Jack Kyser
Peter Navarro
SAN FRANCISCO (Legal Newsline)--It's been called a bailout and a boondoggle, a market correction and a rescue plan, a savior and a swindle. But the impact of the recent $700 million given by Congress to strengthen the country's lending institutions remains completely unclear, leading financial analysts say.
"It's sort of a chaotic situation. You try to see whatever works that can help adjust the market," Jack Kyser, an economist with the Los Angeles County Economic Development Corporation, said.
Wealthy investors will benefit from the bailout, while the impact on homeowners remains less clear, analysts said in recent interviews. And while the size and the scope of the bailout are unprecedented, the economic reality is consistent with problems from the past. Like most every financial change, some will win and others are sure to lose in the chaotic months ahead.
Foreclosure crisis a priority
Amid the chaos stands the priority of fixing America's housing crisis if the economy is going to straighten out anytime soon, analysts agreed.
"A big impact on the economy would be curbing the flow of properties into the foreclosed market," Kyser told Legal Newsline. "As prices continue to decline, anything you can do to stop the flow of properties would be seen as a positive."
Which was exactly the point made by Federal Deposit Insurance Corp. Chairwoman Sheila Bair, speaking on Oct. 23 to the Senate Committee on Banking.
"The continuing trend of unnecessary foreclosures imposes costs not only on borrowers and lenders, but also on entire communities," Bair said. "Foreclosures may result in vacant homes that may invite crime and create an appearance of market distress, diminishing the market value of other nearby properties... The FDIC has strongly encouraged loan holders and servicers to adopt systematic approaches to loan modifications that result in affordable loans that are sustainable over the long term."
Bair has been able to put theory into practice in recent months, following the FDIC seizing control over the failed IndyMac lending institution based in Pasadena, Calif. The FDIC instituted a temporary foreclosure freeze and reworked thousands of loans based on a model that all payments for the home, including taxes and insurance, can not exceed 38 percent of the homeowner's income.
Levan Efremidze, an economist with the Anderson School at UCLA told Legal Newsline the IndyMac effort has yielded positive results.
"According to Ms. Bair's recent testimony to the U.S. Congress," Efremidze told Legal Newsline, "so far some 3,000 homeowners have seen their IndyMac Bank mortgage payments reduced by about $350, with the new loan modification policy."
Advocates for a temporary freeze on foreclosures have grown louder in recent months, as Democratic senators have urged similar policies used by the FDIC be replicated by teetering Fannie Mae and Freddie Mac. Others have urged that foreclosure mitigation be included in deals where the $700 billion provided by Congress is used.
California Gov. Arnold Schwarzenegger became the latest to join the foreclosure freeze movement, when on Wednesday he advocated a 90-day temporary freeze on owner-occupied homes.
"The single most powerful action our state can take to shore up its economy is to help Californians stay in their homes," he said. Schwarzenegger also advocated loan modifications based on the FDIC model.
Despite the attention, recent foreclosure data shows that foreclosures continue at record levels. A disturbing trend came out of Massachusetts, the first state to pass legislation designed to stall foreclosures, this past month. After seeing a sharp decline in foreclosures in the three months following the legislation, foreclosure rates skyrocketed in September.
"Freezing foreclosures alone is not enough," Efremidze said. "The freeze would be effective if during the freeze there will be an effective loan modification program, sizable tax stimulus to new home buyers and well working mortgage loan market."
Winners and losers
Freezing foreclosures continues as the popular buzz word, but the step of reworking loans is falling by the wayside, according to many of the leading activists touting the urgent need for relief to beleaguered homeowners.
"How is the bailout going to work?" asked Robert Gnaizda, general counsel for the Greenlining Institute. "Not at all."
Gnaizda said the bailout provided relief to those that made risky investments in mortgage companies, but does not insist that those lenders agree to rework loans. Gnaizda said the recent settlement between Bank of America and attorneys general from California and Illinois is an example of the obstacles facing genuine relief to homeowners.
Bank of America bought Countrywide Financial Corp in July. Countrywide is the subject of many lawsuits for its predatory lending practices, including allegations that employees were given bonuses for selling customers more risky and expensive loans. But the settlement did not address the role of investors, who bought interest in bundled mortgages from institutions like Countrywide.
"Many investors are saying they don't agree to loan modification unless you demonstrate fraud," Gnaizda said. "But even in the recent Bank of America settlement, the company is not admitting to a pattern of fraud. Bank of America will not want to sully its reputation, nor its acquisition of Countrywide. They can't make loan modifications without investor approval, and the investors won't agree."
Gnaizda said government needs to guarantee all mortgages held by those at or below 120 percent of the median income as part of the bailout package, while insisting on 30-year fixed rate loans with a 5 percent interest rate.
"We believe that's the best way to stabilize the market," he said. "You'll create millions of potential new homeowners while putting pressure on financial institutions to modify their mortgages when they face competition from these low-interest fixed-rate loans."
Peter Navarro, a professor at the Merage School of Business, University of California- Irvine, said the government has other priorities.
"The Bush administration seems more concerned with bailing out the banks than helping homeowners," Navarro told Legal Newsline. "The number of foreclosures speak darkly to that fact."
Again, the missing step of loan modification appears to be a missing link in solving the problem, according to Navarro.
"The federal government needs to set up a system to go along with any freeze that rapidly screens the applicants and, if they meet the criteria, rapidly get refinancing at an affordable rate," he said.
He said the foreclosures have actually helped the market to some extent, in that radically reduced prices for homes help the "market rebound." A freeze without a modification plan would simply stall that correction, he said.
Each of the analysts said whatever market corrections come from Congress in the coming months will provide some help to a specific group of people - those with troubled home loans. Those that have already lost their homes and those that have continued to be in good standing on their loans will likely not see any redress.
"There won't be any retroactive relief, which is why people need to hang on as long as possible," Navarro said. "Yes, the responsible borrowers are going to get relatively reamed here."
"The government in these types of situations is not concerned with 'fairness,' whatever that word may mean," Efremidze said. "There will be winners and losers in any case. The focus is on resolving the crisis."
Efremidze said people who have made their mortgages won't likely default now and run the risk of ruining their credit.
More to come
Though fixing the housing crisis is the first, and likely, most difficult step, Kyser cautioned that the full impact of the economic crisis is still to be fully realized as
the housing crisis has spilled into every other area of the economy.
"You have a problem with the financial markets more or less frozen up," Kyser said. "Small- to medium-sized businesses are feeling the impact."
Retail businesses should expect a "blood bath" this holiday season, Kyser said, followed by an almost certain spike in unemployment as retailers lay people off in January and construction and development layoffs rise due to the shortage of loans.
All of which severely ties the hands of those trying to improve the economy. With the bailout already approved and with hundreds of thousands likely to get radically improved home loans, the path taken has already been decided. Navarro said that while it may be necessary, he isn't pleased.
"This bailout is going to save a lot of speculators who deserve to go down the drain," Navarro said. "An alternative would to have let the whole house of cards tumble. The upside is to return housing prices to affordable prices and not rewarding moral hazard behavior."
But that type of chaos, according to Efremidze is not consistent with American policy. While talk of the evils of socialism became pretty popular in the closing days of the presidential election, adjusting the market is not anything new to the world's bastion of capitalism, analysts agreed.
"The marketplace is never in a vacuum, it is always under some sort of regulation, either the right type or wrong," said Efremidze. "The marketplace would not exist without rules of the game. People will not go to market, if it does not have rules or if the rules are not enforced. Sometimes we learn that old rules are no longer working and we need to change the rules to the better."
Those corrections, Kyser said, will be a return of financial sanity discard in recent years. Home loans in the future will look much like the past - 20 percent down, 30-year fixed-rate loans and solid credit histories with proven income required, Kyser said.
"You'll see a much more conservative lending industry," he predicted.