swaps “AAA,” the best rating a bond can have.

Today the CEO’s from the three top credit rating agencies — Moody’s, S&P and Fitch — are testifying before the House oversight committee. Rep. Henry A. Waxman, (D-Ca.) the committee chairman, just noted that these CEO’s earned more than $80 million — despite the fact they were a “colossal failure” in stemming the mortgage crisis.

Rep. Chris Shays (R-Conn.), meanwhile, concocted an elaborate analogy about how the CRA’s were referees paid off by the players.

Will the committee tie their oversight into the larger congressional fight over how to revamp Washington’s policing of Wall Street? Will the Republicans stay monomaniacally focused on Fannie Mae and Freddie Mac?

Stay tuned for updates.

That’s why you should expect to see more sad stories like the one Peter Viles at L.A. Land notes. A Pasadena woman, facing eviction and foreclosure, apparently killed herself. Wanda Dunn, 53, may have set her house on fire first, then committed suicide, police said.

From The Los Angeles Times coverage:

…Neighbor Scott Harden, 36, said he had heard from others that Dunn was going to kill herself because she was going to lose her house. He said he also knew that she was apparently going to be evicted on Monday, “so I was on red alert.”

On Sunday night, he said, he saw Dunn moving boxes and packing up her car. About 5 a.m. the next morning, he said he saw smoke coming from the house and immediately called 911.

It’s unavoidable that people are going to lose their homes; lenders can’t just give them away. But surely, in all this mess, if we can come up with a $700-billion rescue package for Wall Street, we can think of a way to add some humanity to the foreclosure process. In some Michigan counties, tax collectors use social workers to help people facing foreclosure adjust to losing their homes and move on to renting.

It’s just a small thing, and it’s not hard to replicate elsewhere. It’s a recognition that among the tangle of credit default swaps and subprime mortgage-backed securities is a person who faces the pain of losing her house.

If we can take all sorts of unprecedented steps to intervene in the private market and provide banks with capital, couldn’t we also do a little bit more for the people with their boxes on the sidewalk — and their dreams down the drain?