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Wonkbook: Regulators push foreclosure fixes for banks -- but what will homeowners get?


It's becoming clearer that the foreclosure mess is likely to require some sort of federal response. In a good scenario, agencies like Fannie and Freddie can simply take of this on their own. In a bad scenario, where investors are able to push the rotten mortgages back onto the banks that sold them, we could be looking at another insolvency crisis.

But there's opportunity here, too. The foreclosure mess is new, but the foreclosure crisis has been going on for years now, and homeowners still need help. That the banks were this lazy and shoddy and potentially fraudulent when the consequences would be on them is a good reminder of how many homeowners were sold mortgages that they not only didn't understand, but that were simply misrepresented to them.

If we have to help the banks get through this, then we also need to do more to help the homeowners get through this. A good start would be allowing courts to negotiate down principal balances to help underwater homeowners (that's the "cramdown" idea that the House passed and the Senate rejected some months ago), and another idea would be expanding right-to-rent, where foreclosed homeowners have the right to rent their home at fair market value. Either way, it's increasingly clear that if the banks need help to stay out of trouble, they're going to get it. But as the full dysfunction of the mortgage markets continues to reveal itself, it's time to do more for the distressed homeowners the market got into trouble.

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Federal regulators are beginning to address the foreclosure mess -- but mostly just by having banks conduct internal reviews, report Zachary Goldfarb, Dina ElBoghdady and Ariana Eunjung Cha: "While [the Federal Housing Finance Agency] does not oversee banks or most other financial firms directly, the regulator can still exert pressure by way of its authority over Fannie and Freddie, which now own or guarantee well over half the nation's home loans. If banks and other lenders do follow the policy prescriptions, the FHFA could threaten to impose financial penalties and other sanctions. The policy statement tells lenders to make sure that documents used as part of the foreclosure were properly reviewed and signed. If they weren't, lenders must work with local lawyers on a fix. This could include filing new paperwork."

The American people should get mortgage help in return for the bank bailouts, writes Tim Fernholz: "Fannie and Freddie own or insure most of the mortgages in the U.S., and the government could overlook the paperwork irregularities so that Fannie and Freddie can absorb the losses rather than send them back to the banks...People suffering from employment problems, those whose mortgages are underwater due to the drop in home prices, and the victims of fraud should have the opportunity for deep principle write downs and substantial loan modifications. Those have been hard to access because servicers devote few resources to working out sustainable loan agreements with borrowers. That could change if the government has the option of putting a serious package of bad loans back onto the banks - primarily Bank of America, J.P. Morgan Chase, Wells Fargo, and Citibank."

Sen. Mary Landrieu is refusing to release her hold on OMB nominee Jack Lew:

Congressional liberals want the Bush tax cuts for income over $250,000 to end in order to reduce income inequality, reports Lori Montgomery: "'I just really believe it's an argument we can win,' said Rep. Tim Ryan (D-Ohio). 'If you look at our tax structure from World War II to 1980, we had a system where the wealthiest paid more, we kept reinvesting back into our country, and we had a strong middle class.' Since then, the rich have raked in a growing share of the nation's income even as their tax rates have fallen. 'It's just been this sucking sound up the ladder to the wealthiest Americans,' he said...Rep. Sander Levin (D-Mich.), chairman of the tax-writing House Ways and Means Committee, wants to go further in taxing the wealthy, by treating their dividends - a large chunk of earnings in top households - as regular income."

Insurers will be able to charge more from families with sick children if they ask for insurance outside open enrollment periods, reports Robert Pear: "In September, the administration said that insurers could establish open-enrollment periods — for example, one month a year — during which they would accept all children. Now, on Wednesday, the administration, answering a question raised by many insurers, said they could charge higher premiums to sick children outside the open-enrollment period, if state laws allowed such underwriting, as many do....The problem may be solved in 2014. If Democrats can beat back Republican efforts to dismantle the law, most Americans will be required to carry health insurance, starting in 2014, and insurers will be required to accept all applicants, regardless of pre-existing conditions."

Got tips, additions, or comments? E-mail me.

Jon Cohn offers a simple test to apply to stories touting big disruptions from the Affordable Care Act: "Here are three basic questions to ask every time you hear a story about changes the Affordable Care Act is unleashing: 1) Is something actually changing? 2) Is the change related to the Affordable Care Act? 3) Is the change really for the worse?" As he details, the stories we're hearing fail at least one of the tests more often than you'd think.

Live indie interlude: Beach House plays "Norway".

Still to come: Fannie and Freddie have begun investigating the foreclosure mess; the oil spill commission is split over the future of deepwater drilling; Obama calls for extending a tax break for students; and a man builds an airplane from scratch.


Fannie and Freddie have started investigating the foreclosure mess, report Nick Timiraos and Carrick Mollenkamp: "Last Friday, Freddie told mortgage servicers to stop sending cases to the Law Offices of David J. Stern, of Plantation, Fla. Fannie followed suit on Monday. The law firm has been at the center of recent allegations by the Florida attorney general's office, which released a deposition of a former law-firm employee. In the deposition, the employee alleged the firm routinely forged notarized documents amid closed-door screaming matches that broke out because files weren't moved fast enough...Fannie and Freddie have hired separate firms to review the foreclosures handled by Stern's offices."

Fast trading may have left big banks without proper mortgage documents, report Ariana Eunjung Cha and Jia Lynn Yang: "The foreclosure debacle has exposed one of Wall Street's little-known practices: For more than a decade, big lenders sold millions of mortgages around the globe at lightning speed without properly transferring the physical documents that prove who legally owned the loans. Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves. Their collective actions, if successful, could blow a hole through the balance sheets of big banks and raise fundamental questions about the financial system, financial analysts and a lawmaker said."

Critics are pouncing on Obama's admission that "there's no such thing as shovel-ready projects":

Investors believe Fed action is imminent, reports David Hilzenrath: "Several corporate earnings reports might have contributed to the market's optimism, but analysts said that the minutes of a Federal Reserve policy meeting released Tuesday raised expectations that the Fed will buy a boatload of Treasury bonds. 'There's a growing acceptance that the Fed will likely be successful in driving asset prices, including the equity market, higher,' said Barry Knapp, an equity strategist at Barclays Capital. Said Joseph Battipaglia, a market strategist at the brokerage and investment bank Stifel Nicolaus: 'With a day to think about it, the conclusion is they're going to do something sooner than later' and 'it may well be substantial.'"

The auto and bank bailouts don't get the respect they deserve, writes David Ignatius:

The IMF is partly to blame for currency disputes with China, writes Simon Johnson: "Its handling of the Asian financial crisis in 1997-1998 severely antagonized leading middle-income emerging-market countries - and they still believe that the Fund does not have their interests at heart...As a result, emerging-market countries, aiming to ensure that they avoid needing financial support from the IMF in the foreseeable future, are increasingly following China’s lead and trying to ensure that they, too, run current-account surpluses. In practice, this means fervent efforts to prevent their currencies from appreciating in value."

Great moments in hobbyism interlude: A Kenyan man with no engineering knowledge makes an airplane from scratch.


Even a more competent White House couldn't have passed cap and trade, writes David Leonhardt: "The most obvious Republican suspects for a bipartisan bill -- Olympia Snow, Susan Collins, George LeMieux -- simply were not going to vote for it, as Mr. Lizza’s reporting makes clear. Republican leaders have done a very good job of keeping defections to a minimum over the last two years. Meanwhile, the Democrats faced much more internal opposition than on health reform. Evan Bayh, Kent Conrad, Byron Dorgan, Carte Goodwin, Blanche Lincoln, Ben Nelson, Jay Rockefeller and Jim Webb all looked like questions marks or worse."

The recession, Senate opposition, and industry lobbying killed cap and trade, writes Daniel Weiss:

Clean energy investment should supplement, not replace, a carbon price, writes David Roberts: "Climate policy is not a zero-sum game. These policies work in concert. The carbon price raises the unit cost of dirty energy while efficiency and public investment drive it down. Charging polluters for their climate pollution (and removing existing subsidies to dirty energy) can help raise the money to spend on investment. Regulation can create tangible short-term benefits for the public and help drive industry to the table to negotiate legislation. All the pieces work together and there's no reason they can't all be pushed simultaneously at every level of government."

The spill commission is split on deepwater drilling's future, reports Siobhan Hughes: "William Reilly, a co-chairman of the panel and head of the Environmental Protection Agency under President George H.W. Bush, expressed cautious support for a conclusion that endorsed continued, if closely regulated, deep-water drilling. He previously had criticized the Obama administration's ban on new deep-water drilling, a ban lifted Tuesday...But commissioner Cherry Murray, the dean of the Harvard School of Engineering and Applied Sciences, said, 'The hazards of ultra deep-water need to be spelled out a little bit more.'...'If you went to all electric cars, 70% of our oil usage would go away,' responded Ms. Murray."

Solar power jobs are set to grow 26% this year:

Human activity far exceeds the earth's capability to support it, reports Felicity Barringer: "If business continues as usual, the report predicts, 'humanity will be using resources and land at the rate of two planets each year by 2030, and just over 2.8 planets each year by 2050.' The editorial team that produced the latest report writes that human demand on the planet’s ecosystems more than doubled between 1961 and 2007. Humankind is now consuming the planet’s resources at a rate that outstrips the natural replenishment of those resources by 50 percent."

Some see the EPA's ethanol decision as political pandering:

Advertising interlude: ING Direct experiments with human billboards.

Domestic Policy

Obama wants to make permanent a tax credit for college students, reports Lori Montgomery: "The credit provides as much as $2,500 a year per student to cover expenses ranging from tuition payments to other expenses, such as books and supplies. According to a new report by the Treasury Department, the credit has significantly expanded aid to the 12.5 million students who took advantage of it last year, raising their annual benefit to an average of $1,736 - a 75 percent increase over the Hope Credit and Lifetime Learning Credit, two earlier federal tuition-assistance programs. The tax credit is also more broadly available than those programs, which were limited to expenses incurred during the first two years of college instead of four."

The FCC is taking on cell phone "bill shock":

Medicare's actuary admits health care reform could cost some seniors, reports Jennifer Haberkorn: "Richard Foster, the actuary for the Centers for Medicare and Medicaid, also tells Senate Republicans that the overhaul will result in 'less generous benefit packages' for Medicare Advantage plans next year. Foster is independent from the administration and non-partisan. Democrats have long contended that Medicare Advantage plans - private insurance alternatives to Medicare - overpay private insurers, increasing premiums for everyone, and needs to be reformulated."

Social Security benefits are staying constant:

Chile and Australia are handling their aging populations most responsibly, write Richard Jackson, Neil Howe, and Keisuke Nakashima:

States should push market-based changes to health care reform, write Scott Gottlieb and Tom Miller: "ObamaCare intends health-care exchanges to be a regulatory dragnet to trap insurers into offering a single government-prescribed set of health benefits. State-designed exchanges could, and should, do the opposite. Any willing insurers already licensed to operate in a state should be able to offer plans. Their operating rules would focus on providing better information to consumers, rather than limiting the types of plans available. Exchanges should also enable easier allocation of private payments and public subsidies, simplify enrollment, and reduce transaction costs."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams. Photo credit: J Pat Carter Photo

By Ezra Klein  | October 14, 2010; 6:39 AM ET
Categories:  Wonkbook  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Reconciliation
Next: Bad news -- and good news -- on education policy


No more bank bailouts.

Let them fail.

I have seen no justification to save them from their own problems.

Posted by: lauren2010 | October 14, 2010 7:52 AM | Report abuse

Moreover, if I had an underwater mortgage, and I again see my tax dollars used to bailout banks, and in the end I am left high and dry, I would most certainly walk away from my mortgage without a trace of guilt.

Posted by: lauren2010 | October 14, 2010 7:57 AM | Report abuse

“Unfortunately,” Ms. Sebelius said, “some insurers have decided to stop writing new business in the child-only insurance market, reneging on a previous commitment made in a March letter to ‘make pre-existing condition exclusions a thing of the past.’

Actually Ms.Sebelius they are not subjecting them to pre-exisiting conditions what they are doing is walking away from a totally disruptive flawed business model that will cause their current policyholders to see large increases in premium because people would have been able to legally game the system. You obviously understand this because of your background but yet you STILL play the "evil insurance company" card. Her thuggery knows no bounds it seems.

What they should do? Like they are doing and have been doing for years with Medicare. Set an open enrollment period once per year and adhere to that. Do not allow people back and forth onto coverage to limit (not end but limit) the gaming of the system. If the system is allowed to be gamed by those that would it only means increased premiums for all no matter how much you want to demonize any one group for your political gains.

Posted by: visionbrkr | October 14, 2010 8:30 AM | Report abuse

--*If we have to help the banks get through this, then we also need to do more to help the homeowners get through this.*--

Is there ever an occasion, Klein, when you not only don't want to subsidize failure, but don't want to double subsidize failure?

It's like giving ever increasing amounts of money to the bums lining the sidewalks on your way to work every morning, and wondering why they haven't bettered themselves with it and moved to the suburbs.

Posted by: msoja | October 14, 2010 8:45 AM | Report abuse

I would like to hear Ezra's comments on the the new trade deficit this morning. It seems that the new numbers really put the global economy into perspective. If you want some analysis of this problem check out my blog:

Posted by: PowerWalkBlog | October 14, 2010 10:59 AM | Report abuse

A great article for the peanut gallery on the chasm between Obama and business:

The president and his closest political advisers might not care that the economy is suffering as he remakes the country in his progressive image, but there are signs that inside the administration some people are waking up to the absurdity of Obamanomics.

"Forget about Big Business moving away from us," said one administration official, "we're losing the Kiwanis Club guys who own a small business and spend their nights wearing those funny hats. They're independents and we need them but all the class warfare stuff seems to have pushed them away."

Hopefully they might start to get it soon. Obama needs to shut his trap.

Posted by: krazen1211 | October 14, 2010 11:16 AM | Report abuse

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