The Most Important Report of the Next Two Years

by: Mike Lux

Fri Dec 17, 2010 at 16:00

It is pretty audacious for me to claim that any given report is the most important one to be issued in the next two years given that I obviously have no idea what else is going to be published. I am feeling fairly confident about this one, though. It's not because the facts assembled are so groundbreaking, or the research goes deep to find things no one else could have found. It is because this report is a clear roadmap to the economic and political path the Obama White House should be taking. The report, Big Banks Bonus Bonanza, was issued by SEIU, National People's Action, the PICO National Network, the Northwest Federation of Community Organizations, and the Alliance of Californians for Community Empowerment. It makes the case strongly for an economic play that would give the country a far bigger economic boost than anything Obama is going to be able to get out of Congress the next two years, and a political master stroke that would completely shift the political dynamics in the country.

I wrote about the broad economic strategy of forcing the banks to write down mortgages on Tuesday, but this report does a great job of laying out the numbers in stark detail. Bank robber Wee Willie Sutton famously said that the reason he robbed banks was because that was where the money was, and if we are looking to get our economy moving again, we should be looking to get the money to do it where the money is. Right now, more than ever, the big banks are where the money is concentrated. The most important fact by far in Big Banks Bonus Bonanza is this one: right now, 11 million American homeowners owe $766 billion more on their mortgages than their homes are worth, but if the banks were to write down those mortgage principals to market value and refinance them into 30 year fixed rate loans, you would get $73 billion pumped directly back into the economy- every year for the next 30 years.

Now unlike extending tax cuts for the rich or reducing the estate tax, which tends to be saved and invested in long term bonds, this money would go directly into stimulating the economy and creating jobs. Think about who those 11,000,000 underwater homeowners are: they are almost entirely middle and working class families who have spent the last couple of years sweating bullets to save their main life investment after its value plummeted by 20%, 30%, or more. They haven't been spending money on new products, they haven't been taking any vacation trips with their families, if they own a little mom and pop business they sure haven't been taking any risks to expand it: they have just been desperately scrimping and saving and trying to hang on by the skin of their teeth. But if their mortgage is reduced to what their house is actually worth in today's market, that means their overall financial situation is far more stabilized, and it means their monthly mortgage payment will go down as well.

With a stabilized debt and lower monthly mortgage payments, with the psychological weight of probable foreclosure off their shoulders, these middle class homeowners (at least the ones with jobs, which is most of the folks who still have homes) are exactly the kind of people who will be likely to start spending a little money in this economy. Maybe they will finally buy the car they have been holding off on now for years. Maybe they will do a little home improvement now that they know they will be able to stay in their home. Maybe they will feel able to finally make the investment in their small business they have been wanting to make, and hire a few extra folks as a result. The economic multiplier effect of this $73 billion would be as good as any money injected into the economy right now.  

You want to know what the second most important fact in this report is? The 73 billion dollars it would cost to write down those mortgages would be only half what the top 6 banks alone are getting ready to write in bonuses and compensation for 2010. If forced to write down these mortgages, the banks will scream bloody murder, even claiming it would endanger them and the entire economy. But all they have to do is cut their bonus and compensation packages, the vast majority of which go to top executives and traders, by 50%. Given all the cash these banks are sitting on, all the profits made and bonuses distributed in recent years, I have no doubt they can afford the hit. The ironic thing is that if they wrote down these mortgages, they would be getting monthly mortgage checks from all these homeowners, plus avoid the costs of all those foreclosure proceedings, but they don't want to write down the property because of their own phony accounting that claims the properties are worth far more than they actually are.

So here's the other little nugget the report alludes to: if you injected 73 billion dollars into the economy through these write downs, the multiplier effects I was referencing earlier- homeowners being able to free up cash to buy things and invest in small businesses and do home improvements- would mean 1.8 million new jobs. That is a lot of jobs, folks: enough to drop the unemployment rate from the almost 10% it has been sitting at for a very long time down to the mid 8s. And it would finally begin to stabilize the housing market, which would do a lot for the economy all by itself.

All of these good economic tidings would be great for the President politically of course, but what would matter more than anything is that him taking strong action to take on the banks on behalf of economically pressed homeowners would do immeasurable good to his political standing in general. He wouldn't be going to Congressional Republicans hat in hand, begging them to do the right thing on some piece of legislation that would never get passed. He wouldn't be having to choose what compromise to make. He could show both the Democratic base and middle class swing voters that he was taking a strong stand on their behalf against a very powerful interest. Working alongside the state Attorneys General and tens of thousands of community activists working on this issue, he could order every agency in government- Treasury, DOJ, Fannie, Freddie, HUD, FHA, etc- to exert maximum pressure on the big banks to write down these loans. That kind of strong decisive leadership would do wonders on his behalf.

Obama showing strength and leadership on this issue could help turn both the nation's economy and the President's political fortunes around. For his sake, and the country's, my biggest Christmas wish this year is that he takes this fight on.  

Mike Lux :: The Most Important Report of the Next Two Years

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Great Post; Obama will ignore this report. (4.00 / 4)
I would bet any amount of money that Obama will not have the sense.

Hate to agree (4.00 / 1)
Add me to the chorus of people saying Obama would never, ever do this.  I would love to be proven wrong but I doubt I will.  Mike, this is a well-written post about a terrific idea, but it's all for naught.

[ Parent ]
Obama's track record (4.00 / 1)
sadly indicates that you are almost certainly right. He is a "Wall St. Democrat." All his actions indicate that he is owned by the banksters.

[ Parent ]
if it involves taking on the powerful interests (4.00 / 2)
that control our economy, i'll bet dollars to donuts that this president won't do it.

remember.  when he told the bankers that he was the only one standing between them and the pitchforks it wasn't a threat.  it was a point of pride.

Do you see any evidence that the president is at all inclined toward anything like this? (4.00 / 4)
Obama showing strength and leadership on this issue could help turn both the nation's economy and the President's political fortunes around.

Because I just don't see it.  I believe 1) his rhetoric and - more important - 2) his actions and their results indicate that he will exert all his will and energy to avoid this:

If forced to write down these mortgages, the banks will scream bloody murder, even claiming it would endanger them and the entire economy. But all they have to do is cut their bonus and compensation packages,...

I like your idea. A lot. My question is sincere: Do you have any insight (regarding any possibility that this WH would do anything like what you propose) from your vantage point that we are not privy to?

One of us is confused … (4.00 / 2)
... or maybe both of us are, Mike.

You say that homeowners are underwater to a tune of $766 billion dollars, but that it would only cost banks $73 billion to write down their mortgages. Is the $73 billion perhaps the one-year cost to the banks, with the 'actual theoretical' cost being $73 billion a year for many years into the future?

(I use the somewhat oxymoronic phrase 'actual theoretical' because the $73 billion a year the banks would lose is based on a comparison to their 'actual' valuations, which clearly have little to do with reality.)

Would a full write down of the mortgages render the banks insolvent? (Or, perhaps I should say, unmask their insolvency?)

Good questions, which will clarify points of the important post (0.00 / 0)


The government has a defect: it's potentially democratic. Corporations have no defect: they're pure tyrannies. -Chomsky

[ Parent ]
Forget Obama (0.00 / 0)
I don't believe you could even get the support of the middle class.  The entire spectrum of citizenry has become so invested in "what's in it for me" that you would never have a consensus on a give-away program of this size.  Even in the case of GM which was only a loan program, we had massive working class resistance.  

The theory of this program is sound, but the human willingness, all around, I just don't think it's there.

I think the immediate response of the leadership would be, "this idea has some merit, we could probably divert some funds from the Soc. Sec. Trust to implement it.  

"Oh. My. God. .... We're doomed." -- Paul Krugman

What About Equity? (4.00 / 1)
I agree in principal that it is far better for banks to adjust these underwater mortgages to market rates. That's one huge reason we're stuck in the ditch.

However, in this scenario, many homeowners will have zero equity after their mortgage is reset. And banks would have to agree to give up the difference between the current mortgage and the reset mortgage. I don't see either happening based on our experience deciding to dump our house (after finding 2 people to buy on short sale, which the bank stupidly rejected).

It would be better to come up with a simple formula that sets the mortgage to reflect current market value but also preserves some of the homeowners original down payment (half would be ideal) and gives banks upside when the market improves and when the house is sold in the future. Banks could even sell this upside to taxpayers in return for government funds (HAMP currently is a one way taxpayer bailout while this approach would be two-way).

It might go something like this:

1. You bought the house at $500,000 with a $400,000 mortgage and $100,000 down. The house currently is worth $350,000.

2. Take the current home value ($350k) and subtract half the homeowner's original downpayment ($50k) to get the new mortgage amount ($300k). You also might subtract an additional 10% of the current home value (10% of $350k = $35,000) to accommodate any future price decline.

3. If you deduct half the down payment ($50k) and 10% of current value ($35k) from the current value of the home ($350k), the new mortgage is $265,000.

4. In return for resetting the mortgage, the bank gets 90 cents of every dollar above the new mortgage plus half the homeowners equity ($265k + $50k = $315k) up to the original mortgage value ($400k) plus 10% of the original mortgage (10% of $400k = $40k) or $440k. When the house is sold and the papers are signed, a check is written to the bank giving them their upside and the homeowner retains at least half their original downpayment. If the homeowner sells after 10 or 20 years, the deal should come out even or ahead for both the bank and the homeowner.

This sort of formula not only reduces current mortgage payments, it also keeps homeowners skin in the game, and it gives the bank upside they can sell to taxpayers if the banks don't want to wait around.

If resetting mortgages to market value was all that was needed, and its not, we'd be past this problem. From 2009 to 2012, there are supposed to be 10 million homes foreclosed on. I don't see that changing unless these issues are addressed (banks can't be forced to lose money and homeowners won't stay if they don't recover some of their downpayment).

Uh, hate to quibble Mike (4.00 / 3)
but this is the Obama Administration we're talking about here. You think theres any possibility whatsoever that he's going to make the banks eat $73 billion a year?



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