[Congressional Record (Bound Edition), Volume 156 (2010), Part 1]
[House]
[Pages 1132-1134]
[From the U.S. 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.
       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

[[Page 1133]]

     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 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

[[Page 1134]]

     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.

                          ____________________