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I really hadn’t thought enough about Timothy Geithner to garner an opinion about him until I read an interview he did not long ago with Newsweek.  In it he reveals that, despite having spearheaded the bailout of the investment banks -- the institutions which utterly wrecked the real estate market in the first place, plundering trillions of dollars worth of homeowner equity -- with billions in taxpayer funds, the relief he’s proposed for distressed borrowers is . . . as close to nothing as you can get.  Here’s what he had to say about how he would be dealing with the housing debacle:

...[W]e are going to focus the bulk of the financial force on bringing interest rates and mortgage rates down to cushion the fall in housing prices and help stabilize home values, which will feed into people’s basic sense of financial stability.

     That’s it?  Not that low interest didn’t create the bubble in the first place, how is it going to help with the crisis now when banks are hoarding cash?  Cushion the fall?  You’ve got to be kidding me.  Feed. . . sense. . .of stability?  The cynicism and condescension of that boggles the mind.

     At any rate, that’s been the tenor of the policy from the Treasury Department which has attempted, poorly and nonchalantly, to cobble together a strategy to help homeowners, the second wave of which are not subprime borrowers but rather took out affordable loans and are now in trouble as a result of unemployment and lost income

     In sum, homeowners, you’re on your own.  Of course, this has been painfully apparent for some time.  The president’s HAMP program (Home Affordable Modification Program) has been a colossal failure.  This one is the latest in a string of government sponsored programs to induce banks to modify borrowers’ awry loans, none of which have been at all efficacious.  You see, when Geithner was shoveling hundreds of billions of dollars into the Wall Street trough, no one bothered to think maybe a string to attach to the bailout, say a requirement that would have forced banks to modify a certain number of home loans, would be a good idea.  Instead we got, “Be nice to the borrowers, banks.”  But they haven’t been, by the longest shot; they are in fact merciless because they can be and because they make money off of foreclosures, not loan modifications.

     The only difference between Obama’s plan and his predecessor’s was the set aside of 75 billion dollars to bribe the banks to help borrowers.  Unfortunately, the payments aren’t nearly enough to humor the banks and they are not accepting the bribes -- in droves.  There are constantly roughly two million homes in the maw of foreclosure.  It’s estimated that total foreclosures since the market imploded have hit five million.  Since HAMP was enacted the number of permanent modifications that have been approved is, maybe, 200,000. 

     Most recently, in recognition of HAMP’s uselessness, the government shifted its effort from attempting to help distressed borrowers avoid foreclosure to steering them towards giving up the fight: HAFA encourages them to short sell their homes, paying them three thousand dollars to do so.  What it lacks in originality it should make up for in inevitable failure. 

     For one, short sales have proved to be unwieldy and difficult to close.  For another, banks have been paying borrowers to move from their homes in exchange for leaving the toilets intact and the drywall on the studs for quite some time already.  What’s more, in many cases to date, a homeowner is better off being foreclosed than electing an alternative, i.e., a short sale or a deed in lieu of foreclosure.  Why?  IRS reform exempts the borrower on her principal residence (not an investment property, say a rental) from tax liability on the debt “forgiven” by the bank (which previously was considered ordinary income and taxed as such).  On the other hand, the deficiency amount forgiven in the context of a short sale or deed in lieu is not necessarily exempt (this is an intricate question for a CPA, keep in mind, and I’m not a CPA).  Which could lead to an iniquitous turn of events: you lose your home AND owe the IRS $28,000.00 on the hundred thousand dollars that was written off to close the sale.

     Then too, as the banks have been reserving their right to sue for the deficiency resulting from a short sale or deed in lieu of foreclosure, you’ve just extended its period of time to recover the loss from six months (in the case of foreclosure) to six years (for breach of a written contract).  HAFA does require the bank to fully release the borrower from future liability, which is helpful, but my sense is that this program is more of the same and the banks, servicers and investors aren’t going to jump on board. 

     Now, what of the Treasury Department’s new push for reduction of principal loan balances?  First, it should have been done long ago.  It’s a flat fact known to anybody who’s been keeping up that the only way to stem the historic rate of foreclosures is through principal reductions.  Homeowners who are severely under water are many times more likely to surrender to foreclosure than otherwise, and why not?  If equity is never accrued, or there is little chance it will in your lifetime, what’s the point of owning a home that you will be renting from the bank until you die? 

     Interestingly, Geithner, until now, discouraged principal reductions, only supporting the lowering of interest rates, which has been in abject vain.  His interest in helping borrowers on main street conspicuously pales in comparison to his affinity for Wall Street.

     The tweaking of HAMP was announced a day or two after Bank of America announced its plan to help some 45,000 distressed homeowners by way of principal reductions.  You know, the media have been doing a really feeble job of reporting on the real estate mess; the B of A stories are perfect examples of laziness and credulity.  First of all, Bank of America’s latest move is not a function of altruism, it’s a response to the settlement of a lawsuit by way of which it was forced to take the measure.  Second, Bank of America is the largest servicer in the country, administering millions and millions of home loans, yet to date it has the worst record for doing meaningful loan modifications, barely in the tens of thousands. 

     So it’s quizzical why the B of A announcement was written of as some sort of triumph.  We’re talking 45,000 borrowers out of millions who are in peril of being foreclosed. 

     Remember, though tweaked, this is still the HAMP program (only expanded) which, since its inception, has only modified a couple of hundred thousand loans.  Why anybody would believe that the banks are all of a sudden going to become alacritous and help enough distressed borrowers to make any difference at all rather escapes me.  I don’t think it all unfair to suggest that they’re doing just enough to look like they’re making, or are going to make, progress, thereby assuaging the Obama administration and relieving some pressure.

     At any rate, the new wrinkle in HAMP purportedly will give a temporary break to borrowers who’ve lost their job: their payments could be reduced to 31% of their monthly unemployment benefits for three to six months.  This would be done in contemplation that the borrower will find work in that brief period.  The other twig of the program aims to give borrowers who are underwater in the range of 115% a write down of the balance of some or all of the amount in excess of 100%.  If the borrower keeps the loan current for three years, the principal reduction could stand permanently.

     The HAMP program hasn’t worked so far and probably won’t work well enough in the future to help turn around the real estate market because, again, not one bank has to modify one loan: it’s all purely voluntary. 

     So, don’t expect the market to improve any time soon.  In fact, you can anticipate it worsening before it gets better.  The tax breaks that the feds have been conferring on first time homeowners and some existing homeowners who are trading up ends at the end of this month.  Then too, there’s the impending pall of the so-called “shadow inventory” yet to deal with. 

     Standard & Poor’s posits that the current glut of foreclosed homes on the market will only worsen when banks begin unloading the shadow inventory, that is, the homes that have already been foreclosed and taken back by the banks, as well as all distressed homes that have not yet been taken back, which have yet to reach the market.  It’s estimated that there are almost three years worth of this inventory, the backlog being caused by servicers’ disorganization which has constrained foreclosures.  S&P also conjectures that this will impel the lenders to ramp up liquidation and shift emphasis away from loan modifications.

     Oh, and one more thing.  Since I began writing this article, the newspapers are reporting that the government’s appetite for keeping interest rates low has been abandoned and they are going back up.  Doin’ a heckuva a job, Timmy.

     On the bright side, if you’re an advocate for slow growth here in the Truckee Meadows, you’re kicking ass.

     Michael Radmilovich has been a practitioner of real estate law here in Reno since 1990.  Contact him at michael@radmilovich.com or 775.771.4958.