Is The Foreclosure Settlement A Shadow Bailout For Broke California

Tyler Durden's picture

Just over a week ago we highlighted the desperate plight of cash-strapped California. With a $3.3bn short-term 'hole', they were looking for cash-management solutions under every rock and hard place they could find. Today we hear that California joins the Obama bank foreclosure settlement enabling $18bn of bank-funded cash (implicitly via Federal Reserve/Government coffers) can flow to the left coast. Los Angeles alone will receive $4bn which while eventually wending its way down to the consumer (to be spent and implicitly spurring further economic activity or perhaps more likely to pay down other debt in this balance sheet recessionary environment), as Bloomberg asks, "Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?" To add to California's 'aid', BofA has become the first bank to sign up for the 'Keep your Home' program where Federal dollars are given to banks to encourage them to reduce mortgage balances on struggling (over-levered and perhaps once greedy) California homeowners. Certainly it is a happy coincidence that perhaps a short-term cash crisis could be band-aided in the Golden State by this well-timed joining of California to the settlement.


Taxpayers Prop Up California House of Cards: Steven Greenhut
By Steven Greenhut - Feb 9, 2012

Why should a taxpayer in Houston or Wichita bail out irresponsible California homeowners, banks and the state’s public employees’ retirement fund?

Yet that’s exactly what the Obama administration is looking to do in its latest effort to shore up a housing market that continues to sag as large percentages of Americans remain underwater in their mortgages.

The administration is pleased that California’s attorney general is now on board with the president’s multibillion-dollar bank settlement after securing tougher measures to benefit individual homeowners.

More good California-based news for President Barack Obama: Bank of America Corp. has become the first large mortgage provider in the Golden State to take part in a federally funded “Keep Your Home” program that would pay banks to reduce the balances that struggling California homeowners owe them.

Unfortunately, the federal mortgage-relief plan and the California foreclosure-aid fund are based on the same deep misunderstanding about the cause of the housing bust that led to many of the problems in the first place -- problems that were particularly pronounced in California because some policies here were worse than elsewhere. Greedy unregulated banks acted like drug pushers by enticing people to take on more debt than they could afford, the Obama administration thinking goes. This view is deeply flawed.

Houses as Casinos

The main debate among states was whether to provide more aid to individual homeowners or to provide greater latitude for states to sue these banks. There’s little discussion in the current negotiations about the role that government lending and land-use policies played in this mess or recollection about how the situation actually unfolded.

After the bubble burst, I recall asking a friend where all the money went as million-dollar tract houses lost half their value. He laughed, and pointed to his new RV -- a reminder of how prevalent it was for Californians to view their quickly appreciating houses as piggy banks. No doubt, predatory lenders engaged in fraudulent practices during the price run-up, but there’s much more to this story than that storyline.

Within months of moving from Ohio to Southern California in 1998, I noticed that home prices were rising rapidly and buyers were getting frenzied. We got out of our lease early, fearful that we would be relegated to permanent-renter status, and bought an aging $200,000 tract house. Within five years, homes like ours were selling for about $650,000.

It seemed as if everyone was refinancing, doing cash-outs, remodeling their places, buying new cars and taking Hawaiian vacations. Water-cooler conversations at work often revolved around discussions of “You’ll never guess what my house is worth.” After the crash, the same people have turned into victims, who apparently had no idea what they were doing and were preyed upon by banks.

Virtually every aspect of the lending process is governed by federal rules, so it’s nonsensical to argue that the banks were unregulated. Our political leaders seem to be forgetting, also, that it was direct government policy to arm-twist banks into giving out loans to unqualified buyers. The Community Reinvestment Act scored banks based on the number of loans they provided to low-income people.

Blame Federal Policy

As John McClaughry wrote in Reason magazine in December, “By 1995 the CRA had become a powerful tool in the hands of ACORN and allied activist organizations,” referring to the Association of Community Organizations for Reform Now. “Unless a bank could silence their protests by making (and passing on to Fannie Mae) the demanded amount of subprime loans, it faced serious difficulties in obtaining regulatory approval for branching, merging, and other corporate decisions.”

This stemmed from an ideology, supported in Republican as well as Democratic circles, that viewed homeownership as the key to a prosperous life. In pricey California, lenders -- and governments, which often offered residents down-payment assistance and low-interest loans -- got ever more creative so that they could help buyers afford median home prices that soared above $600,000 in many urban markets.

Everyone was in on the game. California wants a tougher settlement, the New York Times reported, to help the California Public Employees’ Retirement System recoup some of its losses. Calpers was on the leading edge of this nonsense, as it used borrowed money to build what later became the most upside-down community in the nation -- Mountain House, California, across the Altamont Pass in the Central Valley, where Bay Area residents priced out of their region could afford a home, provided they could tolerate the grinding commute.

If one looks at prices in most places in the Midwest and South during the inflating housing bubble, one will find increased prices and small spikes, but nothing like what happened in California.

California has some of the most extreme land-use controls in the nation. When demand increased, in less-regulated housing markets, builders were able to construct houses in a reasonable amount of time. In California’s coastal communities, it can take years to gain the government approvals necessary to build a new subdivision, so the market couldn’t respond. As a result, the stock of existing homes soared in price and builders went into the hinterlands to build new subdivisions for commuters. This is bad policy on any number of economic and environmental levels.

Jobs Come First

I don’t hear anyone proposing any policy fixes for that problem. Instead, we get proposals to help homeowners refinance their mortgages even though they have no equity in their homes, something that might save them a little money each month, but won’t do anything to solve the real problem of owning a home that is worth less than the mortgage.

The Obama administration has argued that the economy won’t revive until the home market is fixed, but the opposite is true. I own two rental houses in the Central Valley, purchased for about 25 percent of their prices at the height of the market. They receive rents that are about double the total cost of the monthly payments, yet there is an abundance of homes like this available. People aren’t buying them because they don’t have jobs and because the government rules now make it too tough to get the credit to purchase them.

Instead of bailing out bad behavior from banks and consumers, it’s time for policy makers to let the market work -- in lending, land use and economic policy. In discussing the Obama mortgage proposal, USA Today opined this week that the Republican Party’s challenge is “to come up with an alternative that goes beyond simply saying no.” But saying no is exactly what the nation needs now, especially if yes means another bailout for imprudent Californians.

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Silver Bug's picture

ONCE again David Berman over at the Globe and Mail is up to his old tricks again. Hating on Gold and basically calling Gold investors gamblers.

Fukushima Sam's picture

This country is fucked.  Crony capitalism and preferential government handouts now ensure that there is no level playing field for businesses.  The lack of fairly applied rule of law creates major uncertainty in any economic endeavor. The Feds are creating a business environment that is not navigable.

Innovation and entrepreneurial activity will flee the country, with what remains of capital close behind.

Archon7's picture

Re: capital fleeing the country... I tried to explain this to someone who would charitably be described as liberal, and they honestly, sincerely could not understand how capital could flee the country without the government somehow "getting their share" in the process.  They were adamant that the government has a tax structure in place that would capture capital either as it's fleeing, or after it's fled since the Feds can tax people even if they're not living here or doing business here.  This belief startled me a bit, since this was an "educated" person who whines about how jobs are lost by outsourcing offshore, so it didn't make much sense to me that they simply couldn't wrap their mind around the fact that capital follows the jobs.

Xkwisetly Paneful's picture

CALPERS and the rest are still using 8% actuarial assumptions for year over year growth.

Despite being adult aged supposedly professional money managers pointing the fingers at everyone besides themselves as evidenced by the lawsuits et al-who will they point to for still using ridiculous assumptions in their models?

Archon7's picture

8% growth?   Hahahaha...  I was about to say they learned it from the Feds, but even the Feds aren't that optimistic.  8% means they took a double-dose of the blue pill.

smb12321's picture

It's not sexy but the CALPERS mess is a huge story,. Like most funds, it was foolishly set up with expectations of 7-8% annual return (7.75%).    CALPERS website states they have "averaged" 7.5% over 20 years including 7.9% in 2011.  yet the LA Times reports that in 2011 they earned 1.1%  Cal Watch reports that of 2/3/12, CALPERS was $56 billion short of where it should be.  Obviously the zero interest rate for eternity does not bode well for those with fixed assets.

DachsieLady's picture

Just for a few more laughs...

Texas Teacher Retirement System also assumes an 8% growth rate in the fund.  They reprort in November of 2010 that "the fund is expected to remain solvent until 2072".

Common_Cents22's picture

I wonder how many private airplane charters are hauling out cash, diamonds and gold out of the country.

Gromit's picture

No capital controls so long as more comes in than goes out.

Ruffcut's picture

Fuck Cali, they are all things amerika, with hollywood shit like "biggest loser". Nothing like watching two fucking hours of people that can't handle or deal with "their" fat asses.

LawsofPhysics's picture

Already pointed out by several, so yes.  I wonder how those states that are hurting, yet providing power to californians feel about all this?  Would be cool to see Arizona/Nevada shut the fucking power down.  Where's their bailout?

earleflorida's picture

they're not the 8th largest economy in the world

LawsofPhysics's picture

And what is California's Debt again?  LOL, here let me fix that for you "they're not the 8th largest ponzi in the world"-fixed.

Supply lines can really be a bitch in the real world, but more to the point, one insolvent entity bailing out another, yeah, I am sure that will end well.

JLee2027's picture

Apparently it can continue in new and creative ways for years like it has been.


Rainman's picture

Never knew a single liberal who wanted to understand math...never ! They understand taxes though.

earleflorida's picture

if it's any consolation  - i meant they're the 8th largest econ in world 

naught "NOT"

stocktivity's picture

My wife and I did without for many decades, Paid off our mortgage on time every month, put 2 kids through college (ok with some loans on their part but we still struggled) and what do we get???? #%&* politicians in this country!!!! This idiot will get re-elected since republicans are offering no competition. My grandparents and parents generation has to be rolling over in their grave what this country has turned into. They worked so hard to make this country the greatest in the world. Sickening what's happened with Obama, Timmy, and Benny!!!!!

ilovefreedom's picture

They're rolling around in their social security and pensions.

Both are a myth from a time long ago that my generation will never get.

SS will go negative for the first time this year, anywhere from $50 - 250B (depending on unrealistic employment #s and unrealistic trust ROI #s)---- No big deal.

Your kid's kid's will still be paying for your parent's SS.  

lunaticfringe's picture

You people still comment as though your opinion matters. The government doesn't give a fuck what you think. They simply do as they wish. Once you understand that, everything will be fine.

eatthebanksters's picture

California has 55 electoral votes!  If Obama ends up behind in the polls, don't be surprised to see him start literally handing out cash to buy more votes...whenthe population figures out what he's doing, it's going to backfire (like any deal betweenthe EU and Greece)...when he bribes one group the other losers will stick their handsout an say,"Where's mine asshole."

Burr's 2nd Shot's picture

Shadow bailouts are the ones that occur right in front of your eyes, correct?

Troll Magnet's picture

yeah, but no one notices because they're all watching TV.

dontgoforit's picture

no one notices because they feel completely disconnected and ineffectual, kinda like a bad dog with no balls...

dontgoforit's picture

no one notices because they feel completely disconnected and ineffectual, kinda like a bad dog with no balls...

eatthebanksters's picture

Actually they are playing on their ipads purchased with government assistance while eating cheetos and ice cream bought with food stamps while waiting for a phone call on their government paid for cell phones while sitting in their Section 8 rent subsidized apartment waiting for the cable guy to fix their cable TV which they get at below market cost because they are out of a job. Yes really!

GeneMarchbanks's picture

A little QE for votes exchange never hurt anyone. The next shot will have to come from Shalom as MBS mopping is long overdue.

BTW why no mention of this?

Fed moves in lockstep with BoE see overlay.

maxmad's picture

Let Cali go down!!!!!!

Troll Magnet's picture

i live in cali and i agree!  fuck this welfare state!

xela2200's picture

Let it go down? Is there any other option in the long run?

Troll Magnet's picture

debt or earthquake.  one will bite california before the other.  shit.  that reminds me.  i need to switch jobs and move OUT of this fucking hell hole.

Sequitur's picture

I live in California. You know what? FUCK California. Sick of these mother fucking knownothings who spent $750k on overpriced stucco boxes, and now these dopes have the temerity to complain about debt and being underwater on shit property.

If you live in another state and hate California because of this bullshit bailout -- believe me, there are many in California who are with you.

Only a matter of time before this bullshit state needs to once again issue IOUs to businesses and taxpayers because California is bankrupt and can't add the asset and liability sides of the ledger.

Jena's picture

Count me in.  It's the only way to stop the madness.  (Oh yeah, I live in Ca, too.)

kalasend's picture

I live in CA and I'd say to those who bought houses that they weren't meant to able to afford: may God fuck you all

There's no victim here, only whiners who just can't let go of the good years and think house price appreciation is an entitlement. Let them go down. Let them learn what it means to enter the market.

Rearranging Deckchairs's picture

Also live in Cali am sick of the bs. Balancing a budget is simple math not multi variable calculus.

Saw a fox news investigation that made me so mad last night. Some woman had filed 132 claims for hit and run and Medi-cal idiots paid out 250k in claims and then she somehow used the invoices to get her supplementary insurance to pay her 90k in total.

The odds of having 2 hit and runs is tiny. The odds that someone is hit and run 132 times in a couple of years is nil. F-ing morons in Medi-cal couldn't figure it out in the first 25 claims in a row.?

Couldn't find a video posted online. Will share if I find it soon. Will make your blood boil at the level of waste fraud and government incompetence.

Stoploss's picture

Guess who the largest shareholder of face book want's to be?  By all means, GO ALL IN!!

smb12321's picture

But who did you expect to be initial shareholders - Ma & Pa Kettle from Backwoods, KY.  Large firms get an advantage because they provide the seed money and help for start-up businesses.  The concern can always choose to repay the money but almost all agree to either a share of the profits or first dibs on shares.

ghostfaceinvestah's picture

I have to disagree with you on this, TD, most of that cash will never be seen by anyone.  It is almost all "soft credits" - i.e. if the servicer reduces the interest rate on a mortgage from 7% to 4%, the lost interest will be counted against the deal.

Of course, as you pointed out, the borrower WAS paying nothing, so this will actually take money out of pockets.

Plus house prices will decline which will put even more borrowers into distress.

The short term money may help California, but the medium term consequences (i.e. consequences that will become evident by this summer) will definitely not help California or any other state.

Hansel's picture

Seconded, the hard cash component of the settlement earmarked for states is $3.5 billion, and that is to be split by all states.

The remaining $3.5 billion of the $5 billion payment will go to state and federal governments to be used to repay public funds lost as a result of servicer misconduct and to fund housing counselors, legal aid and other similar public programs determined by the state attorneys general. 

YesWeKahn's picture

Don't question too much, you would a terrorist.

Silver Dreamer's picture

I hate to break it to you, but posting on here makes you one by default.  The government can call us terrorists, but history will have us remembered as patriots instead.

LFMayor's picture

Get out and buy some gats if you don't have any yet.  Join us. 

We are Legion. 

We are Mighty.

stirners_ghost's picture

What a stupid ideal.

Call a patriot what he really is: a pretentious ultranationalist. If you think that label connotes libertarian values, you have been seriously mindfucked along with the rest of the plebes.

acompletedouche's picture

Cali could easily issue debt if they wanted to.With yields so low they are still not issuing anything to speak of.If they were in serious trouble they would be issing a crapload right now.

Zero sledge is running out of topics.

acompletedouche's picture

Yes I am,I try my best

I hope the bears are going to be right about something soon.Let's face it,they have been wrong about everything else so far.

slewie the pi-rat's picture

after 13+ weeks and 7 posts, we had hoped you would be doing a bit better, frankly

i guess even the most misguided shithetforbrained moron will stand out a porch for 3 days, too, eh? 

tarsubil's picture

Ha, he down voted you and up voted himself. Take that!

slewie the pi-rat's picture

well, maybe there's hope, then!

LFMayor's picture

LOL at least he knows how to fight dirty and cook the books, too!