The Foreclosure Front of this War

This is a re-post (complete with lack of proper capitalization) that I just made to the ANWF discussion list.

i feel like many of us have been flailing about on the question of how much weight ANWF should throw behind foreclosure mitigation vs. our mission and while reading naked capitalism (http://www.nakedcapitalism.com/) it just clicked in my mind that these are inextricably related. as this http://www.nytimes.com/2009/07/11/business/11nocera.html?pagewanted=1&_r=1&ref=business nyt article reports geithner and the administration are going to call the bankers into the principle’s office for another scolding over their lack of get-to-it-ness on the government’s foreclosure mitigation program.  it appears this is mainly a pr stunt after a previous nyt piece (http://www.nytimes.com/2009/06/29/business/29loanmod.html) exposed the bankers absolute stonewalling on this issue and undoubtedly embarrassed treasury.  the government’s current program has the force of a strongly worded memo from your 5th grade teacher, and it would be charitable to label these efforts as weak.

here is a key section from the first nyt article (emphasis mine):

Many institutions also are reluctant to do large-scale mortgage modifications because they will hurt the balance sheets. After all, if a loan is modified, the bank has to take a write-down on the portion of the loan it is swallowing. If lots of loans are modified, that means a lot of write-downs.

At this moment in the financial crisis, banks are trumpeting their new-found profitability and racing to return bailout money to the Treasury. They’ve been able to do so in part by pretending that their loan portfolios, across the board, are healthier than they actually are. The government’s willingness to ease the rules surrounding mark-to-market accounting have helped this effort. (This is not true of every bank, I should note: JPMorgan Chase, the healthiest of the big banks, has also been the most aggressive about modifying mortgages.)

Sure, foreclosure ultimately costs the bank more money than a modification would. But foreclosures these days take a long time — as much as 18 months in some states. And all that time the banks can keep the loans on their books at inflated values. Daniel Alpert, the managing partner of Westwood Capital, calls this practice “extend and pretend.”

so the meta analysis is this.  the reason the banks are resisting foreclosure mitigation with all their might is that to do so would puncture the government supported illusion that they are not either technically insolvent or close to it.  as the article points out, this was the same purpose of the change in mark-to-market accounting shenanigans.  all to produce the illusion of financial health for these rapacious institutions.  the issue here is that this is simply a back-handed way to give another subsidy from the public to the banks, except in this case it’s not even filtered through acronym challenged, opaque, financial black-ops programs like TARP, but directly on the backs of citizens being forced from their homes.  Remember this is a zero sum game, either the bank takes the haircut on these bullshit loans or the homeowner does by getting kicked out on their ass.

i think this analysis gives the proper frame through which we ANWF warriors understand and prioritize this issue.  it is core.  perhaps we should add as a principle plank of our platform either the re-reinstatement of the law allowing bankruptcy judges to order loan modifications, or a federal law mandating principal reductions for primary residences that are in the foreclosure process or on the verge of heading there.