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Mon

20

Apr

2009

One Wrong Move And the Bank Gets It !
Monday, 20 April 2009 00:11
by Stephen P. Pizzo

Remember when GW Bush told us (ad nauseum) how he would “listen to the generals on the ground,” in formulating his actions in Iraq? Remember how well all that worked?

Fast forward, new administration, same kind of misplaced trust.

President Obama is repeating Bush's mistake by delegating critical tasks to the wrong people. I'm not taling about Iraq here, but closer to home — the bank bailout. The "generals" Barack Obama says he's listening to in this case are Larry Summers and Treasury Secretary Timothy Geither.

And therein we find the seeds of the same dynamics that enabled Bush to fight the wrong war, at the wrong time, in the wrong country with the wrong tactics. Because, you see, Bush's generals were vested in the only status quo they knew or understood, which is why Generals are so often accused of “fighting the last war.”

Well, ditto for Generals Larry Summers and Tim Neither. Their advice has been, and remains, to as quickly as possible recreate the status quo ante for America's financial services industry. After all, it's worked so well – at least for those two guys. Both Summers and Neither prospered mightily from the investment and commercial banking system as we've come to know and loath it. And, since they know they will not be in government forever, they'll be heading back to that industry when this ride is over.

There's a head-banging counter intuitiveness to this which should, by now, be apparent to President Obama. But, like George Bush before him, Obama has decided to follow the advice of some of the very individuals who helped created the problem in the first place.

And, when you hire Willie Sutton and Clyde Barrow to come up with a plan to secure the nation's banking system you get ... well, you get the point.

Anyway, the only reason I mention all that is because I've been watching what the big money center banks that got hundreds of billions of dollars in taxpayer bailouts have been doing with all that money. Or, more to the point, what they are not doing with it, like helping hard-pressed borrowers.

There's a giant disconnect between what Obama says the bailout funds are for and what's really happening outside the Presidential bubble. Just last week, for example, Obama said that mortgage interest rates were now so low that struggling borrowers should run down to their federally bailed out bank and refinance, thereby lowering their mortgage payments by hundreds of dollars a month.


Sounded good, so one of my long-time readers from Rochester, Minn. tried doing just that, and here's what he discovered the bank was up to:

Steve,
Well, I checked out refinancing my 10-year old mortgage yesterday with Wells Fargo (who hasn't sold it yet!) and boy did I get a dose of reality. I can lower my interest rate from 6-3/8 to 4-3/4 and save around $400 dollars in monthly payments.

HOWEVER, the bank rolls the closing costs of $4,500 into the mortgage amount to be refinanced AND I will have to pay for mortgage insurance since I owe more than 80% of the appraisal value of the house.

All I wanted to do is lower my monthly mortgage payment to keep more cash in my pocket. I was even willing to re-set the mortgage starting at a new 30-year period in order to do this.

So, do I take a chance and pay $450 for the home appraisal that might result in PMI plus pay $4,500 in closing costs to refinance? I don't think so. So, I'm just going to sit on my mortgage and probably see the value of the house go down another 10% or more over the next year.

Where is the government break for those of us who have played by the rules and met our financial obligations over the years?

Happy days are here!?
Jeff in Minnesota

Such a deal, huh? I wonder if Tim or Larry discussed bank fees with Wells Fargo before handing them $25 billion of our money? Apparently not.

So, let's see here; taxpayers give the banks $700 billion in free money and the Federal Reserve allows banks to borrow freshly minted bucks at nearly zero percent interest so banks can make an honest profti by charging borrowers 4.5% interest on that money. And what to do the banks do? They view all this as a fresh opportunity to squeeze the consumer grapes one more time by sticking them with enormous closing fees and pumping millions more to their industry friends in the mortgage insurance business. (John Gotti, eat your dead heart out.)

In another case a young couple asked me what to do about their little problem. They bought their first home three years ago at the top of the market. They were not over-extended, had perfect credit and bought a home well within their means. Now that home is worth $90,000 less than their mortgage. Their bank is one of the very giants that got double-digit billions in bailout funds. I'll just refer to as “Giant Ass National Bank, here. The bank had financed the entire purchase price for this young couple.

Suddenly one of them was laid off from his job. So, being responsible young people, they contacted Giant Ass National Bank and asked if the bank could rejigger their mortgage so they would not default and to better reflect current market valuations. Though the young couple had never even been late on payment, Giant Ass National Bank treated them like a couple of deadbeats and showed them door.

Which led me to give them some extraordinary advice:

"Go back to them and tell your bank something like this:

When we came in a few weeks ago I think you misunderstand what we were trying to do. You thought we wanted to discuss our problem. But in fact, we wanted to discuss your problem.

You see, we have zero equity in this house, a house now worth at least $90,000 less than you lent on it. We were willing to offer you a helping hand by maybe splitting the difference with you and renegotiating a new 30-year mortgage. But you turned us away..

So, since you didn't think that was a good idea, we are back to put it to you as starkly, and unambiguously as possible. Let us ask first, Mr. Big Ass Bank loan officer, would you pay 300,000 for a house currently appraised at just under $210,000? Hm? Would you?

Well, neither would we. And, more to the point, neither will we.

So, either share some of that federal bailout money with us, by reducing our principle and interest rate, or we're simply going to hand you the keys at the end of next month. At which time Big Ass Bank will not only lose our banking business and our true-blue, on time monthly payments, and you'll be the ones stuck with the full $90,000 loss in value. Oh, and on top of all that, Big Ass Bank will incur the tens of thousands of dollars in costs associated REOs, the foreclosure process, property maintenance fees and auction/real estate commissions.

I hope we've made ourselves clear this time. Your call. Oh, and think fast, because thirty days from now we'll either have a new loan, or you'll own a cookie cutter house in a neighborhood full of cookie cutter houses, several of which are already bank-owned and on the market. 
My point to them, and anyone in their situation, is that the only way ordinary Americans are going to see a dime of the benefits from the bank bailout billions (soon to be trillions) is if they stand up and demand those benefits. To do that borrowers who, under normal economic conditions would show deference, even fear, when dealing with their bank, need to be ready, willing and able to play hardball instead. Banks have shown that they are not about to renegotiate loans in ways that force them to accept a loss — that is unless it's in their interest to do so, unless the alternative is worst.

I guess in kinder and gentler times what I am suggesting might be considered a form of "extortion." But under these conditions it's nothing personal, just business — good business for consumers. After all, until the tables turn, lenders will remain the only extortionists in this game — as in; “Pay your mortgage on time or we'll take your home away from you.”

All I'm saying is, under some circumstance, like the young couple described above, the right response can often be, “Go ahead Big Ass Bank, make our day.”

I don't mean to imply that every borrower is in a position to play this kind of high-stakes hardball. Those who went hog wild during the easy money decade are toast. They have no bargaining chips. And, frankly, they deserved whatever misery their spendthrift self indulgences earned them.

I'm talking to those borrowers who played by the rules, like the young couple who, through no fault of their own, suddenly find themselves owing Giant Ass banks more than the underlying security is now worth. Nothing about this current mess is their fault. They are the quintessential innocent bystanders.

No, it was greedy lenders, seeking high fees and low risks who caused the real estate bubble, and it's consequences. And it is they who should be forced to shoulder the bulk of the burdens they created. Nevertheless they were given the very kind of help they now deny so many worthy borrowers. Not only were they allowed to stay in their homes (their corporate suites) but they were handed nearly a trillion taxpayer dollars of free money so they'd have the liquidity necessary to help borrowers out.

But they're not doing that. Instead they used that money to bolster their balance sheets allowing them to post profits even in the midst of the worst economy in our lifetimes. For example, Well Fargo, which had $25 billion in bailout funds pumped into it's tummy, reported $3 billion in “profits” last quarter. (I do believe that even the Obama's new puppy could post a $3 billion profit if Uncle Sam wired $25 billion into his bank account.) I wonder how much of that $3 billion in profits came from the kind of exorbitant fees they tried to stick to Jeff in Minnesota?

So, if you, or someone you care about, is being squeezed by one of these Giant Ass welfare queen institutions, sit down with piece of paper and a calculator and see what chips you have to play, then play them like your very lives depended on the outcome.

Having said that, realize, it won't be easy. This is a form of combat, and should not be entered into by borrowers unless they are ready, willing and able to endure the rigors of a fight. But if they fight — if lots of them start fighting back – Washington will have to act, and this time in interest of average Americans.

Until then Generals Neither and Summers will be leading the us right back to where we began.

“The banks have a stranglehold on the political process. Many of their foot soldiers now occupy the highest offices in government. It's up to people like Elizabeth Warren to draw attention to the silent coup that has taken place and do whatever needs to be done to purge the moneylenders from the seat of power and restore representative government. It's a tall order and time is running out.”
(From Mike Whitney's piece, “Is Geithner's Game Up? Damning Report His Smoke-and-Mirrors Bank Rescue Plan”)

Good luck. And be careful out there.
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