HELOC Defaulters Just Being Strategic, Using Bankruptcy Properly By: David Dayen Thursday August 12, 2010 7:37 am
David Streitfeld wrote the previous story about all these strategic defaults and how un-American they are. The next in his series of shaming people who can’t afford things is this beaut, where he equates bankruptcy to stealing, sort of: The delinquency rate on home equity loans is higher than all other types of consumer loans, including auto loans, boat loans, personal loans and even bank cards like Visa and MasterCard, according to the American Bankers Association. Lenders say they are trying to recover some of that money but their success has been limited, in part because so many borrowers threaten bankruptcy and because the value of the homes, the collateral backing the loans, has often disappeared. The result is one of the paradoxes of the recession: the more money you borrowed, the less likely you will have to pay up. This seems to elide the fact that a loan is a contract, with responsibility on both sides. The borrower promises to pay or they lose their assets and their and credit rating, and the lender promises to ensure payment or they take a loss. The lenders aren’t forced to lend at gunpoint, they have agency and they make their own decisions. I also like the term “threaten” bankruptcy, as if it’s a beyond-the- pale option and not the normal procedure for an individual or group actor without the ability to pay. It’s known in the business world as “smart strategy,” but we can’t have that among people. There’s no question that people went overboard with the HELOCs and the refinancing. There’s also no question that lending agencies at any time could have denied those HELOCs and refis, and chose not to. In fact they encouraged them. With giant billboards and ads. And they made the profits at the time. I’m supposed to feel sorry for lenders with flawed business models based on endless and unsustainable home price appreciation? The American Bankers Association flak in this article says “No one had ever seen a national real estate bubble” and “nobody could have anticipated,” but common sense would dictate that home prices doubling could never end well. Streitfeld also addresses in one sentence that the lenders – i.e. the big banks – got government bailouts for their trouble, unlike the poor slobs who lost their jobs because of the financial meltdown or saw their home lose half its value, and now can’t repay their loans. But the most interesting thing here is how the HELOC borrowers learned that they have leverage, in ways that people facing foreclosure don’t. Finally, they point to their trump card: they say will declare bankruptcy if a settlement is not on favorable terms. “I am not going to be a slave to the bank,” said Shawn Schlegel, a real estate agent who is in default on a $94,873 home equity loan. His lender obtained a court order garnishing his wages, but that was 18 months ago. Mr. Schlegel, 38, has not heard from the lender since. “The case is sitting stagnant,” he said. “Maybe it will just go away.” Yes, basically, this would be the practical effect of cramdown, allowing bankruptcy judges to modify the terms of a home mortgage. It gives individuals a fighting chance against the banks, and forces everyone, not just the borrower, to take a haircut. With foreclosures not set to peak until next year, you’re simply going to see more borrowers use the tools at their disposal. And if they can’t raise the possibility a bankruptcy judge changing the power dynamic with the banks, they’ll walk away from their homes. ************************* Untruth in Lending: Why Ex-Fannie Mae Exec Caroline Herron Got Fired for Doing Her Job By Alain Sherter | August 6, 2010 1 Comment 1 Vote Alain Sherter OK, GM, You’re Headed for Public Ownership; Now Get Back to Work The Sky May Be Falling for Everyone Else, But WPP Sees Only Growth Actually, Facebook Places Doesn’t Compete with Foursquare Gulf Oil Spill: Meddling Scientists Keep Ruining It For BP Renting Bio Beetles: Hawaii’s Clean Car Growth Industry View more Former Fannie Mae (FMC) executive Caroline Herron is blowing the whistle over what she claims is the government housing finance agency’s calculated failure to help homeowners avoid foreclosure. But her lawsuit, which appears to be the first of its kind against Fannie by a former employee, goes beyond simply detailing the company’s botched administration of the federal Home Affordable Modification Program. If what Herron says is true, the complaint is a searing expose of organizational dysfunction. For corporate managers, her allegations provide a case study on how not to run a company. It paints a picture of a company where leaders lack accountability, bureaucracy and politics reign, and communication is wielded as an instrument of control. And for employees, unfortunately, it’s also a reminder of just how hazardous to your career it can be to fight city hall. Truth Hurts >From 2000 to 2007, Herron was a rising star at Fannie, according to a story today by The Center for Public Integrity, a nonprofit media firm. She got superior performance reviews, took on key projects and rose through the ranks to become a vice president. Fannie evidently thought so highly of Herron that, after she accepted a voluntary severance package as part of company downsizing, the company brought her back two years later as a well-paid consultant. In that role, she was tasked with helping Fannie coordinate with the U.S. Treasury Department to run HAMP, which President Obama launched in early 2009 to help borrowers work with lenders and loan servicers to modify their mortgages. Her bosses, who are named as defendants in the suit, even recommended her for a job at Treasury, which agreed in principle to bring her aboard. Then Herron made what was, at least for her career advancement, a mistake — she told the truth. She found that Fannie’s handling of HAMP was a mess. Worse, that was by design. Under its arrangement with the government, Fannie was compensated based on the number of homeowners it put in so-called trial modifications, not on how many people actually kept their homes. That’s a problem, since HAMP is supposed to help borrowers avoid foreclosure, not simply delay it for a few months. According to the suit: It appeared that Fannie Mae officers were focused on maximizing incentive payments available to Fannie Mae under various federal programs — even if this meant wasting taxpayer money and delaying the implementation of high-priority Treasury programs…. At the same time that Fannie Mae was attempting to process as many trial modifications as possible before the end of 2009, company executives were delaying or quashing other efforts to streamline a process in which borrowers could provide documentation up front before a trial loan modification is processed. Herron contends that she raised such concerns with her immediate managers, and was roundly ignored. Indeed, her efforts seem to have poisoned relations with her supervisors. In retaliation, they sabotaged her pending position at Treasury and, in January, fired her, according to the suit. Fannie not only never explained why she was being dismissed, but also barred her managers and other Fannie employees from divulging details regarding her firing, she claims. Skewed Financial Incentives Herron also alleges that Fannie blocked the launch of a planned Web site aimed at streamlining the process of applying for mortgage modification. The so-called loan portal, developed by a Newport, Ky., company called Default Mitigation Management and already in use by private mortgage counselors, lets borrowers upload required documents, making it easier to coordinate with loan servicers. That would be a boon because such firms routinely lose these records, while homeowners complain that it’s difficult to reach servicers. Fannie execs initially expressed interest in the site, according to the suit. But the plan festered: Months went by, though, before Fannie issued a formal request for proposals from software developers. Then, around the start of 2010, Fannie and the Treasury Department abruptly canceled the bidding process. In a letter to U.S. Rep. Geoff Davis of Kentucky, a top Treasury official explained that as the bidding process neared its end, Fannie identified a need for “broader capabilities” in the portal and “determined not to move forward with a borrower portal at that time.” What else might account for Fannie’s dithering? Money. If borrowers provided loan documents upfront, HAMP would process fewer trial modifications. That would decrease the incentive payments Fannie got under its contract with Treasury, Herron charges. That would be of particular concern for a company as financially troubled as Fannie, which remains in federal receivership. Ira Hecht, an attorney in private practice in New York and a former partner with McGuireWoods who oversaw the firm’s Internet and technology practice, said in an interview that the loan site could have helped homeowners deal with loan servicers. “The fact that the portal idea never went anywhere is surprising because it would’ve created efficiencies that seem to be problematic” with HAMP, he said. Anemic HAMP Problematic is putting it mildly. Simply put, HAMP is a colossal bust. The $75 billion program was supposed to help up to 4 million financially distressed people keep their homes. As of June, or some 16 months into the program, fewer than 400,000 homeowners have received permanent loan modifications. During that time, there have been more than 300,000 foreclosures for 15 straight months (see map at bottom). In a withering report to Congress, TARP Special Inspector General Neil Barofsky last month characterized the anti-foreclosure program as “anemic”: HAMP has not put an appreciable dent in foreclosure filings. Indeed, the number of trial and permanent modifications that have been canceled substantially exceeds the number of homeowners helped through permanent modifications. It’s worth noting that Fannie isn’t alone in failing to halt foreclosures. Virtually all loan servicers, including major mortgage lenders like Bank of America (BAC) and JPMorgan Chase (JPM), have a poor record of permanently modifying people’s mortgages. That reflects HAMP’s fundamental flaws: weak incentives for loan servicers to modify mortgages, and a lack of consequences for servicers that refuse to work with homeowners. “There’s huge institutional inertia in place that has prevented putting loan modifications through at a reasonable pace,” Diane Thompson, an attorney with the National Consumer Law Center, told me. “Treasury hasn’t figured out how to align the economic incentives so either Fannie Mae or other servicers get modifications moving.” I’d like to hear Fannie’s side of the story, but for now it’s not talking. The company declined to answer the Center for Public Integrity’s questions (and didn’t return my call). The housing agency disputes Herron’s claims, however, saying that an internal investigation found “no merit” to her allegations. Until the company responds, here’s my snap take on what happened. In seeking to do her job at Fannie, a highly competent and motivated employee put her nose where it wasn’t wanted. She found things that made the company and her bosses look bad. She proposed changes that threatened to overturn the mortgage-servicing gravy train at Fannie. So it punished her. Ryan Grim [email protected] Arthur Delaney [email protected] | HuffPost Reporting Become a Fan Get Email Alerts from this Reporter Nevada’s Economic Misery May Be America’s Future First Posted: 07-27-10 04:20 PM | Updated: 07-28-10 12:49 PM WHAT’S YOUR REACTION? So many homes in Las Vegas have been foreclosed upon that banks rarely bother to hang a “For Sale” sign on the front lawn anymore. Instead, visitors identify bank-owned properties by the brown grass and the 8.5 x 11-inch sheet of paper taped to the front door or the garage. On a cul-de-sac in the once-pleasant neighborhood of Silverado Ranch, Larry Wood is the last remaining resident. Two of the four homes are in foreclosure and a third is a “party rental” only occupied by rowdy tourists on weekends. One of his neighbors made a few bucks before abandoning the home, he says. “They sold all the palm trees and just walked away from it,” says Wood, sporting a “Freedom Isn’t Free” T- shirt. “It’s a great neighborhood. I guess that people weren’t financially set up to get through the crash.” Wood takes little comfort in being the last resident. “Sometimes it’s scary. There’s a possibility someone would try to rob me and I wouldn’t have any neighbors to help me,” he says, recounting a previous attempted intrusion when his then-neighbor called to warn him not to answer the door because there was a group of thugs knocking. Armed and ready, he huddled near the door but the gang gave up and left. Walking away is becoming a habit among law-abiding residents too. It’s hard to find a home bought before 2009 that isn’t underwater and very few landlords, when running credit checks, look for foreclosures or short-sales on a tenant’s record. Otherwise, a manager couldn’t fill a building. Nevada has a greater concentration of economic misery than any other state. The state’s unemployment rate, which in June edged up to 14.2 percent, has risen faster during the past year than it has anywhere else, and nearly six percent of all homes across the state’s desert landscape received a foreclosure filing in the first six months of the year. While the concentration of misery may be greater in Nevada, it was caused by the same unchecked housing bubble and unregulated financial gambling that brought pain to the rest of the country. If present trends go unchecked, Nevada is America’s future. The jobless rate would likely be much higher, say residents, if Nevada were not such a transient state. When folks lose their jobs and their homes, they often pack up and move in with relatives. Story continues below Others, though, have roots in the state. Robert Garcia, 58, moved to Vegas more than a decade ago to take a job with what is now MGM as a video producer. Back in Salt Lake City, Utah, he’d met his wife, an anchorwoman, on the set. She went to work for US Airways in Las Vegas. The couple, who have two kids, divorced several years ago and sold their home at a healthy profit, which they split. Garcia put $100,000 into a new home that he bought for $350,000. Making nearly six figures, he said, he had no problem covering the mortgage and the $2,400 in alimony and child support. In 2008, things took a turn for the worse. He has been able to weather the downturn, he says, because he always lived within his means — no credit card debt, no car payment. He has a “junky car,” he says, that his kids are embarrassed to ride in. “It’s funny,” Garcia adds, pausing. “Just before I was laid off, I was gonna buy a BMW.” He pauses for another long moment as his eyes well up. Asked where he is living now, he breaks down instantly, tears pouring down his cheeks, knocking his contacts out. “Actually, I’m looking for a place. I’ll be right back,” he says, leaving to compose himself. When he returns, he says that he’s still in his home, which is more than 50 percent under water, but will be leaving as soon as the bank approves a short sale. He had an offer several months ago, but the buyer, a teacher, backed out at the last minute. She’d been laid off. Garcia has applied for 200 jobs all across the country but, at his age, employers want younger workers, leaving him to scrape by on freelance work. He has nothing left, but one bright spot is that the devastation in Vegas is so profound that landlords tell him they no longer check credit reports for short sales or foreclosures. Garcia’s wife, meanwhile, has been laid off by the airline, as fewer tourists fly into town. She’s now on welfare, he says, and, as a consequence, half his wages are garnished. (Welfare policy requires such payments to be made through garnishment.) He doesn’t mind, he says. His bigger fear is that the only job he’ll be able to find will require him to leave Vegas and his children. Meanwhile, the debate in Washington enrages him. It particularly galls him that Republicans say help for the unemployed must be offset with spending cuts elsewhere. Garcia, in fact, volunteers the term “offset,” expressing a better grasp of economics than most of the deficit hawks in Washington. “It drives me crazy when they say that. There’s nothing to take from! Where are they going to offset it?! What’s the phrase? You can’t get blood from a turnip,” he said. “This is my hometown and I’ve watched it struggle and go through so many challenges, particularly over the past two years,” says Julie Murray, president of Three Square, a food bank in Vegas that distributes food to more than 300 partner programs and schools around town. “The way that this economic downturn has been different from others is that I’ve never seen the gaming industry be impacted. Our community would suffer when the economy suffered but gaming was always resilient.” Three Square delivered 10 million pounds of food in 2008; this year the food bank is on track to distribute twice that amount (some of the increase, Murray said, owes to the fact that Three Square is growing; the nonprofit was founded in 2006). Murray said corporate donations to the food bank have been down during this recession, but individual and foundation giving has remained steady. “We’ve been able to sustain distribution of food in a recession because of the sheer will and passion of the community,” she said. “Things are dire — we have more children who are struggling with hunger and more seniors and more families and more middle class families who never thought they’d need social services — however, Las Vegas is rallying.” “Nevada was pretty much a growth economy for most of the past two decades,” says Steven Horsford, the Nevada State Senate’s Majority Leader, a Democrat who represents North Las Vegas. “When the financial crisis hit, it disproportionately affected Las Vegas because of our growth rate.” Horsford says the local economy is struggling not because fewer tourists are coming to Vegas, but because the people who do come are spending less money. (A cab driver complains that he doesn’t have many fewer customers, just more families haggling over the $60 fare.) Horsford said Vegas needs to switch from relying on casino tourism to green energy and medical tourism. “We were used to being able to help virtually all segments of our population get a job if they wanted a job, have benefits, earn money to put their kids through college — we called it the Las Vegas dream,” he says. “From a leadership standpoint, knowing that two-thirds of all homes are either upside down or are in foreclosure is one of the most humbling realities we are dealing with.” The decay in Vegas doesn’t stay there: It reverberates throughout the state. “Coming Soon” signs have been pulled down across the city, because nothing is coming soon other than more foreclosures. The Nevada landscape is pockmarked by empty condos and casinos, some of them fully built and sitting there empty, others are shells frozen in time. When analysts talk abstractly about Wall Street sucking capital out of the real economy, these stalled construction projects are the on-the-ground reality. “60% Reduced Prices” promises one empty condo development. The $3.1 billion Fontainebleau Las Vegas construction project sits nearly complete but the lender pulled out and everybody is suing everybody else. The first Ritz-Carlton in the company’s history to shut down is in Las Vegas. The city’s dance clubs aren’t empty, but there’s less money circulating. “Saturn,” an exotic dancer at Spearmint Rhino, says she and her fellow dancers are making roughly half what they were two years ago. The house she bought for more than $450,000 on an interest- only loan is now worth a third that. She’s negotiating a short-sale with the bank. The Dunkin Donuts that opened in Fabienne Chalaye’s neighborhood five months ago is already empty. “Dunkin Donuts… It’s all empty. Everything is empty,” she marvels, while giving a HuffPost reporter a tour of the city. Chalaye, a chauffeur, says her business is down roughly 60 percent over the last two years. It slowed down almost imperceptibly after 2006, then fell off a cliff in 2008. She hasn’t made a mortgage payment in 15 months and expects to be booted from her home, along with her husband, her adult daughter and her daughter’s boyfriend any day now. She bought the house in 2008 on an interest-only loan for $313,000; it’s now worth $117,000 and her interest rate shot up to 12 percent. Both she and Garcia, however, say they’re leaning toward voting for Harry Reid to return to the Senate, because they have no faith in his opponent, Sharron Angle. “‘I wanna get rid of Social Security,’” Garcia quotes Angle saying. “How stupid is that?” Garcia says a friend of his in the crane business told him he was offloading the hulking useless tools to builders in China because it isn’t worth the cost of storing them. “Office Space Available” blares a sign next to a stalled office project. A five-bedroom home with Spanish tile and a game room sits vacant on half an acre of land. “This property is Bank-owned. We reserve the right to prosecute any and all trespassers illegally accessing the property. Thank you for your cooperation.” The Nugget Casino in tiny Searchlight (population: 576), about an hour from Vegas, laid off a third of its 85 employees in the past two years to cope with reduced demand for the Nugget’s slot machines and chicken fried steaks, says owner Verlie Doing, 86. “We had a great banker when we built this place,” says Doing, who opened the Nugget with her husband in 1979. Now, Doing says, she doesn’t think Wells Fargo will give her a loan to fix the three air conditioners that recently failed. “I’m not gonna talk to the bank. I’m not even gonna bother to waste my time with ‘em.” Doing, a friend and supporter of Harry Reid, is optimistic. “It’s gradually getting better,” she says. “Not noticeably a bunch better — but it’s getting better.” Sarcastic references to President Obama’s 2009 stimulus bill can be seen throughout the Las Vegas area, from glossy Keno fliers at Vegas hotels to the mysterious sign by the front entrance to the Nugget advertising a “Great opportunity” to “stimulate yourself” and make money. “You won’t need a bailout. Call Barry.” Reached by phone, Barry Bunnell of Chloride, Ariz. — a town even smaller than Searchlight — explains that he’s been trying to hire people to sell his Easy Out Fire Protector product, a bottle of fire retardant liquid that’s handy for snuffing out small pan fires, especially in RV trailers. Bunnell needs people who can go door-to- door demonstrating the product. He says he received 37 responses to the Searchlight flier, but nobody was interested in sitting down for an Easy Out interview after Bunnell described the job. He suspects they’d rather stay on unemployment benefits and use the Easy Out inquiry as an easy way to prove to the state they’re still looking for work. A Searchlight sales rep, however, would have to push five Easy Outs on every man, woman and child in town to crack $20,000 a year, selling the type of product that most fire-conscious RV owners already own. (That the unemployed would rather draw benefits than look for work is a common argument among congressional Republicans, even though there are at least 15 million people looking for three million available jobs.) “You can sell two for $39 and keep $20,” says Bunnell of his product, “and people won’t do it because it’s beneath their dignity.” -- You received this message because you are subscribed to the Google Groups "CAPSoff" group. 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