Two news stories in the last few days provide a stark illustration of the different treatment afforded the rich and the struggling middle class. The New York Times reported on the huge bonuses taken by brokers and traders at Merrill Lynch related to the sales of mortgage-backed securities. The story, which you can read in full here,details the hundreds of millions of dollars in bonuses and compensation paid out in the last few years for arranging investments in mortgages that are now in foreclosure. As I have been saying for some time now, all these home loans were being packaged up and sold for huge profits -- and the rich keep getting richer. No one was really attending to the fundamental question of whether the borrowers had the ability to repay these loans; to the contrary, mortgage brokers had incentives to put people in larger, riskier loans because they earned a larger fee if they did! Then, their bosses and their bosses' bosses repackaged and resold these same mortgages, each taking their cut along the way. All that money got taken out of the system and put into the pockets of investment bankers on Wall Street, and it's not coming back. One of the people in the story is now advising firms who are dealing with troubled mortgage lenders -- wonder what he charges for his services?

On the other end of the spectrum, Bush's government solution to help homeowners, the Hope for Homeowners program sponsored through HUD, has received a grand total of 312 applications. Even the government admits the program is a failure, as the Washington Post reports today, here. I have never really trusted that our government was going to do anything that would really help borrowers who are in trouble, and the more time goes on, the more cynical I become. I am really starting to wonder if they are purposefully introducing programs they know won't work to stall for time while the financial services industry tries to get a strategy together. For instance, all this talk about a 4.5% mortgage program, designed for first time home buyers to buy distressed real estate -- how does that help the struggling home owner who is facing a foreclosure? It doesn't! It helps banks and mortgage lenders by providing a new class of potential customers, and the profits that they might generate, albeit at smaller margins. The argument that this will keep home prices up doesn't help troubled borrowers either. They need a way to pay a mortgage they can afford, and higher home prices will not give them that.

The bright spot is that the more government proposals that fail, the greater the likelihood that Congress will have to relent and reform the bankruptcy code to permit loan modification. President-elect Obama advocated for just such a change on the campaign trail. Let's hope that he's true to his word.

Labels: bankruptcy, consumer, mortgages, Obama, politics

The government announced this evening that it is going to provide more money to Citibank, at least $20 billion for starters, and up to $300 billion in "guarantees" for bad loans. The Treasury Department is still unwilling to allow any of the bailout money to be used to help homeowners who are struggling to pay their mortgages. And we have been finding that the mortgage companies and banks are almost impossible to reach on the phone, so even if they are willing to try to help, you probably can't get through to them to find out.

We are hopeful that President-elect Obama's announcements tomorrow about his plan for economic stimulus will have some impact, but frankly, we are not too optimistic. So much of the economy has been based on overspending -- credit card debt, home equity, store credit -- there is going to be some painful adjustment no matter what programs the new administration brings to the table. And unfortunately, we still have to wait two more months to implement those plans.

I have noticed that the previews of tomorrow's big speech have not included much mention of what will be proposed for housing. We continue to hope that bankruptcy reform will ultimately be enacted. Currently, virtually all types of loans can be modified in a bankruptcy except residential real estate loans for primary residences. We could help so many more people if the law protected homeowners as well as it protects Lehman Brothers and Circuit City.

I don't even know what to say about the car companies, except that I wish Resolve Legal had a private jet that I could fly around in. Showing up at Congress to ask for bailout money in a private jet is about the same as showing up for bankruptcy court in one. I don't recommend it.

Labels: bankruptcy, mortgages, Obama, politics