Over the past six months, much was made of the "emergency" need to rescue the nation's largest banks, lest the country enter a downward economic spiral that would have catastrophic consequences for ordinary Americans.
Towards that end the Administration has thrown nearly $1 Trillion Dollars as a "lifeline" to banks. Initially the explanation given was that the money would offset "toxic assets", those bad loans that were stuck in the pipeline with no investors due to their default status or the nature of the loan product by which they had been originated. By doing so, we were told, these banks would be able to free up money to begin lending again which would help "Main Street" which was desperately seeking refinances and other loan products to allow new home sales to continue to fuel the economy, and existing home mortgages to be adjusted to free up consumer capital for spending.
Furthermore, "Main Street" was promised that because the banks were now being "highly regulated" and supervised by the Administration's watchdogs, that loan modifications would increase using new standards established by the Treasury Department. A nice website was created to give "hope" to homeowners who want to stay in their homes but who have been impacted by rate changes and depressed home values, as well as overall economic stresses. The idea, touted by President Obama himself, was that banks would now modify any problem loan of a primary homeowner, following Administration guidelines, allowing "Main Streeters" to remain in their homes rather than face foreclosure.
Now for the reality. By throwing large sums of money at the banks, the Administration succeeded in obtaining the largest measure of government control over the financial industry since the Great Depression. This has been more of a political victory for Democrats rather than a carefully planned solution to America's Main Street mortgage problems.
Rather than open up lending policies, creating more loan products, and establishing helpful and conciliatory loan modification procedures, banks have reacted in an opposite manner. Lending guidelines are so stringent thousands are being denied loans who would have qualified before the bank crisis. Loan underwriting guidelines are not uniform, change weekly if not daily, and are frustrating loan originators who cannot seem to do anything to satisfy a bank that their client is qualified for a mortgage. Loan modifications are even worse. Although the President recently boasted that 9,000 loans were modified in March 2009, that number represents a drop in the bucket of the tens of thousands of borrowers seeking relief at this time. In reality those who are trying to assist homeowners with modifications are discovering that banks are stalling making modification decisions, or simply sitting on requests for months, despite the fact that requests are meeting the Administrations recommended guidelines for a modification.
Why would bank act this way? Because the consequence of not forcing the banks to clean up their own mess, through private investment and internal restructuring, which would have also forced them to make deals with defaulting homeowners, has been to create a "welfare state" mentality on Wall Street. As long as the federal government is willing to cover their losses, with what appears to be a blank check policy, why should they care about making loans with any risk whatsoever, and why negotiate bad debt when at the end of the day their losses are covered?
What we are witnessing, to our detriment, is the psychology of socialism. When the government can be relied upon to take care of all problems, then competition, self-regulation, incentive to grow markets and cater business to consumers is wiped away. The slippery slope of these policies, which are affecting our largest industries (financial, automobile, soon health care) will result in greater inefficiencies and greater financial burdens on taxpayers.
For homeowners, and indeed for all Americans, what began as a promise of "hope" appears now to be an out of control train ride to disaster right in the middle of Main Street.
Copyrighted 2009, Andrew Liput. Andrew Liput is managing attorney at Liput Law Offices PC in NJ and is a consultant to the banking industry on legal and compliance issues. His website is at www.liputgroup.com