Americans Lost Over $2 Trillion in Retirement Assets and $2 Trillion in Home Values

Banks Bungle Foreclosures, But We’ll Suffer

Americans have recently lost over $2 trillion in their retirement portfolios and $2 trillion in the value of their homes. It is no coincidence that loose lending standards started around 2001 and a new bankruptcy law went into effect in 2005. The easy money via loose lending was necessary to create the housing bubble from 2002-2007, and the new bankruptcy law makes it much harder for households to get out from under their consumer debt and is contributing to the rise in foreclosures across the country. The financial oligarchs have engineered a global economic collapse to usher in a global currency and global government under their control.

October 12, 2010

MarketWatch - There’s a joke I like to make to rookies before we go live on our News Hub shows. After the new participant counts to 10 for an audio check, I usually say, “You have passed the exam to become a mortgage banker.” Watch the News Hub. It turns out that’s closer to the truth than most of us ever realized.

Judging by the failure of big banks to get their foreclosures in order, someone who can count to 10 might be overqualified.

What other conclusion can one come to after the wave of moratoriums placed by major banks on their foreclosure proceedings? GMAC, J.P. Morgan Chase & Co. and PNC Financial Group Inc. have halted proceedings in 23 states. Bank of America Corp., living up to its desire to be a national bank, has stopped proceedings in all 50 states.

It’s a humiliating, time-consuming and costly mistake by the banks, and a kind of karmic justice. But their bungling is going to cost us and our economy, as the housing market and people desperate to start anew try to recover.

At issue is “robo-signing,” where bankers signed off on mortgage documents saying they’ve read and understand them — as many as 18,000 a month. Read story on the “robo-signer” controversy in the banking industry.

Sorry, but as judges have pointed out, no one can read a single mortgage document in a day, much less hundreds of them. Now, the banks have to go back and read those tomes of legal gobbledygook and try to make sense of it.

“We haven’t found any errors,” said Brian Moynihan, Bank of America’s president and chief executive. “It’s technical issues and we’re doing our homework.” See story on B. of A.’s decision to halt foreclosures.

‘Unrealistic gains’

Some say the foreclosure halt will be good for housing. Cheap homes won’t be flooding the market. Also, borrowers will be able to save money by staying in their homes as the process drags out, and other borrowers may be able to get current with added time.

But that’s a short-term view. For most borrowers, foreclosure is going to come eventually. Chances are, if a homeowner was unable to rework a loan, they’re not going to be able to do that now. Those homes are going to hit the market eventually, putting more pressure on home prices.

The reality is most Americans who bought during the last decade have an unhealthy amount of personal wealth tied up in their homes. A study by the Congressional Budget Office in 2007 found that rising home prices gave consumers confidence to spend even though household income was flat or falling.

The CBO’s report ominously warned:

“A worse outcome for consumer spending is possible if housing prices fall significantly or if some current spending is based on unrealistically optimistic expectations of future gains in home prices.”

At the time, Americans were tapping into their homes like personal piggy banks and using home-equity lines like savings accounts. Borrowing from home values represented 10% of disposable income in 2005, compared with just 2% in 1995, the CBO said. Read the Congressional Budget Office’s report.

Three years after the report came out, it’s safe to say that the CBO understated the effect. Having lost wealth via their housing, Americans are spending less and saving more. The savings rate was 5.8% in August, up from just 1% five years ago, according to the Bureau of Economic Analysis.

In other words, there couldn’t be a worse time for bank blundering to gum up the housing market. Read WSJ story on foreclosure woes on economy.

Mortgage mess

But it shouldn’t surprise us. During the last 15 years, mortgages were put on steroids. Subprime, pay-go, ARMs and other easy-money loans washed over the country. Many borrowers never understood what they were getting into, even when mortgages were relatively simple.

“Consumers are often not able to use the available information to their advantage,” a Harvard study found in 1999. “In many cases, they do not understand financial transactions, or lack confidence about financial issues. Consumers are also likely to underestimate the risks associated with mortgage loans, despite the information they receive from the lender.” Read the Harvard University study on predatory lending.

The main culprit? The confusing, legal mumbo jumbo that home buyers are presented with when they buy a home. It may not be “predatory lending,” but it ain’t easy either.

Given that foreclosure is a costly process — and it could be very costly for banks should they be fined $25,000 for every mortgage using fraudulent paperwork, as many state attorneys general are recommending — banks need to consider alternatives.

One possibility suggested by Wharton Business School’s Alex Edmans would be to offer a bonus to borrowers who repay their loans. Another, proposed by Columbia University’s business school dean R. Glenn Hubbard and vice dean Chris Mayer, would be to offer a massive government-backed streamlined refinancing program. Read the Hubbard-Mayer proposal.

Homeowners should learn their lesson too. They should quit using their homes as credit cards to buy flat-screen TVs and trips to Disney World.

Ultimately, the new Consumer Financial Protection Bureau should simplify the mortgage process. Everyone should know what they’re getting into.

Easy as 1-2-3 would be nice, but for a start, let’s see if we can get everyone to count to 10.