Loan Modification Plus

The Obama administration has taken the lead from Bank of America and Citigroup and expanded its loan modification program to include writing down some mortgage balances.

The multifaceted effort will let people who owe more on their mortgages than their properties are worth get new loans backed by the Federal Housing Administration, a government agency that insures home loans against default.

That would be funded by $14 billion from the administration's existing $75 billion foreclosure-prevention program. But it could spark criticism that the government is shouldering too much risk by taking on bad loans made during the housing boom. In addition, their existing mortgage companies will be able to receive incentives to lower their principal balances.

The program also includes assistance to help unemployed homeowners keep paying their mortgages.

Last summer, Deutsche Bank came out with a startling study about so called underwater mortgages.

A report put out by Deutsche Bank is creating all sorts of business buzz. That's because the report predicts that 48% of all mortgages will be "underwater" by the end of the first quarter of 2011. A mortgage that is "underwater" is one where the mortgage is larger than the value of the house. These sorts of mortgages have a significantly higher incident of defaults. Currently, the number of properties that are underwater is estimated to be at 26% by Deutche Bank. That's bad enough but their estimation is just down right scary at 48%. All mortgage types will see increases in "underwater" mortgages and even prime loans will have 41% of their mortgages under water. (currently on 16% of prime loans are underwater)

This phenomenon, where borrowers owe more than the home is worth, became the elephant in the room. None of the programs helped these sorts of borrowers and this particular study showed that a substantial number would soon be underwater.

This became a central problem for all loan modification programs. With nearly fifty percent of all mortgages soon to be underwater, no loan modification program would do much unless there was something in there to help them.

The problem is that in order to help these folks you'd not only need to lower their rates but the amount they owed. Loan modifications are already inherently open to so called moral hazard. That is that they reward bad behavior. If these borrowers' balances are lowered along with their rates that makes that phenomenon even greater.

So, the original loan modification program put out last spring didn't include any mortgage that was underwater. The Deutsche Bank study showed that such a program wouldn't do much. So, the administration has expanded their loan modification program to include some of these.

This is exactly what Wade Rathke has been calling on for months.

But for many the chairs in the church haven’t changed. Bruce Marks of NACA and John Taylor of the National Community Reinvestment Coalition have been long allies, and not surprisingly their position mirrors mine: there have to be write downs. Jack Schakett, formerly of Countrywide and now in about the same job with Bank of America concedes, as he always has, that there is a place for write downs, and believes they should be extended. Wells Fargo, as always, continues to keep its head in the mud and believe that someone else will solve the problem they helped create.

...

But, in this world, 7+ million underwater borrowers are crying for a solution, and writing down principle owed still seems like the only horse to ride.

The payment reduction some of these borrowers would receive could be more than fifty percent. Many of them simply over bought. Most would get a deal a borrower that is on time would never get. This dynamic was at the heart of the mortgage class war that I predicted that I believe turned into the Tea Party movement. There's a bigger problem. It's of policy. I've often quoted this Wall Street Journal article.

Is a housing bailout the solution for clogged-up credit markets and a faltering economy? What the Fed has been doing and did again yesterday hasn't really worked, notwithstanding the pops it produces in the stock market every time it shovels liquidity into the system. The Fed's latest move provides financial institutions another $200 billion in direct short-term lending against their unsaleable housing collateral. The Dow Jones jumped 416 points. But it won't restart markets for the underlying collateral.

Where are the speculators, vultures and hedge funds? Where are the big money players willing to buy the exotic but still substantial mortgage-backed securities for which markets have ceased? The Fed's liquidity rush seems only to have convinced them the time is ripe for staying on the sidelines.

To get to a real solution, speculators and investors need to believe that home prices are hitting bottom, that any mortgage debt they might buy today for 80 cents on the dollar today won't be worth 30 cents tomorrow. Then the vultures will pile in: The transfer of wealth from the overleveraged banks and hedge funds to those who kept cash handy will be shocking, ugly and cathartic -- but it will also be relatively quick. Credit markets will begin to function again. The economy will grow.”

Until there is a bottom, there are no "vultures". Without "vultures" there is no recovery. Loan modifications artificially prop up markets. There is no bottom.

BofA to Consider the Reduction of Mortgage Balances

Bank of America will become the first bank to consider the reduction of mortgage balances as part of their mortgage rescue plan.

The program, while limited in scope and available by invitation only, signals a significant shift in efforts to deal with the millions of homeowners who are facing foreclosure. It comes as banks are being urged by the White House, members of Congress and community groups to do more to stem the tide.

The Obama administration is also studying whether to provide more help to people who owe more on their mortgages than their homes are worth.

Bank of America’s program may increase the pressure on other big banks to offer more help for delinquent borrowers, while potentially angering homeowners who have kept up their payments and are not getting such aid.

Citigroup is also said to be making such a consideration. So far, the program will be extremely limited.

This was a bone of a debate between myself and Wade Rathke. Rathke was adament that the reduction of balances was critical not only to giving borrowers an affordable mortgage but to show a correct balance sheet for banks.

That's because we've seen the reduction of real estate values and Rathke believes that mortgage balances need to reflect that or banks are showing assets that are simply not realistic.

I see all these programs as foolhearty and so this would only extend a misguided policy.

TARP to Foreclosures?

President Obama will propose using $1.5 billion in TARP funds to help: Michigan, Nevada, Florida, Arizona, and California, the five hardest hit states by foreclosures.

While he’s in the state with the highest foreclosure rate in the nation Friday, President Obama plans to announce a proposal to take $1.5 billion in funds originally designed to assist ailing banks and instead use it to help the hardest hit states stem the housing crisis, according to senior administration officials.


The proposal to redistribute money from the Troubled Asset Relief Program will benefit the five states with the steepest declines in home prices: Nevada, California, Florida, Arizona and Michigan.

$1.5 billion would be a drop in the bucket. Also, it's unclear what this money would do that his failed $75 billion loan modification plan would do. Most importantly, TARP was not supposed to be used for this purpose.

Making Home Affordable Now Officially a Disaster

I say that because even the New York Times has noticed.

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage payments on a trial basis for hundreds of thousands of people but has largely failed to provide permanent relief. Critics increasingly argue that the program, Making Home Affordable, has raised false hopes among people who simply cannot afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.

Now, if you're a long time reader of this site, you know that the New York Times is largely echoing things I've been predicting for more than a year. Before I give myself too big a tap on the shoulder, let's remember that I predicted all sorts of calamities for mass loan modification. Given that I predicted everything, I couldn't help but be right.

This was a disaster from the start and I was talking about the corossive nature of loan modifications even before President Obama made them policy, in fact even before there was a President Obama.

The first problem is that as recently as 2007 almost no one had heard of loan modifications. Then, President Obama wanted several million done in 2009. That's just not how things work. The main problem is that they're fraught with moral hazards. If you're behind on your mortgage, you're rewarded with a new loan with a rate as low as 2%. You can see where everyone would want that deal. As it turns out, banks were wise to this problem and that's one of the main reasons that so few have been done. They're desperate to avoid the flock from asking for this deal.

It's created the perfect storm of a program that was supposed to be a savior but it has turned into a total waste.

The Mortgage Pow Wow

Politico has a piece about how some of the leaders of the nation's top mortgage lenders, in the industry called servicers (those that hold on or service the loan), are coming to D.C. to meet with administration officials.

This is all part of the administration's attempt to jump start the floundering loan modification program. Yesterday, I laid out just how amped up White House pressure could come to no good. Today, we are getting a preview of how some of that pressure will be applied.

Assistant Treasury Secretary Michael Barr told reporters that the department will be sending “SWAT teams” into the companies and requiring regular check-ins on their progress.

The administration is about to send an unmistakeable message to banks: approve these en masse or else. I can't think of another time where an administration has so openly made demands of private business on their product mix.

There is absolutely nothing that says that banks have to approve loan modifications let alone a lot of loan modifications. Yet, the White House is demanding this of banks. They are going to send in monitors and they are going to tell the banks that they have no option but to approve them en masse. The White House is threatening to publish non compliant banks and post them on the web in an effort to shame them into approving more modifications.

We are headed toward loan modification disaster. It's a road filled with fraud, moral hazards and ultimately it will bring significant damage to our economy.

Soon The Banks Will Be Between a Rock and a Hard Place

The White House is concerned that their loan modification program is floundering and so they're about to put more pressure on the banks.

The Obama administration will crack down on mortgage companies that are failing to do enough to help borrowers at risk of foreclosure, as part of a broad effort to boost participation in its mortgage assistance program.

The Treasury Department said Monday it will withhold payments from mortgage companies that aren't doing enough to make the changes permanent. Officials will monitor the largest of the 71 participating mortgage companies via daily progress reports.

The goal is to increase the rate at which troubled home loans are converted into new loans with lower monthly payments. At the end of October, more than 650,000 borrowers, or 20 percent of those eligible, had signed up for trials lasting up to five months.

To understand just how dangerous this and how much unnecessary pressure this will put on banks first you should understand the process by which banks approve loan modifications. Loan modifications require most of the same paperwork as a regular loan: pay stubs, bank statements, w2's, etc. It also requires a full budget filled out by the borrower and it requires a letter explaining why the current mortgage payment is too high. (I often refer to this as the sob story) This may not seem like a lot but a file that is appoved is often the size of one section of an encyclopedia by the time it's done.



Second, you must all understand that the approval for a loan modification is nearly the exact opposite of the approval for a regular loan. Whereas on a regular loan, you want everything from income to credit to assets to be maximized, you want that to be minimized in a loan modification. At the same time, you don't want a totally hopeless situation since that's a sign of someone totally irresponsible and unfit for a loan modification. At the same time, the government has created its own rules. For instance, the modified loan can't go below 2% and still has a front end ratio of 31%. (by this I mean the housing payment, mortgage taxes and insurance) So, for a bank, figuring out if a loan should be approved is a delicate process.



Finally, loan modifications, on this scale, are totally new. Banks have no bureaucracies for them. They are creating them as they try to approve these loans. At the same time, they are working closely with the federal government and Fannie/Freddie for the first time on this issue. As such, you are asking multiple bureaucracies to work together. We can all imagine the bureaucratic nightmare that creates.



I'm not here to defend the banks. I have no use for banks. I don't care how difficult it is when it takes six months and more, as it often does, there's no excuse. Still, these banks are dealing with a brand new process, that's very complicated, and involves multiple new bureaucracies. Most importantly, it goes against every business instinct for banks to approve a loan modification. After all, you're approving someone entirely based on their current inability to pay.



Now, the White House will try and embarrass all those banks that aren't approving enough. Those banks will be put on some list for all to see. It's sort of like being put in the middle of the town square during the Middle Ages. Banks will want to do everything to avoid being on this list. Doing this means approving more loan modifications.



Now, think about the difficult, confusing, and new process I just described. Add to this directives from banks to the people in charge of processing these loan modifications to get more of them done. What you'll have carelessness and speed into a process that complicated and chaotic. That will mean a lot of people that shouldn't be approved will be approved. This will expose the process to a great deal of fraud. If banks are fixated on approving as many as possible, they will be extremely susceptible to being taken advantage of.



It remains to be seen if the White House will be effective in intimidating the banks. If they are, however, you can bet that will be a decision that we will all regret. That will unleash a terror in the loan modification market that we will all regret. I was always against the proliferation of loan modifications. They have an inherent moral hazard. They are wraught with potential fraud. Now, the administration is determined to make sure that all my worst loan modification nightmares come true.

The White House Threatens the Banks

The president's loan modification program is an utter failure. That's without a doubt. The president pronounced that up to 7 million people would have their loans modified and saved from foreclosure. So far, only 500,000 have been done and almost 90% are in their probationary period. Meanwhile, the loan modification process has turned into a bureaucratic nightmare that has made the normal loan process appear streamlined. If you've ever applied and been approved for a mortgage you can appreciate that comparison.

The reasons are pretty straightforward. First, the approval parameters for a loan modification are much more complicated than they are for a regular loan. (again if you've ever applied for a regular loan, you can appreciate that comparison) Loan usually take at least two months to be approved and it's not that uncommon to wait six months. (this I know through experience) To approve a loan modification, the bank needs to figure out an entire budget for a borrower including gas, food, electricity, etc. It's not entirely clear what is and is not allowed for each of twenty different boxes.

Second, banks don't necessarily want to approve a loan modification. There's an inherent moral hazard in approving them. A borrower can get a rate of as little as 2%. Keep in mind that you only qualify for a loan modification if you can't afford to make the payment on your current mortgage. While it's not mandatory, banks are much more apt to approve a loan modification if you're already behind on your current mortgage. If too many people get a loan modification everyone will want one and everyone will scheme, including missing mortgage payments, to get qualified for one.

Finally, prior to 2008, there were a handful of loan modifications done. Even in 2008, the number was in the tens of thousand for all banks. Now, the president wanted to expand that to 7 million. He literally created a new industry, the treasury also created all the rules for said industry, and so no one should be surprised that said industry is going through growing pains.

This is all entirely due to a complete lack of planning by the White House. The administration wants the banks to them en masse. Yet, the banks are very weary of doing too many. They are confused by the rules. Their bureaucracies are still being set up to handle the influx of applications. Most of all, banks do in fact realize the potential disaster looming if they create another moral hazard in mortgages to their own bottom line.

The administration's strategy throughout vis a vis the banks has been to guilt them into approving more of them. The administration constantly harps on the fact that many of these banks received a bailout. It's true. They did. Yet, they received a bailout following reckless behavior. Wouldn't we want to now encourage banks not to continue reckless behavior. I'd say that approving, en masse, loans as low as 2% to borrowers currently behind on their mortgages is reckless.

The failure of the loan modification program adds to a growing list of administration programs that are turning into an embarrassment. Now, it appears that the administration will amp up the pressure on the banks.

The banks are not doing a good enough job," the Times quoted Barr saying in a Friday interview. "Some of the firms ought to be embarrassed, and they will be."

Treasury spokeswoman Meg Reilly said Saturday the department was "taking additional steps to enhance (mortgage) servicer transparency and accountability as part of a broader focus on maximizing conversion rates to permanent modifications."

That could include new resources for borrowers, Reilly said without offering details. The department will announce new measures Monday, Reilly added.

Put yourself into the position of the banks. Loan modifications were always supposed to be a case by case basis. They were always meant to be done very infrequently for truly extraordinary circumstances. Then the administration makes them a key cog in their overall economic recovery plan. The administration even gives the banks incentive to do them. (banks get a $1000 fee for each closed plus yearly and monthly fees) Yet, the program is totally confusing and it goes against every business instinct. By refusing to approve them briskly, you then earn the ire of the administration. So, you're effectively stuck between the proverbial rock and hard place.

Now, imagine if the administration does in fact follow through, effectively, and embarrasses all those banks that aren't closing enough modifications. Now, banks will suffer through a miserable period of public relations being put in the cross hairs of the administration's media machine. Just ask the insurance companies how that feels. The only alternative is to begin to make hasty decisions in a confusing process that you really want no part of to begin with. Talk about a recipe for disaster.

The Mortgage Rescue Plan and the Lessons for Health Care Reform

CNBC has a long and detailed article about the current state of the President's mortgage rescue plan.

Eight months later, the plan is plagued by delays, red tape and, some critics say, a reluctance by banks to do their part. Just 17 percent of eligible borrowers have had their loans modified and monthly payments cut. Hardly any have been given a cut in the amount they owe on homes which are now worth less.

That means many successful applicants are left with loans that they still will not be able to afford in the long run. So instead of resolving the housing crisis that pushed the U.S. economy into recession, America may be prolonging it and, in the process, stunting the global recovery.

Think of the President's mortgage rescue plan as a mini version of the president's health care plan. This certainly wasn't debated as furiously as health care, but most of the same types of promises about health care were made about this plan.

When it was announced in February, the president said that up to 7 million RESPONSIBLE homeowners would have their mortgages renegotiated and save themselves from foreclosure. Furthermore, President Obama said that homeowners not in need of help would be helped because this plan would stabilize real estate values. Meanwhile, foreclosures continue to rise to record levels. This plan has actually helped a fraction of the people it was supposed to. On top of all of this, the actual process of modifying a loan has turned into a bureaucratic nightmare. Modifications often take up to six months.

The most frightful part is that the final verdict still hasn't been analyzed. In 2008, when loan modifications were done without a government program backing them, about half of loans modified wound up going back into default. Numbers for the initial batch of modifications have yet to be analyzed. If this crop's numbers are anywhere near those in 2008, then this plan will truly be a total disaster.

That would mean that not only very few be helped, a bureaucratic nightmare be created, but on top of it all the plan wouldn't work.

All of this was perfectly predictable. Prior to 2008, loan modifications were done a handful of times. Banks rarely publicized them and only did them in rare cases when the situation really did warrant it. With rising defaults and mortgages difficult to get, mortgage professionals discovered this tool. Loan modifications rose exponentially. Of course, loan modifications were never supposed to be an industry. They were always supposed to be something done on occasion. Banks had the capability to handle a loan modification here and there. They didn't have the capability to handle them on a mass scale. Then, the president wants to do up to 7 million loan modifications.

They don't just get done. There's paperwork that needs to be processed. There's numbers that need to be analyzed. There's more paperwork that needs to be created. This is an entirely new bank bureaucracy. Is it any wonder that this is a bureaucratic nightmare. The president created a new bank service without accounting for how a bureaucracy would deal with the service.

Worse than that, loan modifications work in the opposite way of the way a loan should work. Whereas in a loan, a borrower would want all their credit profiles maximized: income, assets, credit. In a loan modification, the exact opposite must be true. The whole thing is premised on the idea that you can't afford your current situation. So, all the same principles must be minimized. Let's just look at one story the article highlighted.

In March, Latta heard about Obama's Home Affordable Modification Program, or HAMP, that allows mortgage payments to be reduced to 31 percent of a homeowner's income. The plan was launched as a central plank of Washington's efforts to stem foreclosures.

Latta applied for a loan modification but was rejected. His bank said his income from selling pumpkins and firewood — a net of $906 in 2008 — was too high.

"Frankly, I'm disappointed," Latta said. "I thought I would qualify as I am at high risk of default."

Mr. Latta was denied a modification specifically because he got a second job to help him pay his bills. I don't need to state the obvious and tell people just how corrosive a policy is if it denies people a loan product because they got a second job. Let's apply this concept to health care reform. By mandating that everyone that wants coverage will get coverage, the current health care reform program encourages people not to get insurance when they're healthy but when they get sick. Of course, the point of insurance is to protect against the unexpected not the expected. Current health care reform encourages the exact opposite of what we want to encourage much like this loan modification plan.

It's hard to put into words just how much of a disaster this policy has been and there's no end in sight. The failure of the president's loan modification program has mostly been reported in business journals. Most people know that foreclosures are at near all time highs and that's an inherent failure of the plan. It's a lot less reported just how much of a bureaucratic nightmare it's been and Mr. Matta's case, one of millions, rarely gets any exposure.

The same people that brought you this program want to totally transform health care. Make no mistake, the transformation is no less monumental than this program. This program revolutionized an industry, loan modifications. It did everything in the exact opposite manner of what was promised. Imagine health care reform with everything working the opposite of what was promised: higher costs, less access, less choice, add to the deficits, etc. and you have the outcome that this program had. The same foolish arguments now being made about health care were made in defense of this plan. That failed MISERABLY and so to will health care reform if it is enacted.

Target HUD

Here's what you'll find at the top of the ACORN Housing Inc. website.

President Obama formally announced this morning a new $75 billion dollar plan designed to help families prevent foreclosures and stabilize hard-hit communities. The Homeowner Affordability and Stability Plan includes a loan modification program, which provides incentives for lenders to modify the loans of borrowers who are at risk of foreclosure because their incomes are not sufficient to make their mortgage payments. It also includes refinance opportunities for borrowers who are current on their mortgage payments but have been unable to refinance because their homes have decreased in value.

ACORN Housing Corp and other non-profit HUD-certified housing counseling agencies will be helping borrowers access these programs. While the program will not officially go into effect until March 4th 2009, homeowners can get started on the process NOW by filling out an application for assistance from ACORN Housing. The application is available online at http://www.acornhousinghelp.org/ or by calling 888-409-3557.

There is no fee to participate in this new program or to receive counseling from ACORN Housing. Please beware of any companies that charge you money to provide housing counseling or help modifying a delinquent loan, especially any that ask for an upfront fee.

So, as we speak, ACORN Housing Inc. is a prominent player in the administration's $75 billion loan modification program. Long term readers should not be surprised about this. I first pointed to this portion of the site in June. I'd like to say that I am ahead of the curve but in this case another adage holds true. That is that a picture is worth a thousand words. What's changed is a set of videos like this one.


With these videos, ACORN Housing Inc has gained national prominence, or better yet infamy. Suddenly, their relationship to all sorts of powerful folks is under a new microscope. The census bureau cut ties with ACORN yesterday. Now, the spotlight is on HUD and it's relationship with ACORN Housing Inc.

Conservatives have cheered the Census Bureau's decision to sever ties with ACORN because it had lost confidence in the group, but the hidden-camera videos that prompted ACORN to fire four workers this week could raise more questions about the federal funding ACORN receives for housing outreach.

ACORN Housing Corporation received $1.6 million to provide housing services to low-income communities in this fiscal year, ending Sept. 30, according to USASpending.gov, a federal government Web site for tracking government grants.

The Department of Housing and Urban Development Grants has given $8.2 million to ACORN in the years between 2003 and 2006, as well as $1.6million to ACORN affiliates.

ACORN receives millions to be a HUD approved counselor for the President's $75 billion loan modification program. It is these very counselors that counseled the supposed prostitute how to buy a home and use it as a brothel. At this point, there's no defense for HUD keeping ACORN on its approved counselor list. ACORN also works with several localities, including New York City, Philadelphia and St. Louis, in the same function.
HUD itself is not without its own problems. Here's a story I did at the beginning of the year.

Yet, it's likely that HUD is the biggest shakedown artist of them all. Of course, again, the nature of the beast says that we'll never know just how much of this they have done, but let's put Kendrick's bio into a new context. Only one accused individual would speak to me. Even they made me swear to keep their case as vague as possible. Here is the only way they would allow me to describe their current situaiton.

One real estate professional told me that he is being targeted by HUD for discrimination. He was never presented with an accuser, nor a specific accusation of discrimination, only "it has been alleged". He not only denied the allegation, but communicated that he had actually done a large portion of their business with those he allegedly discriminating against. Despite this, the entity has been "asked" by HUD for a several thousand dollar cash "donation" because of this "alleged" violation, even before HUD went forward with the full investigation of the COMPLAINT!! Worst of all, the initial correspondence was initiated on stationary by COMPLAINANT Kim Kendrick herself. Because the case continues in litigation, the entity has asked me to keep their name outof the story. This individual did tell me that they received a letter similar to the one Bader received. Furthermore, the complaint only asks for a few thousand dollars, so why is the complaint letter coming from the office of the top deputy at HUD, Kim Kendrick.

HUD is notorious for running a racket in which they shakedown those in real estate. They find any advertisement or other professional correspondence and try and find language that can be construed as "discriminatory". In the example I gave, a realtor started a site called Christian Realty. HUD claimed this discriminated against all other religions and they demanded that he pay a fine. Often, HUD hires out third party groups to scour the ad pages and the internet for anything that can be construed as "discriminatory". Yes, often one of those groups is an ACORN affiliate just like ACORN Housing. As such, right now, HUD is paying ACORN to find unsuspecting individuals, organizations, and companies that can be targeted, accused of discrimination, and ultimately those groups will pay some hefty fine to HUD.

Bill O'Reilly said that in light of the investigation that ACORN can no longer receive any more government funds. Most of us have been saying this long ago. The census has already cut off all ties. HUD needs to follow and the rest of the government right after that.

You Can Put Lipstick on a Liberal...

There is now a plethora of analysis about where Obama's health care plans went wrong, where his agenda went wrong, and why his popularity is dropping like a lead balloon. The best analysis came from Scott Rasmussen. Rasmussen said that support for health care reform was tanking because it is the culmination of a multitude of domestic policies the public doesn't like: the stimulus, cash for clunkers, the bailouts, etc. The public had finally gotten fed up and their pent up anger had reached its limits.

It's rather remarkable because those that opposed Obama most virulently proclaimed that his policies were liberal if not worse. Yet, throughout the campaign, then candidate Obama was able to so eloquently verbalize his vision that it seems the public was hypnotized by the rhetoric. Here's just one example. (this was said in a speech in the summer of 2008)

Here, in Nevada, we see how so many people are fighting for their American Dream. Because in so many ways, Felicitas and Francisco have lived the American Dream. Their story is not one of great wealth or privilege. Instead, it embodies the steady pursuit of simple dreams that has built this country from the bottom up

....Yet a predatory loan has turned this source of stability into an anchor of insecurity. Because a lender went for the easy buck, they are left struggling with ballooning interest rates and monthly mortgage payments. Because Washington has failed working people in this country, they are facing foreclosure, and the American Dream they sought for decades risks slipping away

....The foreclosure crisis has played out in painfully steady but predictable motion. While lenders were taking advantage of folks like Felicitas and Francisco, they were also spending hundreds of millions of dollars lobbying Washington to stay on the sidelines. For President Bush, the answer was to do nothing until the pain out on Main Street trickled up to Wall Street. Then, a few months ago, he rolled out a plan that was too little, too late. Instead of offering meaningful relief, he warned against doing too much. His main proposal for an economy that is leaving working people behind is to give more tax cuts to the wealthiest Americans, even though they don’t need them and didn’t ask for them

....I do not accept an America where Washington’s only message to working people is: “you’re on your own.”

...To stabilize our housing market and to bring this crisis to an end, I’m a strong supporter of Chris Dodd and Barney Frank’s proposal to create a new FHA Housing Security Program. This will provide meaningful incentives for lenders to buy or refinance existing mortgages, and to convert them into stable 30-year fixed mortgages. This is not a windfall for borrowers – as they have to share any capital gain. It’s not a bailout for lenders or investors who gambled recklessly – as they will take losses. It asks both sides to sacrifice. It offers a responsible and fair way to help Americans who are facing foreclosure to keep their homes at rates they can afford.

Throughout the campaign, Obama was espousing very standard classic liberal policies. It worked because 1) Bush was very unpopular and 2) he's very eloquent. The policy he was describing in this speech turned out to be his loan modification program. That is one of many policies that has turned off the electorate to Obama. It is the subject of Rick Santelli's infamous rant, which helped to spawn the tea party movement.

So, if you think about it, during the campaign, Obama was putting lip stick on his liberalism. The standard boiler plate big government tax, borrow, and spend government programs were being dressed up by a great orator that was full of charisma. He gave everyone hope that there would be change. He did this by promising everyone everything. Here's another famous video during the campaign.


When you're campaigning, you can get away with making people believe you can give them everything. None of your promises have to be paid for YET. It turns out quite a lot of people believed that Obama would be able to provide them with everything and at no cost. For instance, during the campaign, Candidate Obama also famously said this.

I am absolutely certain that generations from now, we will be able to look back and tell our children that this was the moment when we began to provide care for the sick and good jobs to the jobless; this was the moment when the rise of the oceans began to slow and our planet began to heal.

It sounded great then. That's because he could put lipstick on his liberalism because he didn't have to have any specifics. That was during the campaign. Now, that it's time to govern, he can't dress up his classic liberal policies with eloquent speeches. He can't talk about a dawning of a new day (he can it just won't work) because the dawn of this new day is now filled with mountains of red ink.

That's the difference between campaigning and governing. During the campaign he could make every promise in the world. None of them had to be paid for yet. Obama introduced his first budget within two months of the new administration. That's when we first learned that under his vision our deficit would grow to nearly $2 trillion and stay higher than the worst deficit under Bush for the next ten years. There's no lipstick you can put on those numbers. They speak for themselves. Once we learned that in order to save Felicitas he would create a government program that would reward those that couldn't pay their current mortgages with rates that were better than rates for those with perfect credit, there was no putting lipstick on that classic liberal policy. Once we learned that in order so that the "rise of the oceans began to slow and our planet began to heal" we would try and implement a complicate scheme in which the government mandates which energy companies can an cannot use, you could no longer put lipstick on the liberalism. Once we learned that in order to "provide care for the sick and good jobs to the jobless" that this meant a $787 billion government spending boondoggle and 1000 page incomprehensible government take over of health care, there was again no putting lip stick on his liberalism.

So, there's many ways to analyze the rapid decline of the Obama presidency and agenda. One way to look at it is this. During the campaign, his eloquence and charisma allowed him to put lipstick on his liberalism. Now that he's governing, there's no more putting lipstick on his liberalism. His classic liberalism is on display and the country simply doesn't want a government of tax, borrow and spend liberalism.

Bleeding Heart Liberalism: Theory Vs. Reality

One of the most remarkable things about the implosion of the Obama agenda is that on principle it's no different from anything that he campaigned on. A couple years ago I spoke with Republican activist who told me that the Republicans were losing the health care debate. I couldn't believe that the public at large was being swayed by socialized medicine but in fact for the last two years of the Bush administration that's exactly what was happening.

Of course, that was only happening while socialized medicine was a theoretical process. By theoretical, I mean the concept in which everyone got insured, health insurance providers were kept in check, and everyone lived happily ever after. When it was purely conceptual,

Then, an actual bill had to be proposed and we saw details. We see that you can't add nearly 50 million people onto the health care system and not 1) increase costs dramatically or 2) cut medical care for everyone else. Once a bill that did conceptually was put in front of the folks, the compassion of covering everyone turned into a massive government takeover.

There's a similar dynamic to the government's loan modification program. In the campaign, the president constantly bemoaned the poor borrower that was taken advantage of. He promised to help all the poor borrowers and make sure to do everything he could to keep them in their homes. Then, he became president and introduced his loan modification plan. In a loan modification, a borrower that is struggling to pay their mortgage receives a new loan with new lower payments. Once that plan was put in front of the public, it was overwhelmingly rejected. It lead to Rick Santelli's now infamous and viral rant.


When candidate Obama was promising to save homeowners in the theoretical, he appeared to be compasssionate and standing up for the little guy. Once he put a policy behind this "compassion", the people rejected it as rewarding bad and irresponsible behavior.

Also all throughout the campaign, the president bemoaned the loss of manufacturing jobs and promised to keep millions of manufacturing jobs at home. Then, he became president and bailed out and took over both Chrysler and GM. The public overwhelmingly rejected that policy as well. Once again, in the abstract, bleeding heart liberalism sounded great, but in reality, the policy behind it was overwhelmingly rejected.

You remember in the campaign when then candidate Obama famously proclaimed that "we'll look back on today as the day that the rivers started to recede and the earth would be saved". Then, we find out that to save the earth the president proposes a bill that's a complicated mess that one Congress person described as thus.

The truth is, nobody knows for sure how this is going to work

Saving the planet is fine when you speak about it abstractly. When people find out that in order to save the planet, you'll design a complicated scheme that will increase energy costs for everyone dramatically it doesn't sound as good.

Finally, there's the stimulus. Remember during the campaign when the president bemoaned the economy 2001-2008 as one that rewarded the wealthy at the expense of everyone else. How did the president level the playing field? He imposed a near $1 trillion spending bill that was nothing more than an endless stream of pork. It's one thing to talk about "leveling the playing field", but in reality there is no policy to do that. As it turns out, the policy to level the playing field is the biggest pork laden spending bill in our history.

There's the difference between bleeding heart liberalism in theory and reality. In theory, it all sounds compassionate and caring. In reality, it's nothing more than big government tax and spend policies. That's why it was overwhelmingly accepted during the campaign. There was only concepts then. For similar reasons, it's being overwhelmingly rejected. The specific policies aren't compassionate or caring. They're just more of the kind of big government tax and spend policies that have failed over and over.

Some Perspective on TARP, Bank Profits, and the Economy

The second quarter's earning reports are nearly over and there has been a remarkable turnaround by many of the nation's banks and financial services companies. Many posted profits and some even posted rather robust profits. For instance, Goldman Sachs reported second quarter profits of $3.44 billion. Yet, when you look behind the numbers, it's clear that Goldman benefitted tremendously from government assistance and used barely little of that assistance to filter into the economy.

This week, Wall Street superpower Goldman Sachs announced second quarter net profits of $3.44 billion, far exceeding expectations. Earnings per share also rose, to $4.93 from $4.58 a year ago. This is a promising sign that the battered financial industry is on the mend, but it should be noted that Goldman didn’t do it alone. In fact, at least some of these profits were made possible by guarantees, low-cost loans and other assistance from the federal government.

...

Goldman also benefited from artificially inexpensive debt thanks to the FDIC’s Temporary Liquidity Guarantee Program (TLGP). This program put a federal guarantee behind bonds issued by Goldman and other banks, including Bank of America and JP Morgan Chase, making them far more attractive to investors. For example, when Goldman sold $5 billion of 3.5 year bonds in November, it was able to attract buyers while offering a yield only 200 basis points higher than ultra-safe Treasuries with similar maturities. Altogether, Goldman issued $28 billion in debt using this program between November and April.

...

Finally, it should be noted that Goldman Sachs and other major financial players are benefiting from a Federal Reserve program that allows them to borrow funds overnight for close to zero percent. Designed to catalyze economic activity and keep interest rates low for businesses and consumers, the program has also boosted bank profits by widening the spread between the cost of their incoming and outgoing capital.

...

Shrewd business decisions by Goldman traders (along with a reduced field of competitors) were undoubtedly responsible for a good share of the profits being crowed about by the firm this week. Notably, the firm cashed in on profit margins for commodity and foreign exchange trading that, according to the Financial Times, now stand ”between two and eight times higher than before the height of the financial
crisis.

So, what do we have? Godman received $10 billion in TARP funds. They received government guarantees on their debt. The government's bailout of AIG put an extra $11 billion into their pockets. They received access to low interest government loans. Furthermore, they benefitted from nearly zero percent short term Fed interest rates. What did they use all of this cheap money for? They used it to beef up their trading desks in commodities and currencies. Little if any of this money was filtered back into the economy in the form of business, commercial, and residential loans. In fact, Goldman has unloaded all its sub prime mortgage divisions. They still have a commercial mortgage division but all of commercial real estate has amounted to $15 billion for the first six months of the year. So, essentially, the government gave Goldman Sachs a big fat bailout and then Goldman used that money in a way that lined its own pockets while doing little for the rest of the economy. In fact, given that some of their profits were due to commodities trading you could even say they hurt all other Americans by speculating up the price of oil.

Then, there's Citigroup. Citigroup made $4.29 billion this past quarter. Yet, that profit was made entirely, and then some, by their sale of Salomon Smith Barney which they sold for $6.7 billion to Morgan Stanley Dean Witter. Of course, had they gone into bankruptcy they still would have sold Salomon Smith Barney but it would be sold for much less. By infusing Citigroup with $40 billion, the government allowed the company to stay afloat and continue operations. Those operations largely consist of investment banking and trading. The company's profits have little to do with any loans they are making. Much like Goldman, Citigroup took their bailout and pocketed it to increase their own profits without having much of that filter into the economy at large.

Then, there's Bank of America. Bank of America's profits fell but still posted of just over $7 billion in profits. Yet, it was all of its consumer operations that saw contractions. In the meantime, investment banking, mergers, and trading operations increased. In mid last year, Bank of America cut off its wholesale mortgage residential lending operations. It still has a retail residential mortgage division but those operations are being reduced not increased.

Next, let's look at Chase Bank. Chase Bank also posted unexpectedly robust earnings. Those earnings were created almost entirely from investment banking activities. Chase dissolved their wholesale residential mortgage operation in the fall of last year. They still have a retail residential mortgage operation and they still have a commercial mortgage division. (though again commercial mortgages have been non existent this year) Yet, it is their investment banking division that is making them all their money right now. In other words, the tax payers gave Chase billions so they could buy out WAMU and help other companies complete mergers that they were involved in. Little of that money filtered back into the economy at large.

Finally, there's mortgage giants Fannie Mae and Freddie Mac. Last fall, the taxpayers gave those two companies a bailout of nearly $50 billion. In fact, the bailout became so large that the government now is a majority owner in the two companies. In fact, the current market cap is about one fiftieth of the government's injection of the two. They were saved presumably to unfreeze the credit markets. Yet, since their bailout, all both have done is make credit more difficult to get. They've created break points for credit scores in the beginning of the year. They created new break points for condominiums. At the beginning of May, both created new rules for appraisals that have created an extra layer of headaches. It's now nearly impossible for anyone to get a loan with a loan to value of over 80% with either.

In fact, the access for residential mortgages continues to get more and more difficult. All that's happened since the bailout of both is that the difficulties have come more slowly. In other words, credit has continued to tighten only the tightening has slowed down.

Finally, there is the issue of loan modifications. Banks have done about one tenth of the loan modifications that the president wanted done by now, about 500,000. The situation has gotten so critical that Barney Frank has threatened to re introduce the so called cramdown rule which would allow bankruptcy judges to force loan modifications on bankruptcy proceedings. As such, these banks are so reluctant to modify loans for struggling borrowers that Frank wants to take out of their hands.

The president is fond of saying that TARP saved the financial sector from the brink of collapse. That maybe so but the financial was saved in order to continue activities that line the pockets if the players in the financial system and few others. The president is also fond of saying that the credit market has loosened. That's just nonsense. Commercial mortgages are non existent. Residential mortgages continue to be more and more difficult to get.

There's an irony here. The president attacked the Republicans for being too close to big business and their relationship didn't filter to the rest of the country. That's exactly what the TARP bailout, and all other financial bailouts, has created. Financial institutions like Goldman, Chase, Bank of America, and Citigroup were kept afloat rather than having to go through the dififculties of bankruptcy. It cost taxpayers $750 billion. The massive cost was justified because we were told that these institutions were necessary to the rest of the economy. Yet, we all saved these companies from themselves and all they've done is continue to engage in activities that make money for themselves that does little else for the rest of the economy. If the president claims that we saved the financial system from the brink of disaster, that might be true. If the president claims that by doing so, that has helped the economy at large, the evidence simply doesn't back him up. As such, the president has done exactly what he demonized his political opponents for doing.

Next Stop the Incompetent Label

In the span of two days, the administration has blown through two deadlines without producing a report. Yesterday, we marked ninety days since the President asked for his cabinet members to each produce a report that would lead to a reduction in administration spending of only $100 million. That report was due in 90 days. Yesterday, absolutely no report was produced. Meanwhile, a panel was supposed to produce an interim report on progress toward closing GITMO today. That report will also not be filed.

An Obama administration panel will miss a Tuesday deadline to report on its efforts to meet President Obama’s directive to close the detention center at Guantánamo
Bay, Cuba, by January, administration officials said on Monday.

The officials said that a task force reviewing detention policy would need another six months to complete its report and a second group, reviewing interrogation policy, would need two more months to finish its report to Mr. Obama.

Senior administration officials said at a briefing for reporters that the missed deadlines did not mean the administration was bogged down in its effort to close the prison, which now holds 229 men suspected of terrorism.

The president's plan for stemming foreclosures has also been an abject failure.

The Obama administration’s $50 billion program to curb foreclosures isn’t working, and the White House knows it.

Administration officials blame the mortgage servicers charged with carrying out the mortgage modifications and refinancing under the federal program. Many of their Democratic allies on Capitol Hill back them up, but others are criticizing the White House for fumbling the execution. Whatever the reason, the program hasn’t stopped the rising tide of foreclosures: Experts predict that at least another 2 million homes will be lost this year, and the administration’s plan has so far reached only about 160,000 of the 3 million to 4 million homes it was supposed to protect over the next three years.

That’s bad news for the economy — and bad news for the Democrats.

Here's how DEMOCRATIC Senator Chris Dodd characterized the problem.

I’ve had a lot of frustrations in trying to come up with plans that work,” Dodd, a Connecticut Democrat, said during a break in a hearing on the programs today in Washington. “I’m concerned that we’re just going through the motions. I don’t
get the sense of urgency.”A Bank of America Corp. executive told Dodd’s committee that the administration stokes “confusion and delay” among lenders when it announces anti-foreclosure plans before completing the program details, while Senator Richard Shelby of Alabama complained that the programs have fallen short of goals.

Meanwhile, Joe Biden, who himself is an endless stream of embarrassing gaffes, proclaimed on television that the administration misjudged the severity of the recession. That's why the administration predicted 8% unemployment without the stimulus and now it's 9.5% with the stimulus. At the same time, not even $100 billion of the $787 billion stimulus has been spent.

If we get to the summer recess and no headway has been made on health care reform, then during the summer recess will bring more and more calls by pundits of the "incompetent" label in characterizing the Obama administration.

In fact, I challenge anyone to show how Obama has shown competence in doing anything well but speechifying so far in his presidency. The only piece of legislation he passed was the stimulus. At his most popular, he barely got it through with 3 Republicans on board. It's true that all his initiatives are still incomplete. Yet, if you were to give a grade in execution on the stimulus, his mortgage bailout, GITMO, and all his legislation you'd have to give F grades for everything but cap and trade.

Even cap and trade, while it was passed in the House, has little hope of passing in the Senate. Furthermore, almost no one likes the bill that was passed. Here's how Tom Friedman characterized the bill.

There is much in the House cap-and-trade energy bill that just passed that I absolutely hate. It is too weak in key areas and way too complicated in others. A simple, straightforward carbon tax would have made much more sense than this Rube Goldberg contraption. It is pathetic that we couldn’t do better. It is appalling that so much had to be given away to polluters. It stinks. It’s a mess. I detest it.

Friedman, mind you, supports cap and trade. I'd be hardpressed to find anyone strongly believes in the legislation that passed the House. As such, even the one piece of legislation that has seen any movement is a piece of legislation almost no one likes.


So, with no real legislative victories to speak of, no initiatives that are successful, if the president isn't able to move forward on health care, then we are going to start hearing more and more people in August label him INCOMPETENT. That is, frankly, a devastating label.

President Obama's Foreclosure Nightmare

Let's make some stipulations. President Obama didn't create the foreclosure nightmare. Instead, he walked in while it was unfolding. That said, it will be his nightmare because among the first things he did was create loan modification program that he, himself, said would save nearly ten million people from foreclosure. The president held a press conference, and he said it would cost about $75 billion. As soon as he did all of this, he took ownership for the rising foreclosure crisis. The opinions of what to do about rising foreclosures are plentiful. For instance, those like me would say that you do nothing. Let the homes get foreclosed on naturally because that's the only way the market can bottom out. Then, there are those like ACORN and the Center for American Progress that say not enough is being done. For instance, earlier this year the so called cramdown rule, championed by Dick Durbin, was filtering through Congress and didn't get passed. Cramdown would have allowed bankruptcy judges to force loan modifications on any homeowner in bankruptcy.





What is clear now is that so far the administrations efforts have been akin to putting a band aid on a heart attack. To understand just how corrosive this problem is you must first understand that it is very layered. Second of all, even while the president's efforts have so far been largely useless all of the negativity of the efforts are in play.





Right now, there are four main drivers of future foreclosures: continuing resetting of adjustable rate mortgages, continued growth in unemployment, resetting of Option Arms, and balloon payments coming due on commercial mortgages. So far, the president has done a little bit to limit the first problem and nothing to limit the other three.





ARM's Resetting:





Here's a graph that illustrates the problem.



In this Politico piece, a Harvard economist makes this assertion.

Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, said that while the Obama plan was well-crafted for the issues at hand in February, the cause of foreclosures has changed. Now they are less about the
creative, variable-rate loans that buried many homeowners and more about an
unemployment rate that has even those with fixed-rate loans struggling to keep up.

“The issues have changed, and in some ways the solutions haven’t kept up with the problems,” Retsinas said. “The most effective intervention would be to put people back to work.”

At this moment, he's right, however that's sort of a misleading assessment. Right now, the main foreclosure problem is unemployment. People can't pay their mortgages because they don't have work. ARM's resetting is NOW not as big a problem because in 2009 there aren't that many resetting. What will happen in 2010? There will be a lot more. So, in fact, come 2010 resetting ARM's will again become a driving force in the foreclosure mess.



The president's foreclosure prevention plan was mainly supposed to deal with resetting arms. That's because those getting a loan modification were supposed to show a "hardship". There's a built in hardship when you see your payment go up several hundred dollars monthly. It's also supposed to deal with the problem of underemployment. There's also a built in hardship when you see your income go down a few hundred dollars monthly.



The problem is that the president's plan was implemented very haphazardly. Banks are confused. The rules are unclear. Their departments aren't equipped for hundreds of thousands of struggling borrowers all demanding loan modifications all at once. As such, very few have been done compared to the growing numbers of foreclosures. Now, everyone is pointing fingers at everyone else.

The White House realizes the stakes. Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan took the 27 participating servicers to task in a July 9 letter to their CEOs, telling them to add more staff, improve training, create an appeal path for borrowers dissatisfied with the service and fulfill other measures to do more modifications, better.

The servicers were told to designate a liaison with the administration who will meet with Treasury and HUD on July 28. The servicers have to tell the administration by July 23 what specific steps they’re taking to improve performance.

In addition, the administration announced that next month it will start publishing company-by-company results, including how many modifications each servicer has made and how quickly. At the least, that will give policymakers ammunition to shame recalcitrant lenders.

“We think that that type of disclosure, servicer-by-servicer, will be important to spurring greater activity on their part,” Herbert Allison, assistant treasury secretary for financial stability, told Dodd’s committee.

It speaks to how terribly chaotic the system is when the administration puts a gun to bank's heads and still loan modifications aren't getting done. since I've begun to analyze the failures of Obama's loan modification program, I've identified the main culprit that this is a whole new industry being created from scratch. It's going through the same problems that any industry would in its infancy, growing pains. Up until this year, there were a few thousand loan modifications done yearly. Now, the administration wants there to be several million. Such a revolutionary change doesn't happen overnight and without serious problems. Of course, the problems of foreclosures can't wait until everyone involved figures out how to work them.



Joblessness:



I think everyone has heard that our unemployment rate is 9.5%, but in the context of the foreclosure problem, that number is misleading. It doesn't include those that took on less paying jobs, part time jobs, and those that quit looking. When you figure out underemployment, the number approaches 20%. Many of those folks are property owners and thus all in danger of being unable to pay their mortgage.



There is little the government can do to make sure that someone unemployed pays their mortgage on time short of creating an environment conducive toward job creation. Right now, things are bad and getting worse. That's why Mr. Retsinas was so focused on jobs. In that respect, he's right. If job losses continue to grow with no end, that will spill into a foreclosure mess and there's nothing the federal government will be able to do. While, I believe that unemployment benefits can be included in loan modification income, almost no one that relies on unemployment would qualify for a modification. The stunt in income would be too great.



So, unless jobless rates are curbed soon, that will continue to spill into higher foreclosure rates. All of it is a vicious cycle. If foreclosures are exploding that is a cancer to the rest of the economy. Unemployment works much the same way. Most expect unemployment to cross 10%, some 11%, and others into the teens. Foreclosures will be a variable of that.



Option ARMs



Here's a loan that most have never heard of. How about this? The three biggest players in option arms were: Bank United, Washington Mutual, and Countrywide. It's NOT a coincidence that all three are no longer in existence. That loan product brought all three to their knees.





That's a graph of Option ARMs, specificially, adjusting. You'll notice that a fair few have adjusted so far but that is about to change with its zenith happening in 2011.

First, Option ARM's no longer exist. They were a gimmick loan who's fatal flaw was exactly the current economic climate.

It worked like this. For the first five years, the borrower was allowed to make a payment that had no relation to the interest rate they were charged. The payment wasn't merely small but tiny. For instance a $300,000 mortgage would have a payment of just over $1000. (the small payment is made up at the end of the loan with a concept known as negative amortization) After five years, it adjusted and reset to track the rate and the current payment. Since the first five year's payment didn't track the rate, that payment almost always built negative equity. As such, the borrower would owe more after five years than they started. So, any option arm that adjusted would have an obscene payment shock. (payment shock is when payment adjusts up. Obscene is when it adjusts up a LOT)

Well, starting in 2010, all of 2011, and most of 2012, we'll have at least $10 billion monthly adjust. While that is a relatively low number, an enormous amount of these will go into default unless drastic measures are taken. Remember, the president's play is only $75 billion. Most of it is supposed to run out at the end of 2010. Furthermore, Option ARMs aren't even a part of the plan. So, starting in a couple months, we'll see about $10 billion in foreclosures monthly that no one has been paying attention to. There's about $500 billion in Option Arms that will adjust in total. Most of those borrowers are stuck. Their balances have gone up while their values have gone down. As such, they can't sell. They can't refinance either. It's unclear if they can modify. That's what Bank United attempted to do on a mass scale and still went under.

Commercial Mortgages:

The most underreported looming problem is that of commercial mortgages. Congress woman Maloney recently held a hearing on the problems faced in commercial mortgages. The numbers are frightening. In 2007, $488 billion in commercial loans were financed, $143 billion in 2008, and $15 billion year to date. Furthermore, there have been ZERO commercial mortgages securitized year to date. As such, there is no commercial mortage securitization market. If you were to do a commercial mortgage, the bank would have to hold it. Imagine asking a local bank to finance a hundred million dollar property. That's just far too much to put into one loan. That's why financing of $50 million and more are nearly non existent.

The problem isn't simply that multi units, warehouses, and office buildings aren't financed and sold. The problem is much bigger than that. Many commercial loans are done as balloon loans. That means that while they are calculated as though it is a 25 or 30 year loan, they are due after 3,5, 7, or 9 years. At that time, there is a massive, or balloon, payment for the remaining balance. So, the holder of a commercial mortgage needs to sell or refinance before the balloon is due. If not they either face a massive payment or foreclosure.

Of course, commercial loans are NOT part of the president's loan modification program. In fact, it's problems have almost been entirely ignored. I'd challenge anyone to even find a time when someone in the administration even talks about the problems in commercial mortgages. According to testimony, starting in 2010, commercial mortgage balloons will come due with the zenith in 2012. (an estimated one trillion dollars of balloons coming due in that year)

Let's think about that. Normal ARM's will increase their adjustment in 2010, Option ARM's will have their adjustment zenith in 2011, and commercial mortgages will have their zenith in 2012. So far, his plan is a largely impotent $75 billion program to modify mortgages and a stimulus package that has done little to stem joblessness. That's what I would call a NIGHTMARE.

Moral Hazards:

I first heard about loan modifications last fall. I immediately had a problem with them as a matter of policy because there is an inherent moral hazard. What I mean is that loan modification reward exactly the sort of behavior we want to punish. Here's how loan modifications work. You are struggling to make the payment on your mortgage. As such, the bank modifies your payment to something you can afford. The rates on these modifications can be as low as 2%. As such, if you have a modified loan, your rate is very likely to be better than that of someone with perfect credit. How's that for fair?

Banks are very aware of this built in moral hazard. That's one reason that loan modifications have been slow in coming. They don't want word spreading that loan modifications are a legitimate option for struggling borrowers or soon everyone will want one and suddenly everyone struggling is demanding their 2% mortgage. Suddenly, everyone is figuring out how to be struggling to get their 2% mortgage.

In fact, that's the Obama vision. He may not say it but if his plan works out 7 million people who have mortgages they can't afford will get mortgages better than those that can afford them. Remember, loan modifications are based on hardship. That means if you can afford your mortgage, you have no hardship. Isn't getting an affordable mortgage what we want to encourage? If your credit is perfect, mortgage is affordable, you have plenty of money in the bank, see if you can get a 2% mortgage. Remember, Obama doesn't go as far as want. Some want modifications to include a reduction in balance. In other words, if you're really struggling, then you won't owe $300,000 but say $250,000. See if you have perfect credit and ask if your bank will reduce your balance as a result.

That creates an upside down and perverse mortgage market. The most irresponsible are the ones rewarded the most. That's a moral hazard.

Now, moral hazard is a legitimate problem, but if we avoid a foreclosure crisis, some would say it's worth it. That's not what's happening. Instead, foreclosures are exploding all while the administration ramps up efforts to reward bad behavior. Remember, both Treasury and HUD are about to put extra pressure on banks to hurry up and approve more loan modifications. So, lot's more irresponsible borrowers will be rewarded all while foreclosures explode anyway. The administration will create a massive moral hazard with hundreds of thousands of homeowners being saved from themselves all while doing little actually solve the foreclosure crisis. I'd call that a nightmare.

Note to the Conservative Media...Here's How You Bring Down ACORN (and the Obama Administration With Them)

What if I told you that there was an organization who's long time leader hid a million dollar embezzlement perpetrated by his brother? What if I told you that this leader told eight of his deputies and each of them made a commitment to keep the embezzlement hidden from the rest of the organization? What if I told you further that this organization is really a collection of two hundred plus loose affiliates most of which just happen make their home office the EXACT SAME ADDRESS? What if I told you that this organization uses the tax laws to created a maze of money that makes it nearly impossible for any watch dog to track it? What if I told you that current and former insiders accuse this group of misusing funds, voter registration fraud, embezzlement, mismanaging pensions, and co mingling government grants so that they aren't used for their intended purpose? What if further I told you that these very insiders were removed from the organization and even retaliated against for making these charges? You'd probably say that this organization is rotten to the core but also that the revelation of all of this has likely made them so toxic they couldn't function. If that organization is ACORN, you'd be right on the first, and wrong on the second.

ACORN is rotten to the core and in need of major reform but they continue to function and even thrive despite the public record being filled with so much evidence of criminality that it's not unfair to refer to them as a RICO organization. (Racketeering Influence Corruption Organization) They are allowed to function because the media in general has done an awful job of getting to the heart of the story. The MSM has simply ignored their criminality and then subsequent influence over our political structure. Meanwhile, the conservative media is so desperate to tie ACORN to major politicians like the president that they totally miss the heart of the story. That's because at the heart the story is NOT ACORN's alliance with President Obama. At heart, the story is a criminal organization that continues to pervert their original purpose through systemic corruption and criminality. The reason that this criminality and corruption is important is NOT merely because of their connection to President Obama but to politicians, influence peddlers, and power brokers of all shapes and sizes on all sides of the political spectrum. So, here is how you bring them down.

1) Make the story what it is, not what you want it to be

I would be hard pressed to find a story on the conservative blogosphere in which ACORN is mentioned without President Obama being mentioned. That's why some in the media are fixated on ACORN's connection to the census. Their actual connection is still to be determined. That doesn't stop many in the media from writing endlessly about this connection. I'm not saying this isn't a story. It is, but there's nothing ACORN would like more than for their political opponents to spend endless time hyper ventilating about their loose connection to the census. By doing so, you also miss the real story.

For instance, while everyone in the press was hyper ventilating about this connection, almost the entire media missed a significant story of ACORN corruption in St. Louis. It was first reported by Nancy Armstrong of Ms Placed Democrat. In St. Louis, ACORN received $100,000 to do loan modifications. The problem is that they only did 34 and charged $750 per loan modification. That's only $18,000, and NO ONE, not ACORN not the city of St. Louis can account for the other $82,000. The implication is massive. First, the city was robbed of $82,000. Second, the money could have gone anywhere else in the ACORN universe. For all we know, that $82,000 is now being spent to help pass universal health care. If you're a Republican in St. Louis, how would you feel about your city dollars being spent to help ACORN help the Democrats pass universal health care.

In fact, former ACORN board member, Gwen Cogshell, held a news conference in late June to recount the details of this scam. The only news media that attended was a documentary news crew from Fox News. Why? Why was this story ignored by the media? I know why the MSM, including those in St. Louis, ignored it. Why would the conservative media ignore this? Isn't an $82,000 fraud perpetrated on the citizens of St. Louis news? Isn't fresh evidence of criminality by a criminal organization news? I'd suspect that one reason it was ignored is because no one could tie President Obama to the story. As such, an important story of corruption and criminality was ignored. Of course, if the media ignores crime and corruption, criminal enterprises, like ACORN, are able to continue to engage in it.

The other problem is that ACORN is so shadowy and organic that many in the media see a conspiracy everywhere in covering. Nothing is as it is, and so everything is turned into some sort of sleight of hand. Glenn Beck is a great example of this. He's talked to so many insiders who have told him so much about the shadowy manner in which ACORN operates that he now sees a machiavellian plot everywhere. The so called name change is a great example. About a month ago, nearly the entire conservative media breathlessly reported that ACORN had changed its name. The only problem was that it wasn't true. In fact, ACORN International, the organization now run by Wade Rathke (former CEO of ACORN and brother of embezzler Dale Rathke) changed its name. This non story was turned into a major story by a breathless conservative media trying to turn nothing into something. This lead to days of endless speculation. Beck was now convinced that Wade Rathke, who was officiall removed as CEO of ACORN last summer following the revelation that he covered up his brother's embezzlement, was actually secretly running ACORN. His only evidence was this supposed name change and endless speculation that he came up with himself and that other insiders suggested might be going on.

2) Propaganda

The problem with making the story what you want it to be rather than what it is, is that you turn into a propagandist. One of the reasons that the ACORN story hasn't reached the mainstream is that most of the folks that do report on it ultimately turn into propagandists. Between endless speculation that ACORN will rewrite districts using their new power in the census, endless loose connections to the White House, and false stories that they commit voter fraud and thus change elections. (there is no documented evidence of voter fraud, only voter registration fraud which is something wholly different) the rest of the public doesn't care because most people don't respond to propaganda.

When conservatives tie ACORN to every bad deed ever created, it looks as though conservatives are creating a boogeyman. ACRON must be presented as it is, not as the conservatives would like them to be. The first is journalism, and the second is propaganda. Every story can't have some dubious connection to the White House, some conspiracy theory about the impending takeover of the government, and whatever other machiavellian storyline someone creates in their head. If every story focused on their real and documented criminality then the public would see them for what they are, a RICO organization, rather than what Republicans and conservatives want them to be.

3) Get to know ACORN 8
(for full disclosure, I've had several on and off the record conversations with several members of this group)

ACORN 8 is the biggest threat that ACORN has ever had. ACORN 8 is a group of current and former ACORN board members and employees who discovered the criminality of the organization and demanded real reform. For their efforts, they were often removed from their position and retaliated against. They are almost entirely Democrat, most are African American. As such, they can't easily be marginalized as some rabid conservative looking to create a hatchet job. More than that, they know everything about how ACORN really functions. They can tell the story as it is. They can provide the details necessary to write and produce the sort of story that can make a difference. They're willing to go on the record if necessary.

The folks at ACORN 8 know all the players, Wade Rathke, Dale Rathke, Michael Shea, the Kest Brothers, etc. intimately. They can provide the sort of inside information that only insiders can provide. They are willing to speak to any media that is willing to produce an honest telling of the story. So, why have major portions of the conservative media written and talked about ACORN without contacting them? It's mostly likely because they are too lazy. It's much easier to produce a story that's mostly rank propaganda than to speak to someone for an hour or more and get the real story. That would require real work of journalism. It's certainly not because they aren't available. Members of ACORN 8 have been interviewed by major media figures like Glenn Beck and smaller ones like me. They will speak to anyone that will listen. Of course, it's also important that their agenda is not to bring down the Obama administration. It's not even necessarily to bring down ACORN, but rather to reform it.

4) Get to Know Truth 2 Power

Whereas as ACORN 8 is a collection of former ACORN board members, Truth 2 Power is a collection of current and former ACORN employees. No one has been mistreated worse in the ACORN saga than their own employees. Here are some of the stories that Truth 2 Power can tell: Despite running two union locals in SEU and taking in millions of union members' dollars each year as a contractor, there are no unions for ACORN employees, ACORN pays most of its organizers only about $25,000 a year to start, and requires them to work between 54 and 80 hours a week (the pay and benefits are worse than what organizers organize for in our campaigns), many ACORN organizers have to work alone in dangerous neighborhoods, minority organizers say they were fired for speaking out against racism at the top of the ACORN food chain , ACORN has brutally beaten back previous union drives of their employees by using threats and intimidation and legal maneuvers. Just think about that for a minute. The same group that supposedly fights for a "living wage" doesn't pay its own employees a "living wage". The same group that demands that businesses allow unions comes down hard against any employee that tries to unionize. The same group that fights for worker's right sends its own workers into dangerous neighborhoods alone. These are the stories that current and former ACORN employees are ready to tell.

5)Focus on the criminality

The real story is not that ACORN is some communist organization. First, if you claim that, it's easy for them to spin that characterization and say that and say they're an organization that helps the poor. Second, there's nothing wrong with a communist organization even if it is one. Our country is built on political freedom. Folks have every right to believe what they want. They can form organizations that reflect their beliefes, and those that demonize those beliefs belittle themselves. Folks do NOT have the right not to pay their taxes, embezzle, mismanage pensions, co mingle funds between tax exempt and taxable organizations, commit voter registration fraud, and not account for monies that government gave them in grants. All of those things are illegal. The rotten part of ACORN is NOT its mission and purpose. It's not even it's in your face tactics. The rotten part is that all of it is built on the back of a criminal enterprise.

About a month ago, I found out that ACORN"s current CEO, Bertha Lewis, held a conference call with the Conference of Mayors, including Michael Bloomberg. Then, I found out their political arm in New York, the Worker's Family Party, held a mayoral debate that Bloomberg attended and almost endorsed him. I wondered what the connection between Bloomberg and the WFP. The insider gave several different scenarios, some of them nefarious, some cynical and some perfectly appropriate. So, ultimately, unless I get inside Bloomberg's head, no one will ever know why he got into bed with ACORN. Ultimately, it doesn't matter. ACORN's New York branch is run by the Kest Brothers. John and Steve Kest were two of eight folks that knew about the embezzlement of Dale Rathke and didn't say anything. As such, they covered up an embezzlement. These are the folks that Michael Bloomberg has gotten into bed with. Whether their relationship is above board is beside the point, their,ACORN's, behavior in total is criminal. ACORN has built its strength, scope and power through criminality. So, even if Bloomberg's relationship with ACORN is appropriate, it is inappropriate because that relationship was ultimately built on criminality. It's the criminality that we need to focus on.

6)Follow the money

It's a common cliche, but in the case of ACORN, it's very appropriate. ACORN has created a very complicated and loose network of organizations. Some are non profit, some are for profit, and everything in between. Non profit groups have to disclose their financial statements while for profits do not. So, if and when ACORN moves money between organizations, it's easy to lose track of it. The two biggest allegations against ACORN are misuse of funds and co mingling of funds between profit and non profit organizations. Misuse of funds happens when an organization uses monies in manners they weren't intended. In the case of ACORN, the prior St. Louis story I pointed out is a good example. They were paid $100,000 to modify loans. They only modified $18,000 worth of loan modifications. That means that $82,000 was misused. That's not an opinion but a matter of fact confirmed by the mayor's office to Nancy Armstrong.

The second allegation is that funds are comingled between for profit and non for profit organizations. This is an even more serious allegation. That's when a for profit group gets money and then moves that money into a non profit in order to avoid paying taxes. This is nothing less than a form of money laundering. This is much more difficult to prove because the money gets lost in the maze of for profit and non for profit groups. As such, here is what ACORN 8 spokesperson Michael McCray wants.

Thus, no one really knows how much ACORN is actually worth and how much non-profit –vs– for profit funding has flown through ACORN unless and until there is a forensic examination and independent audit. We know that all funding flowed through Citizen’s Consulting Inc. (CCI). But CCI claims to be a private company – but it is really the financial management division of ACORN.Ultimately, their must be a forensic examination and audit of ACORN. Otherwise know one will ever know for sure how much went into ACORN, how much money was co-mingled at ACORN or how much money was embezzled from ACORN. It’s just that simple.

Everyone that wants to hold ACORN to account for all their crimes, proven and alleged, must demand in unison that they be forced into a forensic audit of their books. This is not some unreasonable request. We know that their leader hid a million dollar plus embezzlement. We know that 8 current leaders knew about the embezzlement and covered it up. We know they continue to get federal, state, and local government money. No one should be comfortable with an organization that's been proven to have engaged in embezzlement to continue to get government funds without ever showing the public their books.

7) Once ACORN is brought down everyone associated with them is brought down with it.

It's absolutely unbelievable just how implanted into the political structure ACORN is. ACORN supports every single Obama initiative. In fact, ACORN Housing is now implementing an Obama housing program. That's the same ACORN Housing that took $100,000 from the city of St. Louis and now can't account for $82,000. Conservatives are putting the proverbial cart before the horse. It's as though they think they can bring down ACORN and Obama by tying each to each other.

That's not how it works. ACORN needs to be brought down because it's a criminal organization. Everyone that is associated with ACORN will be brought down if the public is convinced that ACORN is in fact a criminal organization. How will Michael Bloomberg explain his cozy relationship with ACORN, if the public believes that they are nothing more than a RICO organization? The saem will be true of President Obama. That's when their participation in the Census will be a real story. That's when every alliance, loose and otherwise, between every politician and ACORN will be of importance.

I personally don't understand how it is that we already know so much about their criminality and still they function. What this means is that the public hasn't been presented with enough evidence yet. More criminality needs to be documented. There needs to be enough so that no one has any doubt about the nature of the organization. Then, and only then, should the conservative media pounce on their alliance with Obama on health care, housing, the census and all the other loose connections. First, bring down ACORN, and then Obama, and everyone associated with them, will go down with them.