It's called the housing industry's "shadow market": those houses where the owner has defaulted on their mortgage but is in mortgage limbo because foreclosure proceedings have yet to begin. Right now, that shadow market looms large. More homeowners are falling behind on their payments but banks, lenders, and servicers are so backlogged and buried in paperwork that essentially they can't foreclose on people fast enough. As the Washington Postpoints out today, 5 to 7 million are eligible for foreclosure but haven't been taken back by lenders yet. The takeaway here? Despite what you've heard to the contrary, new waves of foreclosures are on the horizon, and the housing industry's quagmire—yes, it's still a quagmire—has a long way to go before getting back to even keel.
Clearing out that shadowy backlog, economists say, could take almost three years. So, on the ground, what you're left with is millions of homeowners living for free in their homes—they're not paying their mortgage because they lost their job or had their hours scaled way back, but they're not being foreclosed on, either. Soon to join that army of homeowners are the record-setting 11 million more people who are "underwater," i.e., they owe more than their home is worth. These people are at risk of falling behind on their payments, too. And if they default, that shadow market will only grow, prolonging the housing mess.
From a economic standpoint, as Dean Baker says, the Post's article is kind of a no-brainer. Think basic economics: The housing bubble inflated demand for building new houses, all those house-in-a-box subdivisions started popping up, then when the market collapsed what's left is a huge oversupply of houses. At this point, home prices are still dropping, and one factor pushing those prices down is new bursts of foreclosures. It also means that talks of the housing market "turning the corner" are most likely unfounded. In reality, the light at the tunnel's end is a long way off.
You've got to hand it to the reporters over at NPR's Planet Money—they're always cooking up clever new ways to report on the big business and economic issues of the day. For their latest feature, two Planet Money reporters sought to better explain what a "toxic asset" was, one of the jargony words you hear bandied about but never simply defined. (I'd try to lay it out for you here, but their cuddly, toxic-asset, Where-the-Wild-Things-Are creature is unbeatable.) So those reporters put together $1,000 between themselves and bought a toxic asset. Their plan is to track the health of their asset over time as a way of describing what a toxic asset actually is. Their opening video is below:
The US Chamber of Commerce, a huge, controversial player in the battle to reform Wall Street and beef up consumer protection, launched its latest attack on financial reform efforts today, criticizing a proposed small tax on financial transactions. The tax would take something like 0.1 percent or 0.25 percent of financial transactions such as stock trades, and could use those funds to offset the cost of, say, health care reform or to lower the federal deficit. One liberal policy center said the tax could raise $100 to $150 billion a year.
Today, as part of its PR push, the Chamber released a study (PDF) claiming the tax would damage US markets and hurt Main Street by reducing investments and retirement savings. "This proposal would starve cash-strapped companies and cripple our efficient, transparent, and liquid markets," said David Hirschmann, president and CEO of the Chamber’s Center for Capital Markets Competitiveness. "The good news is that a majority of Americans agree that it’s a bad idea." (Mind you, that "majority of Americans" claim is based on poll of 800 people; everyone can agree that 0.000002 percent of Americans speak for all of us, right?)
Asked about the Chamber's latest PR move, Dean Baker, an economist at the left-leaning Center for Economic and Policy Research who favors the tax, actually thanked the Chamber for releasing the study and making the conclusions it did. For instance, one of the report's biggest conclusions is that the new tax would raise trading costs to what they were in the 1980s—something that Baker says is far from a bad thing. He also said the poll accompanying the report (PDF) actually shows there's a fair amount of public support for the tax. 31 percent of respondents said they thought the tax was necessary because of the damage big financial institutions did to the economy—and that's with polling language clearly intended to sway people against the tax. Tweak the questions a bit, and you might've seen majority support for the tax. "I'm kind of happy," Baker says. "They're doing our work for us. And we didn't have to pay anything."
There's light at the end of the tunnel for Chris Dodd's long slog toward a new Wall Street crackdown. In a statement today, Dodd announced he's going to release a draft of his financial reform legislation on Monday. "Over the last few months, Banking Committee members have worked together to try and produce a consensus package," Dodd said. "Together we have made significant progress and resolved a many [sic] of the items, but a few outstanding issues remain."
The announcement from Dodd signals that the Connecticut senator's efforts at writing a bipartisan bill have failed. In a news conference soon after Dodd's announcement, his GOP negotiating partner, Sen. Bob Corker (R-Tenn.), said Dodd's announcement was "very disappointing" and blamed a number of factors for derailing the bipartisan talks. "There's no question the White House, politics and health care have kept us from getting to the goal line," Corker said.
Since Dodd released an early draft of financial reform legislation last November, he and other members of the banking committee have been embroiled in closed-door negotiations over issues like a new consumer protection agency, ending the government's implicit bailout guarantee for failing banks, and creating the power for regulators to unwind or "euthanize" too-big-to-fail and too-intertwined-to-fail banks. The fate of consumer protection, in particular, has become a lightning-rod issue in the financial reform talks between Dodd and Corker. Dodd has insisted he doesn't care where a new consumer-protection agency is housed—the Federal Reserve and the Treasury are two potential locations—so long as it's "independent," meaning having a presidentially-appointed leader, independent budget, and rule-writing and enforcement powers. GOPers, however, have pushed back against that independence, arguing that any new agency shouldn't have enforcement authority.
How the consumer protection battle plays is just one key issue to look for in Dodd's draft. While you're at it, here are five more to watch for on Monday:
Payday lenders: Corker, whose home state of Tennessee is a stronghold for these loan sharks, reportedly pushed to gut oversight of payday lenders. The House's financial reform bill, passed in December, included no such exemptions, and consumer advocates say no new set of comsumer protections is complete without a crackdown on these guys.
Bank oversight: The latest proposal to leak out of Dodd's talks has been letting the Federal Reserve keep oversight of the 23 biggest banks—those with $100 billion or more is assets—and creating a super-regulator to oversee the remaining banks, stripping the FDIC of its power and possibly merging several other regulators. The House's plan wouldn't create the super-regulator, but would merge two existing regulators and keep some oversight with the Fed.
Banning risky "proprietary trading": There've been rumblings that Dodd might include the "Volcker Rule"—a ban on proprietary trading, or when taxpayer-insured banks engage in trading for their own gain (not their clients') or invest in casino-like operations such as hedge funds and private equity funds. The House empowered the Fed to ban this risky trading, and a Senate bill announced yesterday would prohibit it as well. It's unclear whether we'll see a similar ban in Dodd's bill.
Fed as bailout king: In the recent financial crisis, the Fed stepped in to rescue the housing markets and essentially backstop the country's banking system and credit markets. There's been little to no discussion coming out of Dodd's talks on whether he'll put a cap on the Fed's bailout power; the House bill would set a $4 trillion cap and add new safeguards when the Fed wanted to flex its bailout muscles.
Derivatives in the dark: Dragging the $300 trillion over-the-counter (OTC) derivatives market onto exchanges and into the light of day, where trades and prices are visible, is another key reform issue. A Democratic Senate aide said last month that the Senate could include an exemption in its derivatives regulation that would essentially exempt two-thirds of the OTC market, a move that would let off many institutions who use derivatives for speculative reasons, not purposes of risk management or hedging. How Dodd's new bill tackles the derivatives question will be a telling sign of whether he truly wants to enact tough reform, or whether he's offering mere window dressing.
Senators Carl Levin (D-Mich.) and Jeff Merkley (D-Ore.) are the latest lawmakers calling for a tough crackdown on Wall Street banks engaging in risky, leveraged betting with their own funds, or what's called "proprietary trading." Levin and Merkley told reporters today that they're introducing a new bill, the Protect our Recovery through Oversight of Proprietary (PROP) Trading Act, that would mostly ban taxpayer-insured banks from engaging in proprietary trading, prohibit them from sponsoring hedge funds and private equity funds, and impose new limits on banks' financial reserves to cushion for losses. The senators said the goal of the legislation, which is co-sponsored by Senators Ted Kaufman (D-Del.), Sherrod Brown (D-Ohio), and Jeanne Shaheen (D-NH), is to prevent banks insured with taxpayer dollars from imperiling the economy and requiring government bailouts, as they did in 2008 and 2009. "It’s important that we not allow ever again this kind of threat to our financial system," Levin said, "and in order to do that we would put restrictions on these non-banking institutions that are too big to fail as to what kind of proprietary trading they could engage in."
In many ways thre bill resembles the White House's "Volcker Rules," backed by President Obama and former Federal Reserve chair Paul Volcker, which would also ban proprietary trading. But critics of the White House's plan say it isn't likely to solve the problem its supporters claim it will. This kind of risky internal trading, they say, is a small portion of banks' activities, and thus a minor part of the problem. In his statement to reporters, though, Levin countered that banks' financial reports "tell a very different story." He pointed to statements and regulatory filings from Bank of America, Goldman Sachs, and others showing that these institutions suffered far greater losses from prop trading than they've let on, and that several of these banks have previously said half their earnings have come from prop trading.