[Congressional Record Volume 156, Number 16 (Wednesday, February 3, 2010)]
[House]
[Pages H527-H529]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
{time} 1715
FINANCIAL RECOVERY
The SPEAKER pro tempore. Under a previous order of the House, the
gentlewoman from Ohio (Ms. Kaptur) is recognized for 5 minutes.
Ms. KAPTUR. Mr. Speaker, the economic pain in the Midwestern region
of our country is not subsiding in any meaningful way. Approximately
600,000, over half a million Americans, are out of work in just our
State alone and over 20 million Americans across our country. In our
district, one county, Ottawa County, is suffering from an unemployment
rate that exceeds 17 percent, and just yesterday another one of its
largest employers, Silgan, announced it would close its plant.
There have been approximately 27,000 bankruptcies in just one county
in my district. Bankruptcy is a desperate act, an act taken only when
you see no other alternative. Today's New York Times talks about
desperate measures that homeowners across our country are now taking.
The front page article describes the growing number of Americans who
are ``under water'' on their mortgages and the steps they are taking to
cope with that situation. Being under water means you owe more on the
house than it's worth. More and more homeowners who are under water are
taking the desperate act of walking away from their homes, even in the
winter.
When the real estate market started sinking in the middle of 2006,
almost no Americans were under water on their mortgages. Now 3 years
later, an estimated 4.5 million homeowners have reached what The Times
calls ``the critical threshold'' where the home's value had fallen
below 75 percent of the mortgage balance.
Frankly, as I predicted, the mortgage workout programs hastily
adopted by this Congress are not working for the majority of Americans.
Some would say this is purposeful to allow the five big Wall Street
megabanks to further gain ownership over huge segments of the U.S. real
estate market. The New York Times cites recent data that suggests the
real estate market is stalling again, and the number of people who have
fallen below this critical threshold is projected to climb to a peak of
5.1 million people by June.
Mr. Speaker, the figure would represent 10 percent of all Americans
with mortgages: one in 10. This is unacceptable in America. And without
improvement in the housing market, America is unlikely to see
improvement in the overall economy because housing always leads us to
recovery.
All of us are anxious to see more economic growth. The most recent
gross domestic product showed that the American economy overall had
grown at the fastest pace in 6 years, certainly better than the lost
jobs of the Bush era. But now economists are saying that we're headed
for a jobless recovery. That is unacceptable. Economist Peter Morici
states that we will need 5 to 6 percent growth over the next 3 years to
replace the jobs that have been lost during the recession, and Raymond
Hodgdon, in his economic report out of Chicago, suggests the same
number.
Our Nation got to these desperate times through the financial crisis.
Our economy essentially functions on credit, and much of our credit was
created through the securitization of loans which should lead to a
discussion of the shadow banking system, a secretive, opaque
netherworld where fraud can thrive even as it devastates the entire
country.
Equally in the shadows is the Federal Reserve. Last week we had a
hearing in the Oversight and Government Reform Committee with Secretary
Geithner of Treasury on his role as president of the New York Federal
Reserve Bank during the AIG bailout. The Secretary stated he had
recused himself from such activities as the bailout of AIG once he was
nominated as Secretary of the Treasury. But when I asked him for his
recusal agreement for the record, he stated that there was no
documentation. No recusal agreement exists--nothing legal, no waiver,
nothing. He made decisions, and only he is accountable for them. There
was a gasp in the room.
Beyond the shadowland of our Nation's financial system, our small
community banks are struggling as bad loans from commercial and
residential real estate continue to plague our financial system. The
small community banks that have survived are trying to lend to small
businesses which are the main engine of our economy, but they cannot do
so if the big banks are holding credit hostage. And turning to TARP is
not the answer for our community banks because it isn't Treasury's job
to pick winners and losers in the commercial marketplace. That should
be a market function.
The end result is that small businesses are dying too. The small
community banks cannot loan to local small business. Without access to
credit, small business is letting people go, too; and they're becoming
unemployed. And meanwhile, the Wall Street banks are just getting
bigger, using Federal money to gain an edge on their competition.
Mr. Speaker, this situation is simply unacceptable, and it's time for
Congress to rework legislation to allow people to stay in their homes
and to begin creating jobs in this country so we can actually bring the
deficit down as people pay their taxes to the Treasury of the United
States.
[From the New York Times, Feb. 3, 2010]
No Help in Sight, More Homeowners Walk Away
(By David Streitfeld)
In 2006, Benjamin Koellmann bought a condominium in Miami
Beach. By his calculation, it will be about the year 2025
before he can sell his modest home for what he paid. Or maybe
2040.
``People like me are beginning to feel like suckers,'' Mr.
Koellmann said. ``Why not let it go in default and rent a
better place for less?''
After three years of plunging real estate values, after the
bailouts of the bankers and the revival of their million-
dollar bonuses, after the Obama administration's loan
modification plan raised the expectations of many but
satisfied only a few, a large group of distressed homeowners
is wondering the same thing.
[[Page H528]]
New research suggests that when a home's value falls below
75 percent of the amount owed on the mortgage, the owner
starts to think hard about walking away, even if he or she
has the money to keep paying.
In a situation without precedent in the modern era,
millions of Americans are in this bleak position. Whether, or
how, to help them is one of the biggest questions the Obama
administration confronts as it seeks a housing policy that
would contribute to the economic recovery.
``We haven't yet found a way of dealing with this that
would, we think, be practical on a large scale,'' the
assistant Treasury Secretary for financial stability, Herbert
Allison Jr., said in a recent briefing.
The number of Americans who owed more than their homes were
worth was virtually nil when the real estate collapse began
in mid-2006, but by the third quarter of 2009, an estimated
4.5 million homeowners had reached the critical threshold,
with their home's value dropping below 75 percent of the
mortgage balance.
They are stretched, aggrieved and restless. With figures
released last week showing that the real estate market was
stalling again, their numbers are now projected to climb to a
peak of 5.1 million by June--about 10 percent of all
Americans with mortgages.
``We're now at the point of maximum vulnerability,'' said
Sam Khater, a senior economist with First American CoreLogic,
the firm that conducted the recent research. ``People's
emotional attachment to their property is melting into the
air.''
Suggestions that people would be wise to renege on their
home loans are at least a couple of years old, but they are
turning into a full-throated barrage. Bloggers were quick to
note recently that landlords of an 11,000-unit residential
complex in Manhattan showed no hesitation, or shame, in
walking away from their deeply underwater investment.
``Since the beginning of December, I've advised 60 people
to walk away,'' said Steve Walsh, a mortgage broker in
Scottsdale, Ariz. ``Everyone has lost hope. They don't
qualify for modifications, and being on the hamster wheel of
paying for a property that is not worth it gets so old.''
Mr. Walsh is taking his own advice, recently defaulting on
a rental property he owns. ``The sun will come up tomorrow,''
he said.
The difference between letting your house go to foreclosure
because you are out of money and purposefully defaulting on a
mortgage to save money can be murky. But a growing body of
research indicates that significant numbers of borrowers are
declining to live under what some waggishly call ``house
arrest.''
Using credit bureau data, consultants at Oliver Wyman
calculated how many borrowers went straight from being
current on their mortgage to default, rather than making
spotty payments. They also weeded out owners having trouble
paying other bills. Their estimate was that about 17 percent
of owners defaulting in 2008, or 588,000 people, chose that
option as a strategic calculation.
Some experts argue that walking away from mortgages is more
discussed than done. People hate moving; their children
attend the neighborhood school; they do not want to think of
themselves as skipping out on a debt. Doubters cite a Federal
Reserve study using historical data from Massachusetts that
concludes there were relatively few walk-aways during the
1991 bust.
The United States Treasury falls into the skeptical camp.
``The overwhelming bulk of people who have negative equity
stay in their homes and keep paying,'' said Michael S. Barr,
assistant Treasury secretary for financial institutions.
It would cost about $745 billion, slightly more than the
size of the original 2008 bank bailout, to restore all
underwater borrowers to the point where they were breaking
even, according to First American.
Using government money to do that would be seen as unfair
by many taxpayers, Mr. Barr said. On the other hand, doing
nothing about underwater mortgages could encourage more walk-
aways, dealing another blow to a fragile economy.
``It's not an easy area,'' he said.
Walking away--also called ``jingle mail,'' because of the
notion that homeowners just mail their keys to the bank,
setting off foreclosure proceedings--began in the Southwest
during the 1980s oil collapse, though it has never been clear
how widespread it was.
In the current bust, lenders first noticed something
strange after real estate prices had fallen about 10 percent.
An executive with Wachovia, one of the country's biggest
and most aggressive lenders, said during a conference call in
January 2008 that the bank was bewildered by customers who
had ``the capacity to pay, but have basically just decided
not to.'' (Wachovia failed nine months later and was bought
by Wells Fargo. )
With prices now down by about 30 percent, underwater
borrowers fall into two groups. Some have owned their homes
for many years and got in trouble because they used the house
as a cash machine. Others, like Mr. Koellmann in Miami Beach,
made only one mistake: they bought as the boom was cresting.
It was April 2006, a moment when the perpetual rise of real
estate was considered practically a law of physics. Mr.
Koellmann was 23, a management consultant new to Miami.
Financially cautious by nature, he bought a small, plain
one-bedroom apartment for $215,000, much less than his agent
told him he could afford. He put down 20 percent and received
a fixed-rate loan from Countrywide Financial.
Not quite four years later, apartments in the building are
selling in foreclosure for $90,000.
``There is no financial sense in staying,'' Mr. Koellmann
said. With the $1,500 he is paying each month for his
mortgage, taxes and insurance, he could rent a nicer place on
the beach, one with a gym, security and valet parking.
Walking away, he knows, is not without peril. At minimum,
it would ruin his credit score. Mr. Koellmann would like to
attend graduate school. If an admission dean sees a dismal
credit record, would that count against him? How about a new
employer?
Most of all, though, he struggles with the ethical
question.
``I took a loan on an asset that I didn't see was
overvalued,'' he said. ``As much as I would like my bank to
pay for that mistake, why should it?''
That is an attitude Wall Street would like to encourage.
David Rosenberg, the chief economist of the investment firm
Gluskin Sheff, wrote recently that borrowers were not
victims. They ``signed contracts, and as adults should also
be held accountable,'' he wrote.
Of course, this is not necessarily how Wall Street itself
behaves, as demonstrated by the case of Stuyvesant Town and
Peter Cooper Village. An investment group led by the real
estate giant Tishman Speyer recently defaulted on $4.4
billion in debt that it had used to buy the two apartment
developments in Manhattan, handing the properties back to the
lenders.
Moreover, during the boom, it was the banks that helped
drive prices to unrealistic levels by lowering credit
standards and unleashing a wave of speculative housing
demand.
Mr. Koellmann applied last fall to Bank of America for a
modification, noting that his income had slipped. But the
lender came back a few weeks ago with a plan that added more
restrictive terms while keeping the payments about the same.
``That may have been the last straw,'' Mr. Koellmann said.
Guy D. Cecala, publisher of Inside Mortgage Finance
magazine, says he does not hear much sympathy from lenders
for their underwater customers.
``The banks tell me that a lot of people who are
complaining were the ones who refinanced and took all the
equity out any time there was any appreciation,'' he said.
``The banks are damned if they will help.''
Joe Figliola has heard that message. He bought his house in
Elgin, IL, in 2004, then refinanced twice to get better
terms. He pulled out a little money both times to cover the
closing costs and other expenses. Now his place is underwater
while his salary as circulation manager for the local
newspaper has been cut.
``It doesn't seem right that I can rent a place somewhere
for half of what I'm paying,'' he said. ``I told my bank,
`Just take a little bite out of what I owe. That would ease
me up. Isn't that why the President gave you all this money?'
''
Bank of America did not agree, so Mr. Figliola, who is 48,
sees no recourse other than walking away. ``I don't believe
this is the right thing to do,'' he said, ``but I've got to
survive.''
____
[From Enlighted Economics, January 2010]
Hodgdon Economic Commentary
Economic Recovery 2010?
Economic Outlook
The Dow Jones (19%), the S&P 500 (24%) and NASDAQ (44%)
were all up significantly in 2009. The stock market seems to
be forecasting strong economic growth in 2010 and beyond.
Unfortunately, it will require roaring economic growth (8%-
10%) to justify these stock prices. This will not happen.
Most economists are forecasting economic growth of 2%-4%
(probably optimistic). This level of growth is too low to
reduce the unemployment stock (20 million). It requires
economic growth of 3%-4% just to absorb new entrants into the
job market. The current level of unemployment is 10%. This
level is understated because it does not include everyone
that is unemployed. The real rate of unemployment is 17%.
The average first year economic recovery coming out of a
recession is 6%. Usually the greater the recession, the
greater the first year recovery, that will not happen this
time.
The financial crisis that caused the economic collapse was
the result of 30 years of inflated credit. This artificial
credit took the form of securitized bank loans (The Shadow
Banking System).
By 2008 the unregulated Shadow Banking System was larger
than the regulated banking system ($12 trillion). This
inflated the role of consumer spending (70%) in the economy.
The Shadow Banking System no longer exits and will not
return, without serious financial regulatory reform.
In other words, the inflated level of credit that was
artificially supporting the economy has been withdrawn and it
will not return because the credit ratings and in many cases
the securities themselves were fraudulent to begin with. The
economy runs on credit. If you withdraw $12 trillion in
credit from the economy, the economic trajectory will be
lower than it was before.
Consumer spending will not return to 70% of GDP either or
anything close to it. Historically, each 1% decline in
consumer spending
[[Page H529]]
cuts U.S. imports by 2.8%. The economy is on life support and
the consumer will not come to the rescue this time.
All the money the Fed is pumping into the economy is
propping the economy and the stock market up but it is not
restoring the economy to previous artificial levels. And
those artificial levels were not so great to begin with. For
example, GDP growth for the decade just ended was slightly
less than 2.0%. Core inflation for the decade just ended was
about 2.4%.
Thus, real economic growth was slightly negative for the
first decade of the new millennium. Let's call it zero to
account for rounding errors. Not surprisingly, stock market
growth for decade just ended was also zero.
This is why banks are not lending and borrowers are not
borrowing. Banks are using Fed money and low interest rates
to restore their balance sheets and to reduce their risk
exposure. Repaying debt in 2010 will continue to be
attractive to borrowers and reducing risk exposure will
continue to be attractive to lenders.
With consumer spending and lending remaining well below
recent levels and unemployment remaining at historic levels,
there is no chance of a roaring economic recovery. This also
raises serious doubts over conventional concerns about
inflation.
Inflation is a function of velocity not money supply
growth.
The monetary equation is: MV = PT
Velocity increases when economic growth is very strong.
Velocity declines when the economy contracts. There is no
chance of velocity increasing anytime soon under current
conditions.
Deflation remains a greater concern, which is why the Fed
will not increase interest rates before the end of the year.
Excess capacity in the U.S. and worldwide along with velocity
continuing to fall will keep inflation low.
Real Estate Outlook
Excess inventories of houses for sale, the mortal enemy of
prices, remain huge. And inventories may rise. A quarter of
homeowners with mortgages are under water and 40% of
homeowners who took out mortgages in 2006 are under water.
Since building costs don't change much over time, the
volatility in house prices is really fluctuating land values.
The collapse in land values the past two years will probably
persist. The 30% decline in house prices nationwide has put
the 5 percenter's way under water. It took three decades for
the financial sector to expand its leverage to the levels
reached in 2007. Deleveraging will take at least 10 years.
Due to bad commercial as well as residential real estate
loans, small banks are dropping like flies. Since small banks
are the primary lenders to small business and since small
business is the engine of job growth, it seems likely
unemployment will remain high and slow economic growth will
continue.
Excess capacity in commercial real estate and big
refinancing requirements in coming years beginning in 2010
will continue to plague hotels, malls, warehouses and office
buildings. Moody's/REAL Commercial Property Price Index fell
44% last October from 2007. Retailers closed 8,300 stores
last year exceeding the previous peak of 6,900 (2001).
Most of the really bad loans in residential and commercial
real estate were made in 2005-2006. Those loans will have to
be refinanced in 2010-2012. It is estimated that as much as
50% of these commercial real estate loans will not roll over
in 2010.
Economic Summary
Thus, the economic weather report for 2010 is for slow
economic growth, high unemployment, falling real estate
prices, continued deleveraging, more small bank failures and
a huge supply of bad residential and commercial real estate
loans needing to be refinanced. This is not a clear skies
ahead or a return to business as usual forecast, as the stock
market seems to have been forecasting.
Financial Outlook
The economy will eventually adjust to this lower economic
trajectory but it will take time. The only thing that could
speed up this process would be to identify the cause of the
financial crisis (The Greatest Securities Fraud in History)
and fix it.
Unfortunately, the Obama and Bush Administrations have
covered up the cause of the financial crisis in order to
protect those responsible. Perhaps the Financial Crisis
Commission, which is investigating the cause of the crisis
will identify the real cause of the crisis and recommend
positive corrective actions. Absent that, we are looking at a
sustained period of slow economic growth.
Throughout this crisis, President Obama, a gifted public
speaker, has consistently spoken on behalf of ``Main Street''
but acted on behalf of ``Wall Street''. This strategy is
based on the belief held by politicians and the investment
banking cartel, which caused the financial crisis and is in
complete control of the Administration, that you can fool
``all the people all the time''. It will come as no surprise
that all of the President's key financial advisors work for
or are surrogates for the investment banking cartel.
President Obama proposed prohibiting Big Banks from
engaging in Proprietary Trading and Proprietary Hedge Funds.
``Main Street'' was not impressed and ``Wall Street'' laughed
The reason ``Wall Street'' laughed is that proprietary
trading and proprietary hedge funds had absolutely nothing to
do with cause of the financial crisis and taking it away does
nothing to help ``Main Street'' or curtail ``Wall Street's''
subsidized risk taking. While it is true that investment
banks benefit from access to the Fed's discount window and
bank deposits for trading purposes. This is the result of the
repeal (1999) of Glass-Steagall, which was the ultimate cause
of the financial crisis, along with the economic structure of
the financial industry (cartels, oligopolies and duopolies).
In other words, the President learned nothing from
Massachusetts. Tinkering with symptoms of the financial
crisis rather than its causes is just not good enough.
Moreover, it is not the size of banks that is the problem;
it is their configuration and lack of regulation. That is the
mixing of unregulated investment banks (gambling casinos)
with regulated commercial banks is the problem. It is the
combination of investment banks and commercial banks that
makes banks ``too big to fail'' not their size.
There is no systemic risk from the failure of a stand-alone
investment bank. The repeal of Glass-Steagall, which ushered
in a decade of unparalleled risk taking and fraud by
permitting investment banks and commercial banks to combine
for the first time in 70 years created the ``too big to
fail'' problem.
In the process of tinkering and ignoring the real problem
the President managed to embarrass Paul Volcker, a great
public servant, by making him take credit for this
foolishness. This was not Volcker's Proposal. Volcker's
Proposal was to bring back the Glass-Steagall Act, which was
repealed by the Financial Destruction Act of 1999.
While it is true that Glass-Steagall would prohibit
commercial banks from engaging in proprietary trading and
hedge funds, it would prohibit a lot more than that. It would
prohibit commercial banks from engaging in all investment
banking activities. Proprietary trading and hedge funds are
crumbs on the floor by comparison.
____________________