Kevin Drum

Preying on the Weak

| Wed Jan. 27, 2010 3:48 PM EST

So how's that program going that's supposed to help homeowners who are close to defaulting on their mortgages? Well, it turns out that banks are largely reducing monthly payment levels for people who participate in the program, but at the same time they're also increasing the principal amount of the loan — despite the fact that the whole problem with these loans is that homeowners are underwater. (That is, the principal amount of the loan is higher than the value of the house, which gives homeowners a big incentive to simply default and walk away.) Mike Konczal is properly outraged:

I’ve seen a lot of bad things during this financial crisis, but this is the most disgusting thing I’ve seen so far. At a time when one out of four homeowners are underwater, banks are using a mortgage modification program to pile on more debt on these loans. They do this even when it’s well known the correlation between the level of being underwater and default.

How? From the report: “Servicers routinely capitalize delinquent interest, corporate advances, escrow advances and attorney fees and other foreclosure-related fees and expenses into the loan balance when completing a loan modification.” So fees allow them to make it look like they are doing their clients a favor, while all they are really doing is running them in a big circle.

So it's the same old story: the real action for mortgage holders is to string homeowners along because they can pocket a whole bunch of fat fees along the way. Sure, the poor saps will probably default in a couple of years anyway since they have an even more crushing principal burden than before, but in the meantime, ka-ching! More from Mike in a followup post:

So I’ll ask the obvious question. Is the current system predatory?....Within 1 year almost 45% of modified loans become “delinquent.” 7-9% reach 60-day delinquency within just the first three months after modification, which for all intents means the borrower didn’t make the first post modification payment.

....So we have a financial technique offered to consumers that (a) piles on principal unexpectedly through hidden fees and surcharges and (b) has a reasonable expectation that the consumer won’t be able to make the payments. That doesn’t sound good, does it? Lawyers in the audience, would you consider this predatory? How do those arguments proceed?

(Or, more pithily via Twitter: "I expected the mods to be ineffectual, but not that they'd bundle an extra layer of sociopathic financial engineer with it.") As it happens, the simple answer to this problem was addressed last year in a bill that would have forced mortgage holders to accept principal reductions imposed by bankruptcy judges. But the finance lobby crushed that effort. Stephen Labaton of the New York Times told the story in a piece that deserved more attention than it got:

The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis.

....Documents and interviews with lawmakers, lobbyists and administration officials show that the banks defeated the bankruptcy change — the industry picturesquely calls it the “cramdown” provision — by claiming that it would push up interest rates and slow the housing market’s recovery, even though academic studies have countered such claims.

The industry also steadfastly refused offers to negotiate over a weaker version. And it poured millions of dollars into lobbying: four of the industry’s top trade groups spent nearly as much on lobbying in the first three months of this year as they did in all of 2001.

But an industry strategy of dividing the Democrats had the most success.

One target was Senator Mary Landrieu, the moderate Democrat from Louisiana. On April 1, about 30 bankers from Louisiana crowded into a room off the Senate floor to press their view that the bankruptcy measure would force them to raise mortgage rates and hurt the very homeowners Congress was seeking to help.

Donnie Landry, a senior executive vice president at MidSouth Bank of Lafayette, La., recalled that last year Ms. Landrieu had “not been very receptive to some of our concerns. But this time she could not have been more cordial,” even helping them get to see Senator Christopher J. Dodd, the Connecticut Democrat who is the chairman of the Senate banking committee, while they were at the Capitol.

Etc. Not only did the banks utterly defeat the cramdown proposal, they actually managed to add billions of dollars in extra bailout money for themselves at the same time. Read the whole thing for the entire gruesome story. I should note that I relied heavily on Labaton's reporting for the finance lobby piece I wrote in the current issue of the magazine. If we'd had a couple dozen more like him, the public would have a much better idea of what happened last year than it does.

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The Mood in Davos

| Wed Jan. 27, 2010 2:41 PM EST

So what's the mood in Davos this year? Who knows. But Felix Salmon is there, and his mood is distinctly sour:

I'm [] siding with the pessimists like Nouriel Roubini and Martin Wolf. They're both convinced that the problems of southern Europe are both grave and intractable, although they differ in their prediction of what the consequences will be: Nouriel sees a good chance of the eurozone breaking up, while Martin sees the PIGS (Portugal, Italy, Greece, Spain) staying in the euro and ending up stuck in a long-term slump, able to neither cut interest rates nor devalue their currencies in an attempt to regain competitiveness. The only other option is an across-the-board cut in nominal wages, on the order of 30% or so. That's something which is pretty much inconceivable, although Ireland seems to be trying to move in that direction.

....My feeling is that the US poses at least as much of a risk to the global economy as southern Europe does. There's a good chance that 2010 could be the year of walking away from underwater mortgages; there's no sign of the private sector releveraging; and the government has clearly reached its limit in terms of the degree it can step in and borrow on behalf of the rest of us. If the attempt to prop up the still-overvalued housing market fails and there's another downwards lurch, there will be a whole new wave of bank insolvencies and much less fiscal space to bail them out than there was pre-crisis. And the fact that most delegates here at Davos seem blissfully unconcerned about the possibility of a second nasty lurch downwards doesn't reassure me in the slightest.

For what it's worth (and you can guess how much that is), I think I agree about Europe but I'm not quite so pessimistic about the U.S. The American economy seems unlikely to come roaring back to life this year, and a midyear dip seems at least plausible, but overall I suspect we're just going to see a long, hard slog to recovery, not a second disaster.

The wild card, though, is whether a disaster somewhere else will ripple across the globe and eventually touch off a disaster here. That's certainly possible, and it's part of the risk I think Tim Geithner took when he chose to rescue the banking system the way he did. It's left the entire system in fragile shape, which is OK if nothing terrible happens in the next couple of years and everyone has time to earn their way back to full strength. But if something terrible does happen, we're still not in very good shape to handle it. So let's hope for a lack of disasters, OK?

Pass the Bill

| Wed Jan. 27, 2010 2:14 PM EST

Paul Starr on healthcare reform:

If Congress can complete work on health-care legislation and send it to the president (as of mid-January, the final bill is still under negotiation), it will be a stunning historical achievement and the most important liberal reform since the 1960s. It may also be the most underappreciated social legislation in recent history. Never in my experience has such a big reform been treated as so small. Never have Democratic members of Congress who are putting their careers on the line for something they believe in been so vilified as sellouts by influential progressives. And never have those progressives been so grudging in their endorsement of landmark legislation or so willing to see it defeated.

Exactly right. Elsewhere, James Morone looks to the legacy of Harry Truman to show Obama and the Democratic Party the way forward:

Truman submitted his healthcare plan in 1946 to mighty cries of "socialism!" So many groups lined up to blast the proposal that Congress extended its hearings and then buried the plan. The Democrats lost their congressional majorities, and Truman went into the 1948 reelection campaign polling below 30%.

If ever there was a time to retreat on healthcare, this was it. Instead, Truman (who had been, as he put it, "a dub of a speaker") found his voice. He passionately embraced the policies he cared about, especially national health insurance. Fifteen times a day on his long, famous whistle-stop tour he would rise and scorch the medical lobbies and their congressional pals. Truman, of course, won that election. He never came close on healthcare reform, but he kept on fighting. As a result, he left his party a legacy, an ideal to fight for.

Truman didn't get the healthcare plan he wanted, but he won reelection that year and Democrats took back the House. And thanks to his full-throated defense of universal healthcare, the ground was paved for LBJ to pass Medicare 15 years later.

Obama needs to provide the same defense tonight. And when he's done, Democrats need to knock some heads, agree on a reconciliation compromise, and pass the Senate bill. If they don't, disaster awaits in November.

Amping Up the Response

| Wed Jan. 27, 2010 1:38 PM EST

When I heard that Virginia's shiny new GOP governor, Bob McDonnell, was going to deliver the response to the State of the Union address tonight, my first thought was, "Does he have a death wish? Why is he planning to wreck his career before it's even started?" After all, SOTU responses are famously stiff and crappy and almost never make their speaker look good. Speeches like this really need to be delivered in front of a crowd to be effective, instead of recited stiffly into a bare camera.

But it turns out McDonnell is a smart cookie. Via Matt Yglesias, here's his plan:

When the national spotlight turns to Gov. Bob McDonnell tonight as he delivers the Republican response to President Barack Obama’s State of the Union address, he’ll be surrounded by 300 people in the chamber of the Virginia House of Delegates. McDonnell plans to stand in the well of the House accompanied by family, supporters, administration officials, activists and lawmakers, some of whom will stand on risers set up for the live speech.

This is still less than ideal. It would be better to fill the whole chamber, rather than set up risers for a few hundred supporters. You need loud applause! You need cheers! But it's still a big improvement. It'll be interesting to see if McDonnell makes anything of it.

The Fate of Healthcare

| Wed Jan. 27, 2010 12:40 PM EST

So is President Obama going to rally the nation behind the cause of ambitious, wide-ranging healthcare reform in tonight's State of the Union address? It sure doesn't sound like it. Here's what the nation's media has to say this morning:

In the Washington Posts' speech preview, healthcare isn't even mentioned until the 12th paragraph, and the message is bleak: "Despite the uncertain fate of health-care legislation — Obama's top domestic priority — the president is not expected to call for a precise way forward, although he will reiterate his commitment to the cause."

In the New York Times, you have to wait until the 8th paragraph: "Still undecided, advisers said, was how much of the address would be devoted to health care as the prospects of finding a lifeline for the legislation seemed to be diminishing."

And in the LA Times you need to slog down to the 14th paragraph: "Although it was not clear what Obama would have to say about the battle over healthcare, he does plan to lay out steps meant to change the way Washington does business."

This really doesn't sound like good news. If Obama isn't willing to step up and take ownership of passing the current plan, what chance is there that Congress is willing to get out on a limb and take the risk itself? Not much, I'm afraid. I sure hope Obama and his advisors screw up their courage on this and do the right thing before the end of the day.

UPDATE: More pessimistic tea leaf reading here and here from Ezra Klein.

The Oregon Alternative

| Wed Jan. 27, 2010 1:26 AM EST

This morning's story about Oregon in the LA Times:

Over the years, voters here have capped property taxes (saddling the state with two-thirds the cost of running the schools) and passed a constitutional amendment requiring rebates whenever tax receipts come in 2% over budget. Nine times they have been asked to OK a sales tax — and said no. Proposals to increase the state income tax? Down in flames twice.

But now the Legislature is taking a tack that analysts think could finally pull the rug out from under the tax revolt: soaking the rich.

The Oregonian tonight:

It looks like Oregon corporations and high-income earners will pay higher state taxes as voters weighed in Tuesday on two hotly debated measures....Measure 66 raises the income tax paid by households earning at or above $250,000 a year or individual filers who make $125,000 or more. Measure 67 raises the state's $10 minimum corporate income tax.

I await the immediate immolation of Oregon's economy. That's what happened to America after Clinton raised taxes on the rich, after all.

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Good News on Healthcare?

| Wed Jan. 27, 2010 1:00 AM EST

Brian Beutler says that House Democrats are coalescing around the idea of passing the Senate healthcare bill, and quotes Clyburn, Schakowsky, Waxman, and Weiner in support:

However, though the idea has begun to resonate with House members in theory, they're not willing to hang their hopes on the Senate, an institution they increasingly distrust. They want something concrete first, before they'll move ahead with the Senate health care bill.

"The idea of doing the Senate bill and then doing the reconciliation on spec just to see what happens — I don't think anyone really thinks that's a good idea," Weiner said. "I don't know if the Senate literally has to move first, but at least they have to give us the high sign on what it is that they can do and can't do. And we're not getting much guidance from them, and we're also not getting much guidance from the mothership about what the White House really wants, and what they're prepared to push for, etc."

If this is really the developing consensus, it's a very good sign. The notion of "sidecar reconciliation," where the Senate passes a set of modifications to its own bill and then lets the House vote on both the main bill and the modifications at the same time, has always struck me as problematic. Even under reconciliation rules I think this would take too long,1 and I'm convinced that healthcare reform really needs to be moved on fairly quickly. But if that path is too tortuous, then at a minimum the Senate leadership has to provide some credible assurances about what modifications it thinks it can pass later in the year. If a majority in the House is really willing to accept this, it's a big move forward.

But can Harry Reid deliver? Conference negotiations were far enough along before the Masschusetts meltdown that it seems as if coming to an agreement shouldn't be all that hard. Keep your fingers crossed. And call your senator to encourage them to get on board.

Oh — and it would be nice if Obama chimed in on this too. And if he does, it would be even nicer if the Democratic caucus in Congress were willing to treat him as the leader of the party and actually listen to him.

1Though I'm willing to be disabused of this notion by someone who really knows what he's talking about.

That Was Then

| Wed Jan. 27, 2010 12:27 AM EST

The conventional wisdom on Obama sure has changed in a heartbeat, hasn't it? Compare and contrast:

Yesterday: calm and cool. Today: flat and remote, doesn't show enough passion.

Yesterday: smart. Today: too cerebral for heartland.

Yesterday: analytical and lawyerly. Today: not connecting with voter anger.

Yesterday: needs to move quickly to take advantage of honeymoon. Today: tried to do too much.

Yesterday: plays the long game. Today: needs to pivot fast or lose his presidency.

Yesterday: policy driven. Today: too detached.

Yesterday: pragmatic. Today: not taking charge of process.

Yesterday: inspirational speaker. Today: uses teleprompter1 too much.

Yesterday: postpartisan. Today: has been crushed by partisanship.

So which was right: yesterday's conventional wisdom or today's? Personally, I preferred yesterday's except for the whole postpartisan thing. The public says they like it, but it was always doomed to failure. Time to move on.

1Sorry, I meant TelePrompTer™. And I have to admit that his reliance on it even in small settings is getting kind of weird.

The Public Mood

| Tue Jan. 26, 2010 8:59 PM EST

Our story so far: rich people brought the global economy to a near meltdown in 2008. We were saved from a repeat of the Great Depression only by massive interventions from a big, activist government. Today, a year later, the public is in a seething rebellion against.....the big, activist things that the big, activist government did to save us from collapse.

At least, that's the current narrative. But it does not compute.

The Audacity of Gimmicks

| Tue Jan. 26, 2010 6:37 PM EST

From the Washington Post today:

With lawmakers eager to pivot to economic legislation, Senate Democratic leaders have drafted an initial version of an $80 billion-plus job-creation bill that will be heavy on tax breaks designed to spur businesses to make new hires....Though that number may change as the process moves forward, it is clear Senate Democrats have no intention of moving a jobs package as large as the $154 billion measure the House passed in December on a narrow, party-line vote. The House measure included money to extend unemployment benefits and COBRA health insurance coverage, items that aren't in the draft Senate bill but may move in the chamber separately.

"There is 'big bill fatigue' in the Senate right now," said a Senate Democratic aide....A primary goal of the Senate bill will be to encourage employers to add to their job rolls. "We are looking at a form of wage tax credits that would provide an incentive to put people back to work more quickly," Dorgan said.

So we're going to try to pass a jobs bill too small to create many jobs,1 and then offset the cost with a spending freeze too small to really affect the deficit. Do I have that right?

1And, apparently, deliberately designed to exclude any policies that actual ordinary people might understand and support.