Bailout

~ susie

Everybody’s talking about Neil Barofsky’s new book, and it sounds like a real doozy. Can’t wait to read it!

Barofsky does all he can to take an inventory of the aggregate bailouts and assess their total cost, pissing off Barney Frank when he adds all the various “commitments” and “guarantees” together and arrives at the staggering sum of $23 trillion. But even that number misses some critical costs to the public, as he finally realizes while listening to Geithner defend the abject failure of Treasury’s mortgage modification initiative to help homeowners:

In defense of the program, Geithner finally blurted out, “We estimate that they can handle ten million foreclosures, over time,” referring to the banks. “This program will help foam the runway for them.”


A lightbulb went on for me. Elizabeth had been challenging Geithner on how the program was going to help the home owners, and he had responded by citing how much it would help the banks. Geithner apparently looked at HAMP as an aid to the banks, keeping the full flush of foreclosures form hitting the financial system all at the same time. Though they could handle up to “ten million foreclosures” over time, any more than that, or if the foreclosures were too concentrated, and the losses that the banks might suffer on their first and second mortgages could push them into insolvency, requiring yet another round of TARP bailouts. So HAMP would “foam the runway” by stretching out the foreclosures, giving the banks more time to absorb the losses while the other parts of the bailouts juiced bank profits that could then fill the capital holes created by housing losses.


In other words, Geithner did not have the remotest intention of avoiding foreclosures; quite the contrary. Because foreclosures—and delinquencies, and modifications, and just about any kind of mortgage that isn’t getting paid on time as usual—are such massive profit center for banks due to the gargantuan fees servicers reap off them, he fully intended to do whatever it took to keep the foreclosure boom booming!

All of a sudden, bits and pieces of conversations that I had had began to fall into place. Allison had used the phrase “helping them earn their way out of this” during part of a more extended conversation that summer about his worry that the banks could still collapse. HAMP was not separate from the bank bailouts; it was an essential part of them. From that perspective, it didn’t matter if the modifications failed after a year or so of trial payments or if struggling borrowers placed into doomed trial modifications ended up far worse off, as long as the banks were able to stretch out their plan until the profits returned.


Geithner’s revelation (he apparently similarly told bloggers in 2010 during an off-the-record conversation that HAMP had succeeded in extending out the foreclosure crisis) also helped explain one of the odder aspects of HAMP. For many borrowers, the modifications weren’t really all that “permanent.” Instead, after five years, the interest rate would be permitted to rise, much like the resetting adjustable rate mortgages of the financial crisis. This meant that within a handful of years after the “permanent” period of HAMP expired, the average borrower whose interest rate had been reduced to the minimum rate during his modification would eventually see his monthly payments rise by 23 percent,possibly putting him once again at risk for a default. Though that policy might undermine the long-term success of the program from the borrowers’ perspective, it made perfect sense if an immediate “foaming of the runway” for the banks was Treasury’s primary goal. For the banks, five years was an eternity.