Sure, it seems to make sense that banks would be modifying loans anyway, but the fact is they aren't because it's not about the monthly note for so many homeowners it's about the fact the value of their home has been sliced too deep to ever hope to breakeven. I suspect in addition to the cost, banks must be worried about just how far government will reach into their business. If modifications don't work, and the majority probably will not, the next step is to force banks to lower principle. Of course, it's not clear this isn't already a plan in the works.
This comes to a head just as Republicans are pushing through a bill to kill HAMP, which Jim DeMint (R-SC) calls a "disastrous mortgage program." The program was announced with fanfare, and the promise to help up to 3 million Americans stay in their homes, all for just $30.0 billion. The plan hasn't worked as only 250,000 or so Americans have been able to stay in their homes. There is no doubt the plan has failed, and coupled with all the other schemes, has prolonged the natural course of things. People think I'm crazy when I say a sharper, more painful freefall would have been preferable to the agony of dragging this along through a series of ultra-expensive speed bump programs.
It's all coming to a head, and here are the players:
White House - Looking for Street cred after it bailed out banks that have been doling out giant pay and bonus packages and just announced massive hikes in their dividends.
GOP - Beholden to the Tea Party, which is adamant about the slippery slope of moral hazard and the use of taxpayer funds to achieve a form of social justice.
Banks - Looking for true independence but staring down the barrel of Dodd-Frank and its endless string of fresh rules and regulations.
MERS - The electronic system that became steroids for the housing market. This system allowed for the supersonic movement of mortgages to the point where many were lost in the haste to dump them to the next sucker. The system was created in 1997, and from what I understand never had more than 50 employees although it holds title to approximately 60 million mortgages. The players behind MERS include Fannie Mae, Freddie Mac, JP Morgan (NYSE:JPM), and Bank of America (NYSE:BAC). Talk about witches surrounding a giant cauldron and one heck of a brew.
MERS, as I've written many times, is a mess that cuts across party lines and speaks to the desire to grow homeownership in this nation by any means necessary. MERS is no longer operating in the shadows, but it's still something of an enigma. Yet, more and more people are challenging MERS and the notion that state laws requiring mortgages to be held by county clerks can be usurped to the point where the original paperwork is lost in the black hole that is cyberspace. The legal battles have gone back and forth, only adding more confusion to the situation. It is because of this legal seesawing that scuttlebutt began late last year of a bill that would ratify MERS under the interstate commerce clause and approve its actions and functions retroactively.
Apparently, the White House is prepared to sign such a bill into law. Of course, that would cement every scheme ever cooked up by conspiracy theorists.
In February, US Bankruptcy Judge Robert E. Grossman opined that MERS could not act as a "common agent" for undisclosed principals under law. Adding that MERS did not have authority as nominee or agent to assign the mortgage absent a showing that it was given specific written directions by its principals. Saying he knew his decision would have "significant impact", Judge Grossman nonetheless said MERS isn't an agent of the banks that own the mortgages. The news was cheered by a wide spectrum of people looking to keep their homes without further payments. Then, modification is a moot point.
Since Grossman's ruling, MERS has won a string of legal victories.
* March 29, 2011- The US District Court for the District of Oregon ruled in favor of Mortgage Electronic Registration Systems finding it a proper beneficiary on the deed of trust assigned to Sun Trust.
* March 28, 2011: The US District Court of the Eastern District of California dismissed with prejudice a False Claim Act suit.
* March 23, 2011: The US Bankruptcy Court for the District of Wyoming ruled last week in favor of MERS, and affirms company's ability to assign based on terms of mortgage.
* March 21, 2011: Two federal judges in the United States Court for the District of Utah ruled in favor of Mortgage Electronic Registration Systems.
* March 3, 2011: The Supreme Court of the State of New York County of Bronx held that mortgage documents granted broad powers to MERS to act as an agent for the lender, including the power to foreclose on the loan and to assign it.
There is no doubt in my mind MERS trampled on consumer rights and was used by everyone from the industry to politicians to speed up the goal of home ownership. But, Fannie Mae and Freddie Mac have sucked up closer to two hundred billion dollars in taxpayer funds and will suck up even more, so that takes us back to banks.
They should be hit on the knuckles for robo-signing, and they should never be bailed out again, but we cannot allow them to be pushed around into doing things they don't want to do. Of course, there are still 300 banking rules still to be written, so they may be persuaded into accepting $20.0 billion instead of more draconian measures.
...Fire burn and caldron bubble
The housing market continues melting down long after the molten lava has flowed. There have been some signs of life, but very few.
* 20% of loans that were 90-days delinquent a year ago are now current
* 30% loans in foreclosure have not made a payment in over 2 years
* 47% loans in foreclosure have not made a payment in 18 months
A jobless recovery, coupled with a smoldering housing market, doesn't seem like the perfect backdrop to a strong stock market. I'd like to see politicians get out of the way and allow the housing market to hit rock bottom sooner so the true recovery could begin sooner, too.
Witches Brew of Rules and Regulations
In an op-ed in the Financial Times, Alan Greenspan warns Dodd-Frank reforms risk the "largest regulator market distortions" since the imposition of wage and price controls in 1971. He stated regulators are ill-equipped for more intrusive supervision because they can never get more than a glimpse at the international workings of the simplest of modern financial systems. I guess the iron hand of government is no match for the global invisible hand that is the inner workings of the world's financial system.
Banks are going to find ways around the system, and they begin with ways to avoid lending to small businesses and individuals on the margins. Last week the big deal was AT&T (NYSE:T) going after T-Mobile, armed with a loan of $20.0 billion from JP Morgan. Just think how many individual businesses could be funded with that kind of money. It's a huge risk for JP Morgan, but less hoops to jump through than trying to be a community-based lender.
It reminds me of Charlie Brown lining up to kick that football even though each time before it was pulled away last minute, sending him tumbling. Investors are buying stocks ahead of the jobs report, buoyed again by data they come to loath after the Bureau of Labor releases its data. Small businesses, despite all the obstacles, continue to power the nation ahead according to the latest ADP employment report. The total came in close to consensus, actually sending equity futures a smidge lower.
Challenger, Gray & Christmas also produced a solid number, revealing the fewest 1Q job layoff announcements since 1995. The 41,528 for this month are down from 50,702 in February, and down from 67,611 a year ago, but higher than the December number of 32,004.
Count me as one of those Charlie Brown imitators ready to kick the ball and ready to take the fall if there is disappointment on Friday morning.