THE PROMENADE SHOULD BE RENAMED “THE GHOSTWALK”

Dale Kasler did a follow up in the Sacramento Bee about General Growth Properties, Inc. it’s Reorganization Plan, and the prospects for the Promenade in the near future. Elk Grove’s unfinished megamall will likely remain stalled even though its developer has taken a major step toward exiting bankruptcy protection. General Growth Properties Inc. said it has reached agreement with lenders to restructure billions of dollars in debt, as part of a reorganization plan that would leave the Chicago mall developer largely intact. The plan needs the approval of creditors.

But unfinished projects, including the Elk Grove Promenade, aren’t part of the reorganization plan. General Growth is still negotiating with lenders on those projects, company spokesman Jim Graham said Wednesday.

The Promenade’s future “remains to be seen,” Graham said. Construction on the on the 1.1 million-square-foot mall ground to a halt in October 2008, and lawsuits from contractors seeking payment began piling up. Last February the project, surrounded by chain-link fence and sprouting weeds, was officially put on hold indefinitely. Two months later, buried under billions of dollars in debt, General Growthfiled for Chapter 11 bankruptcy protection. The site is now a steel ghost town, an e1ery site that looks like the survivor of a nuclear winter or an outtake from the Omega Man.

The company tried to sell the mall earlier this year but pulled it off the market several months ago. Graham said the Promenade’s fate is “subject to market conditions that are unrelated to the bankruptcy.” Analysts agree, saying the Promenade190 is a troubled project regardless of what happens to General Growth.

Another point of view might be that the market conditions that caused the bankruptcy was the failure of the developer and planners to adequately prepare feasbility studies and understand demographic trends. Ambition and greed may have factored into a ill fated decision to go ahead and build before the time was ripe. That’s of course the dual problem of being a developer, being a visionary and being accurately able to predict future growth patterns.

The Sacramento research director at commercial real estate broker Colliers International, Garrick Brown, said the Promenade won’t open “for three years at best, more likely four years.” Brown said the retail market is starting to improve, but the Promenade was built too far out in front of Elk Grove’s housing development. The mall is about two miles from the nearest housing. “Nobody wants to touch it until there are homes there,” he said. The mall, first proposed in 1997, has been a symbol of Elk Grove’s ambitions and frustrations. It spurred Elk Grove’s push for cityhood in 2000. Macy’s and Barnes & Noble were among the earliest anchor tenants committing to the project.

With unemployment officially at 10.2% nationwide, the State in Deep Financial crisis, Bankrupticies at all an all time high, and Chairman of the Fed Ben Bernanke saying Monday that the employment picture isn’t going to get dramaticallly better in the near futre, until economic circumstances change, the Promenade is going to be a symbol of ambition gone awry and failed dreams. The Promenade might now be known as the “Ghostwalk,” a regional symbol of the times, where the dreams of visionaries haunt the landscape, waiting without hope of a certain future.

Paul R. Bartleson
Sacramento Bankruptcy Lawyer.

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TransUnion, a major credit reporting company predicts that mortgage  delinquency rates will continue to rising in the Sacramento area– with 12 percent of homeowners falling at least two months behind on their payments by year’s end. That figure is nearly twice the national projection and a dramatic jump from just two years ago, when less than 2 percent percent of area homeowners’ notes were delinquent.

“There are serious issues confronting the housing industry, and it’s not out of the woods by the end of the year,” Becker added. He predicted the would begin falling in 2010. It analyzed trends in the for the second quarter and offered year-end projections for the Sacramento market and the state.

Today, 60-day mortgage loan delinquency rates, i.e, the percentage of homeowners at least 60 days behind on their mortgage payments, stood at 9.62 percent, just below the state’s rate of 9.7 percent. That compares to the national rate of 5.81 percent, which is projected to rise to 6.93 percent by the end of the year.

California, Arizona, Nevada, which has the highest delinquency rate at nearly 14 percent are a tracked closely as key indicators because the 60-day threshold is traditionally seen as a step toward foreclosure.

In markets where home values have dropped most sharply, delinquency and foreclosure rates are highest. By that measure, the capitol region remains in trouble. According to First American Core Logic, more than half of Sacramento area homeowners owed more on their homes than they were worth.

“As long as housing values continue to decline, the delinquencies and foreclosures are likely to continue,” particularly at the same time as unemployment is rising. turns around, there’s not much hope for those rates to reverse. And until the housing decline will probably not change course.

TransUnion also predicted that by the end of the year, 12.2 percent of Sacramento area homeowners and more than 14 percent of homeowners statewide will be at least two months behind on their mortgage payments, as a result of double-digit percentage unemployment and unpaid furlough days. The impact is also being felt on borrowers with conventional loans and are increasingly catching up with homeowners who have “safe” fixed-rate loans. Borrowers who borrowed to stay in the house and keep up with living expenses,are now being confronted with the choice between paying their mortgage loan or their living expenses.

Despite the ominous cloud of current darkness, Becker of TransUnion predicted the sun could come out in 2010. and further predicted that the delinquency rate would fall three times faster than in the nation as a whole. With the State’s budget in turmoil on the rise, housing sales flat, it is difficult to understand the basis for this prediction.

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Following the latest news on Loan Mod Metrics, the reports on the most recent foreclosure statistics are in.

According to RealtyTrac, in July, there were more than 360,000 properties with foreclosure filings — including default notices, scheduled auctions and bank repossessions — an increase of 7% from June, and 32% from July 2008. That number represents that one in every 355 U.S. homes had at least one filing during July.

The July report marked the third time in the last five months where a new record has been set for foreclosure activity.

Those numbers indicate that neither the stimulus package or the loan mod program is working.  In fact, the rate of foreclosures and defaults is increasing.  The fact that foreclosures are delayed as people go through the loan mod process is misleading.

RealtyTrac statistics revealed that more than 87,000 properties were repossessed by lenders.  There have been a total of 464,058 repossessions — or REOs (Real Estated Owned) in industry parlance — so far this year.  Foreclosures were blamed on more option ARM resets, triggering defaults, but also on more prime loans, which are failing due to job losses.

The worst hit areas continue to be in the “sand states,” with California posting the highest number of total filings, 108,104, and Nevada posting the highest rate of foreclosure at one for every 56 homes.  The other hardest hit states are Arizona, at one filing for every 135 homes, and Florida, at one for every 154. Las Vegas, with one for every 47 homes, had the highest rate among metro areas. It’s the 31st consecutive month topping the list, a dubious honor.

This does not bode well for the recovery some experts had hoped for in 2010.

At the same time, another report by Deutche Bank predicted that 50% of homeowners would be underwater by 2010 as more option Arms kick in, noteably those of the 5/25 variety.

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It appears that the Federal plan to revitalize the mortgage industry that was announced in February is off to a slow start. The first institutions to join began accepting applications in April.  The Treasury Department reported that only 9% of delinquent borrowers are in trial modifications. The figure represented 235,247 loans that were at least two months delinquent. The Obama administration said it was on pace to help up to four million homeowners over the next three years. That projection anticipates that there are a lot more defaults on the horizon.

After hearing a flood of complaints from borrowers who complained about lack of response to loan mod requests, Tuesday’s report came a week after the administration invited servicers to Washington, D.C., to discuss ramping up the program’s implementation. Officials want to see 500,000 loan modifications under way by Nov. 1.

The administration is apparently hoping to “hold institutions responsible” for their performance by releasing the servicer’s progress reports. The monthly reports will allow the public to see which institutions are lagging in implementing the plan. This of course assumes that the institutions could be publicly shamed into compliance or that would somehow magically rewrite loans for the borrows. The question is whether this is like asking the fox to guard the henhouse after raiding it.  If the numbers regarding the institutions’ losses were not enough to influence their behavior, it is doubtful how forcing disclosure of their record regarding implementing loan modifications is going to influence their actions.

Institutions have extended modification offers to 406,542 troubled borrowers, or only 15% of those behind in payments. The bulk of trial modifications have been done by a handful of servicers. There is an obvious staffing problem which may be a major impediment that needs to be removed before any substantial numbers are achieved.

Performance was very uneven among the 38 servicers participating in the program, which was led by Saxon Mortgage Services, a subsidiary of Morgan Stanley putting 25% of its delinquent loans into trial modifications. Saxon was followed by Aurora Loan Services, a subsidiary of Lehman Brothers Bank, with 21%.

GMAC Mortgage, which is partly owned by the federal government, put 20% of its delinquent loans into trial modifications.

Among the major banks, JPMorgan Chase came in first with 20% of late loans in trial modifications, followed by Citigroup with 15%. Wells Fargo and Bank of America lagged behind the pack with 6% and 5%, respectively.

Servicers contacted acknowledged they need to improve their performance, saying they were committed to the president’s foreclosure prevention plan. They also stressed that they were doing many modifications outside of
the administration’s initiative.

Wells Fargo said it will eliminate its backlog within weeks, attributing it to the time lag between when the government announced the initiative and when it released the guidelines. It did not start modifying loans owned by private investors until the end of June, though it began adjusting loans owned by Fannie Mae and Freddie Mac in April. The bank vowed that it soon will be able to send eligible borrowers the trial modification agreement within 48 hours. In a change from past practices, it will enroll homeowners in a preliminary adjustment right away after receiving the initial application if they meet the basic eligibility requirements. During the three-month trial, the servicer will gather additional information to see whether the borrower qualifies for a permanent modification.

Wells Fargo, Chase, Citigroup and Bank of America promised to ramp up efforts to expedite the loan process.

Bank of America also acknowledged it needs to improve its efforts to reach out to those in need. B of A, which purchased the behemoth Countrywide Financial last year, had done only 28,000 trial modifications after extending nearly 100,000.00 offers. That number accounts for nearly one in four trial modifications offered under the Obama plan, but has by far the largest number of eligible delinquent loans: nearly 800,000.

Amidst complaints of lost paperwork and lack of response, both the Obama administration and the industry are feeling mounting pressure to respond to calls and applications.

The Criteria for the Program is follows:

1) Participation by Institutions in the program is voluntary, though once an institution agrees to participate, it must offer a trial modification to those who meet the criteria. The 38 participating servicers cover 85% of mortgages.

2) The loan modification plan allows eligible borrowers who are in or at risk of default to lower their monthly payments to no more than 31% of their pre-tax income through a loan modification. Adjusting the loan must recover more value than foreclosing on the home would for a modification to be offered.

3) The adjustments are made permanent after the homeowner makes three on-time payments. Homeowners, servicers and mortgage investors receive thousands of dollars in incentive payments in hopes of increasing participation.

So far, the government has committed $20 billion to the effort and has said it would provide $75 billion overall. There did not appear to be any information on loans modified after bankruptcy proceedings were initiated or how many borrowers were in default following permanent modification or how many failed to meet the trial period.

Earlier this year, congress defeated the bill that would allow modifications of loans in the bankruptcy court with the unemployment rate growing and number of defaults continuing to rise, time will tell whether publishing reports will be effective holding the institutions responsible. Given the poor performance rate thus far in proportion to the eligible number loans, the mortgage crisis continues to slow down the economy.

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The Sacramento Bee reported some ominous statistics on the state of the mortgage industry:

The mortgage meltdown is continuing on from the “risky,” “exotic” subprime that had variable interest rates.  As the State and Capitol area economy continues its decline, howeowners with fixed mortgages are getting into trouble.

The Bee reported that capitol-area job losses approached 5,000 in the past year and unemployment at 11.1 percent.  Various financial industry consults, lenders, bankruptcy attorneys, and debt counselors all say they’re seeing rising delinquencies among prime borrowers with fixed-rate loans and good credit. Many of those slipping into trouble are state workers, the one of the mainstays sof Sacramento’s economy. Not coincidentally, the State Budget stalemate continues.  So as the State Legislatures fight amongst themselves to satisfy the needs of their own particular interest groups, and the State has now gone to three furlough days a month and started issuing IOUs, its not coincidental that the economic woes continue to grow.

More workers with “steady jobs” are experiencing a loss of income.  As a result, they have less money to spend at local businesses, restaurants, and on the fundamental necessities of living.According to the Mortgage Bankrers Association (MBA), there are 3.3 million “prime” loans in California, totaling 56% of all mortgages.  But nearly 4 percent were delinquent in the first quarter, and that number will only continue to rise. Significantly, that number was less than 1 percent two years ago, when the default crisis was dominated by subprime loans.

The MBA says layoffs are now hitting more educated borrowers. For private sector and state workers, it’s not just the layoffs creating trouble for traditionally safe loans. Many area workers have had to absorb wage cuts. Others who lost jobs have been lucky to find new jobs usually find emploment that pays less. Or they have found only part-time work. Many workers who depend on overtime pay have also seen it disappear or dwindle. As the economy has slowed those who usually counted on bonuses for performance based sales are seeing their incomes slashed.

Finally, in a capital region defined by a massive state government work force, furloughs have grown to three days monthly, approximating a 14 percent salary cut. Those who were barely scraping by and living but living within their means are now at risk of financial disaster.  Governor Schwarzenneger is proposing still more pay cuts for an educated population that’s increasingly showing up at nonprofit mortgage counseling centers.  People who planned their lives around safe, secure jobs are finding their is no such thing as job security after all.

The Bee also reported that this upheaval has had a ripple effect on small-business owners.  The thinking that this is a “short term set-back” seems to the Vanity of Human Wishes, because with the State’s budgetary process at a standstill, small business owners and those in the private sector and feeling the pinch of the lack of response by the Legislature to solving California’s budgetary problems.  With the not so unforeseeable consequences of the State’s budgetary problems, having an increasing impact on all of California, legislators still are collecting their full paychecks, despite a California Constitutional Amendment requiring a balanced budget. 

The mortgage meltdown has already claimed 40,000 area foreclosure victims and heartbreak in thousands of other homes, trouble for prime borrowers is one more obstacle to a
housing recovery any time soon.

But the news gets worse:  Borrowers seeking loan mods with recalcitrant lenders are going to have an even more difficult time, simply because lenders are going to be able to restructure loans for underemployed or jobless people who can barely afford any payment and still buy groceries. Economists say rising defaults and the foreclosures to come among these borrowers are likely to persist long after unemployment peaks sometime next year.

Forecasters at the University of the Pacific in Stockton predict unemployment in the capital region will peak late next year at a whopping 12.3 percent – and remain in double digits through 2011. If so, problems with prime loans are likely to linger in a region having difficult times.

The Federal Stimulus Package is obviously not working, and the State Legislature needs to act instead of waiting for a Federal Bailout.  Since the Legislature has not complied with the requirement of balancing the budget, they should not be receiving their paychecks.  In fact, it might be more beneficial if the entire legislature was recalled and replaced with a non-partisan sixth grade government students, who are not influenced by private interest groups, unions, or political ideology.  The next initiative on the California ballot should be a measure to return the legislature to part time status, and to remove the influence of private interests.  California’s legislature has manifestly demonstrated that they are incapable of acting in the best interests of the State of California, and instead have only shown an obdurate insistence in serving whatever political interest group they represent.

For the bankruptcy lawyers, it will be boom times.  For private citizens, including those who work in the private sector, and those who work for the state, their own private economies are not likely to improve very soon.

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CNN/Fortune had some interesting reporting on the TARP today. As you’ll recall, the premise of the Troubled Asset Relief Program (TARP) was that it was promoted as a plan to “reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy.” Offering loan guarantees to a broad array of banks is reportedly among the options being considered by incoming President Barack Obama as he seeks to restore economic growth. According to Joseph Mason, a finance professor at Louisiana State University, the problem with a loan guarantee plan is that it will not necessarily force the banks to fully recognize their losses on souring positions taken on during the credit boom that ended in the summer of 2007.

That point does not go far enough, though, because it’s not a matter of accounting, it’s a matter of accountability. It’s not a matter of how the banks keep their books, it’s a matter of holding the banks responsible for reinvesting the funds and utilizing the funds to fund consumer borrowing a small business financing. It’s about fulfilling the purpose of the bailout, not about keeping a nice set of records.

On Friday, Citigroup said it lost $8 billion for the fourth quarter and $19 billion for the year. Bank of America said it lost $1.8 billion for the fourth quarter and announced a plan under which the government will backstop $118 billion in troubled assets, about three-quarters of which are tied to the bank’s acquisition of Merrill Lynch.

Paul Miller, an analyst at FBR Capital Markets, wrote in November research report that the biggest U.S. banks — names like Citi, BofA, JPMorgan Chase and Goldman Sachs, to name a few — needed $1 trillion or more in new common equity to be well enough capitalized to handle surging loan losses.

On ABC’s “This Week” Sunday David Axelrod, senior adviser to Obama, said that Obama would emphasize that lenders need to keep funds flowing to keep an already sputtering economy from slowing even further. “I think he is going to have strong message for the bankers,” Axelrod said. “We don’t want them to sit on any money that they get from taxpayers.” The contrarian view was expressed by Ed Gainor, a structured finance lawyer at McKee Nelson in Washington, who said dictating that lenders must lend could be counterproductive. One reason lenders are conserving capital, he noted, is that the economy is slumping — which raises the odds that even good borrowers will default as they lose their jobs. “Demanding that they make loans is somewhat silly on a grand scale,” says Gainor. “If the lenders can lend and make a profit, that’s what they will do.” This ignores the purpose of the TARP. Does Gainor think that the bank’s pocketing the funds is going to help the economy?  In response, Mason said the strong message the government needs to send is that existing losses must be recognized, and failing institutions allowed to fail.

Question: Why should the taxpayer’s be willing to bailout the banks unless they are obligated to not only lend it out, but pay it back to the government and the taxpayers?

The self interest of the banking industry without regard to the general economy should be evidentl. The point is that from the taxpayer’s point of view, there is no reason to bail out the banks if they are not obligated to pass it on to consumers, because one of the big reasons the economy is slumping is because of the restrictions on lending, consumer and small business borrowing. Just talk to the Retailers or Building Industry Associations. The taxpaying citizens are, after all, the ones who are ultimately paying for the bailout. It’s absurd under the present scenario that ordinary taxpayers are expected to pay for the bailout of financial institutions without the funds being passed on through. Considering Gainor’s point of view, which sounds like “we’ll lend money if we feel like it,” the taxpayers would be better of if the banks kept their hands out of Congress’s and the taxpayers’ wallet. Now is not the time to start exercising overly strict and scrupulous lending practices, which should have been instituted long before the spiral dive began. Given the present lack of accountability, the TARP is nothing but the biggest charitable giveaway in history. If the banks are unwilling to pass the bailout on to the public who is paying for it in the first place, Congress should simply refuse to distribute any more funds, allow the banks fail, and let the forces of market capitalism take over. Without insisting on accountability in the utilization of the TARP funds, the plan is just simply another fraud on the American public. It’s Robin Hood in reverse, stealing from the common man to give to the rich. If Congress fails to demand accountability and the Banks fail to fulfill the purpose of the TARP, another option that Obama might consider is placing the insolvent Banks in an involuntary Chapter 11 and appointing a Trustee, or “Banking Tzar”to ensure the funds are administered properly, rather than to keep throwing good money after bad. Yes, its a little far fetched. On the other hand bailing out the banks while letting everyone else wither away on the vine isn’t a very attractive option.

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On October 3^rd, 2008, TARP (Troubled Asset Relief Program) was signed into law by President Bush. Since then approximately 350 Billion has been funded or allocated for use.. The bill was touted part to ease credit restrictions for consumers and small businesses and necessary to stabilize the financial and lending markets.

On November 11, 2008, the Bush Administration unveiled a plan which centered on Fannie Mae and Freddie Mac, which between them own or back about 31 million mortgages worth a combined $5 trillion. The federal government took over the firms in September due to mounting losses on their portfolios of mortgages. Eligibility for relief was to be Eligibility is determined by several factors: Homeowners must be 90 days or more late in their mortgage payments, owe at least 90% of their home’s current value, live in the home on which the mortgage was taken and have not filed for bankruptcy. Their mortgage payments would be adjusted through lower interest rates or longer repayment schedules with the goal of bringing payments below 38% of monthly household income. Interest rates could be lowered for five years and then raised to a predetermined level. Loan terms could be lengthened to 40 years.

A week later, on November 18, 2008, FDIC Chairwoman Sheila Bair unveiled details of her plan to have the government help delinquent homeowners. There were two key elements to the proposal. First, housing payments for delinquent borrowers two months or more late would be reduced to 31% of gross monthly income. To get there, mortgage rates could be set as low as 3% for five years, before increasing at an annual rate of 1 percentage point until they hit the prevailing market rate. Loan terms could be extended as long as 40 years. Second, to encourage servicers and investors to participate, the government would share up to 50% of the losses if a borrower who had been helped ended up in default anyway. The risk of re-default had been one obstacle to getting lenders on board with systematic modification plans. In addition, the FDIC would pay servicers who process mortgages $1,000 for each re-worked loan. The plan was expected to initially help 2.2 million borrowers get new loans; after some borrowers re-default, 1.5 million would ultimately keep their homes, the FDIC estimated. The plan would cost an estimated $24.4 billion, which Bair has said could come from the $700 billion bailout Congress approved last month and which was “imperative to provide incentives to achieve a sufficient scale in loan modifications to stem the reductions in housing prices and rising foreclosures.” The proposal had been initially looked on unfavorably by the Bush Administration and Treasury Secretary Henry Paulson.

On December 2^nd, 2008, the Government Accountability Office issued a report regarding the status of the T.A.R.P. In that report, the GAO stated:

“Treasury had a different perspective on what should be done to evaluate how institutions were using funds received under CPP, opting for development of “general metrics” for evaluating the overall success of CPP rather than working with bank regulators to establish a systematic means for determining whether financial institutions’ uses of CPP funds were consistent with the purposes of the program, as we recommended. In technical comments, the Federal Reserve also expressed concern about whether Treasury needed to monitor individual institutions’ use of CPP funds. As discussed in the draft, we agree that it will be important to develop a range of metrics to evaluate the overall success of CPP and we welcome continued discussions with Treasury and the bank regulators on general metrics to achieve this purpose. However, given the magnitude of funds provided to this program, these types of metrics alone will not provide the necessary transparency and accountability needed to ensure that participating institutions are using the funds in a manner that is consistent with the purposes of the act.”

As a former English Major, I don’t know what “general metrics,” means, but I have a sneaking suspicion that it doesn’t have a lot to do with accountability or transparency. As a lawyer, I object to the term as “vague and ambiguous.”

Last week, CNN reported that Merrill Lynch, CitiGroup and others declined to provide information where the bailout funds were used and for what purposes, providing further evidence that neither the Treasury or the Financial Institutions want to accountable for where the funds are spent.

On December 22, Barney Frank introduced legislation consistent with the FDIC plan. Lawmakers have criticized Treasury for not using any of the initial $350 billion to prevent additional home foreclosures. Federal Reserve chairman Ben Bernanke has warned that up to 2.25 million Americans could lose their homes to foreclosure this year. Frank said his legislation would include a version of a plan, supported by FDIC Chairman Sheila Bair, to spend $24 billion to give lenders financial incentives to modify more loans and help more borrowers keep their homes. Bair has estimated it could prevent 1.5 million foreclosures.

Earlier this month, CNN reported that over 50% of all loan borrowers who had their loans modified by voluntary agreements in 2008 were in default once again withing six months after modification, without any reduction in payments. Another news item reported that members of the building industry were predicting that 50% of its members were going to be out of business within the next year because they have had their lines of credit yanked. Stockton and Sacramento were projected as the No. 2 and 5 foreclosure regions in the Country with a projected price drop from 22-24% within the next year. Somehow the consumer isn’t seeing the trickle down effects of the bailout.

What this all means for the Bankruptcy outlook in 2008 in the Sacramento region and entire country is that unless there are some significant changes in oversight, transparency and accountability for the bailout funds, there is going to be a wave of bankruptcy filings that has never been seen before. In fact, with the proposed changes in the Bankruptcy Code, providing for a cram down of mortgage debt in Chapter 13, it is likely that the failure of the financial institutions to fulfill the intended purpose of the T.A.R.P. will encourage, if not compel, even more bankruptcy filings, because that’s going to be the best option for individual consumers, but not necessarily the economy as a whole. Congress needs to act to not only sure that funds are made available to consumers and small businesses, but also that the lenders comply with the guidelines. Otherwise, the bailout only benefits the lending community, by allowing them to hoard the cash infusion, without passing it along to the end users, i.e. the consumers and small business owners, as intended. Without transparency and accountability, the only beneficiaries of the bailout are going to be the financial institutions that were largely responsible for the problem in the first place, due to questionable loan practices, lack of oversight and accountability. Does anyone see a pattern here?

Paul R. Bartleson, www.sactobankruptcy.com; www.sacramentobankruptcyblog.com

paulbar THE CURRENT BUZZ accountability, Add new tag, intended objectives, oversight, TARP, transparency

CNN reported today that

“Fed bets $800 billion on “consumers”"

Central bank and Treasury announce a massive plan to jumpstart lending.

The headline should have read “Fed bets $800 Billion on Banks and Investors.”  That’s because upon closer scrutiny of the treasury “plans,” the prominent Features Include:

a)  A plan to make $200 billion available from the Federal Reserve Bank of New York to holders of securities backed by consumer debt, such as credit cards, car loans and student loans.

b) The Treasury Department will allocate $20 billion to back that lending in order to cover any losses that the New York Fed might suffer.

c) In addition, the Federal Reserve, announced it will purchase up to $500 billion in mortgage backed securities that have been backed by Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500) and Ginnie Mae, the three government-sponsored mortgage finance firms set up to promote home ownership. It will also buy another $100 billion in direct debt issued by those firms.

CNN reported that, “Together, the programs from the Federal Reserve and the New York Fed are more than Congress approved in October for a bailout of the nation’s banks and Wall Street firms. The Fed said the money will come from an increase in its reserves — in essence, it is creating new money.”  (Translation: printing new money.)

CNN also reported that “The idea is that by making money available for investors who are interested in buying loans bundled together into securities, it will be easier and more profitable for banks to loan money to consumers and small businesses.”  (Translation: Boost the economy by encouraging consumer spending, not the production of goods and services.)

Keith Hembre, chief economist at First American Funds said, “It’s certainly not directly going to go through to the consumers… I don’t know if anyone can say how much will get through. It certainly shouldn’t hurt. We’ll have to see how much it does help.”

To that end, government officials said that they would not set up the $200 billion consumer lending program until February. So officials couldn’t say if the mere announcement of the program would cause lenders to make more credit available to consumers in time for the holiday shopping season.

Paulson described the $200 billion consumer lending program as a first step, one that could be expanded later to include different kinds of debt, including assets backed by commercial real estate mortgages and business debt.

It’s not a coincidence that the fact that the New York Fed is taking the lead on the consumer lending program and that the man nominated by President-elect Obama to succeed Paulson, New York Fed President Timothy Geithner, played a central role in this new effort.

Call me a cynic, but this plan seems to be little more than a plan to bailout the banks by printing paper money, the same practice that got the banks in trouble in the first place, by lending money not backed by anything real to unworthy borrowers, and then by selling it as an “investment” to the public, in this case, the taxpayer.  The problem is the security isn’t backed by anything real, its all paper money, and what it’s designed to do ultimately is encourage consumer borrowing and spending, not to encourage prudent lending based on the credit of the borrower and value of the security, with the goal of building assets having long term value.

Jim Wasserman in the Sacramento Bee reported that in the wake of 30,000 foreclosures in the Sacramento area and 3,000,000 nationwide, a newly enlightened FHA, Fannie Mae, Freddie Mac and a growing list of lenders are now aiming for a kinder, gentler foreclosure posture and “moving to quick, simple loan rewrites and foreclosure moratoriums instead of cumbersome case-by-case workouts.”  The goal is to reduce the payments to less than 38 percent of the borrowers income.

Notably missing from this noble goal is how exactly they are going to implement the plan, and even more important, what you have to do to qualify for the modification.  Traditionally, lenders have not entertained loan modifications once an NOD has been recorded but the Sacramento Bee.  This plan is targeted at “borrowers who live in their homes, not to investors. The federal proposal in particular targets owners who are at least three payments behind and have not filed for bankruptcy.”  Does that mean you are still eligible if you are three months behind and the lender has filed an NOD?

The bottom line is that proposed funding is designed only to protect the Banks and Investors, not to do anything to protect the consumers or borrowers.  Unless the bailout funds are conditioned on a simple way for borrowers to do loan modifications, the bailout is meaningless to borrowers.  Its also meaningless to borrowers who are three months delinquent on their payments, because they are not going to be able to take advantage of this availability of “new credit” because they simply are not qualified applicants because their credit has already been torched.  So while the bailout might help the banks and private investors of bogus security instruments, its really not going to help the consumers and they not going to get any help from the lenders, they’re going directly where they’ve been headed all along…to the Bankruptcy Court.  Without conditioning the funds on making loan modifications to severely distressed and unqualified borrowers, there doesn’t seem to be much prospect in a significant mitigation of foreclosures.

paulbar THE CURRENT BUZZ The 800 Billion Bank Bailout