When the Obama Administration's plan to mitigate foreclosures came out, it was clear that it would be insufficient to deal with the particular challenges faced in California. Initially, the plan would only modify loans where the amount owed was 105% of the home's true value. Given that home prices have collapsed here, this would have helped almost nobody in California. State lawmakers, in particular the Democratic point person on mortgages and foreclosures Asm. Ted Lieu, went to Washington to lobby for changes. And today, faced with a sluggish mortgage rescue program attracting few lenders or homeowners, the Administration expanded the plan.
The Obama administration said Tuesday it is expanding its foreclosure prevention program to cover second mortgages and to direct more troubled borrowers to the Hope for Homeowners program.
Under the administration's new program, the interest rate on second mortgages will be reduced to 1% on loans where payments cover interest and principal and to 2% for interest-only loans. The government will subsidize the rate reduction, with the money going to the mortgage investor [...]
Also Tuesday, the administration said it is now requiring servicers to offer troubled borrowers access to Hope for Homeowners as a modification option if they qualify.
Expanding Hope for Homeowners would address one of the major holes in the original Obama foreclosure prevention plan. It helps homeowners whose homes are now worth far less than their mortgages.
Servicers had balked at participating in the Hope program because it required they reduce the mortgage principal balance to 90% of a home's current value.
Hope for Homeowners, which began in October, is being revamped in Congress. Servicers would have to reduce the principal to 93% of the home's value. The change would also reduce the program's high fees, which turned off many troubled borrowers.
Loan servicers get a fair bit of cash incentives for participating in the program, which I don't totally support, but if we have to bribe lenders in order to keep people in their homes, that makes more sense than spending the same amount of money on the fallout from a foreclosure. And lenders do take a haircut in the Hope for Homeowners program, the first loss to my knowledge that lenders have been forced to take.
In some respects the battle over the May 19 propositions is overblown. It's important to kill the spending cap in Prop 1A, and Props 1C-1E represent some dangerous one-time budget solutions that will probably cause more problems than they solve.
But none of these propositions will change the fact that on May 20, California will again be facing a multibillion dollar budget shortfall. And in turn that raises the specter of default. California cannot go "bankrupt", but we can find ourselves without enough money to pay those we owe. The state flirted with that possibility in February, and although John Chiang is confident that we will have enough money to last through the summer, the ongoing collapse of the global economy and its kneecapping of our state's revenue have already caused our bond ratings to sink to the lowest in the nation.
We're only able to keep the lights on through continued borrowing, and that has been helped by federal hints and proposals to guarantee some or all of our debt. But that may not be enough to resolve growing concerns among bond buyers about California debt, and as a result a high-stakes standoff appears to be developing, as Felix Salmon explains:
The more interesting response was, basically, "my moral hazard trumps your moral hazard". In other words, it's true that because California has insured itself against default, there's moral hazard there: whenever anybody is insured against anything, the likelihood of that thing happening goes up. But at the same time, there's a bigger moral hazard at play: the federal government will never let California default, it's too big to fail. And so when push comes to shove, California will get a federal bailout before it defaults on its bondholders.
I suspect, however, that the moral hazard seniority works the other way around: the fact that California's bondholders are insured means that it's not too big to fail, and that in fact a payment default by the state would have very little in the way of in-state systemic consequences. (I have no idea what it might do to the monolines, but if they can't cope with a single credit defaulting, they really shouldn't be in the business they're in.) The federal government might step in to mediate the negotiations between the monolines and the state, but it's not even obvious why it would want to do that.
The basic issue here is what exactly would happen if California defaulted - who blinks first, who has to accept getting less than they are owed. As I see it the possible outcomes look like this, in order of increasing regressivity:
Federal government steps in to provide operating capital to California in order to both pay what the bondholders are owed and prevent the state from having to make crippling cuts. This is essentially what has been done with the big banks, and a solid argument could be made for doing it with CA - if we have to close schools or hospitals, the economic downturn WILL become a Depression.
Federal government makes the bondholders whole but demands California implement crippling budget cuts in order to repay the feds for the cost of helping insure the bondholders. This could be ameliorated with some form of cramming down the bondholders, but folks like you and I would get crammed down even more.
The feds take the Gerald Ford route and tell California "drop dead" - CA under law cannot fail to pay the bondholders, so we're on our own. We could try and negotiate with them, or pay outright. This basically turns California into a Latin American IMF client, having to cramdown working people so the bondholders get paid.
It's worth noting just how important that last point is. As David Harvey explained in A Brief History of Neoliberalism, the 1975 New York City default was a major turning point in economic history. Ford's Nixonian advisers argued that NYC shouldn't be bailed out in order to hit liberals and unions. As a result NYC had to negotiate with the bondholders and was forced to make massive spending cuts, reversing 40 years of policy of increasing services to help working people in the city.
Once the NYC strategy was rolled out and shown to be a success, it became the seed of the IMF's "Washington Consensus" moves in the 1980s and 1990s to impose right-wing economics on nations that needed their aid. NYC was thus one of the earliest victims of the shock doctrine - California may well be next.
Someone is going to have to pay more to solve this mess. The question before Californians is whether the low- and middle-income will be the ones to pay, as we have been in the recent budget deals, as we have been in Asia and Africa and Latin America - or whether the federal government will do the right thing and protect our public services and those who depend on them.
Which is why the Zombie Death Cult is so insistent on forcing the state to go over a cliff. They're salivating at the chance to shock doctrine this state, always have been.
Democratic legislative leaders are in Washington today arguing for increased stimulus money for California. I've been arguing that this is required for some time, and hopefully it will be done in such a way that a) it can be applied to the General Fund deficit (so far Arnold has not asked for budget relief in that way) and b) it can be used without up-front money that will be matched, because the cash crisis limits our ability to do that.
However, there is something else that the Obama Administration can do right away to help the bottom line of the state and its citizens, and that is deal with the crisis in the housing market here. It's no secret that California is one of the hardest-hit states by foreclosures; in Stanislaus County, for example, 9 percent of all houses and condos in the county have been foreclosed upon, a staggering figure. That's almost $4 billion dollars worth of foreclosures in Stanislaus alone. In larger counties like San Bernardino and Riverside, you can see how this foreclosure crisis affects new housing starts (there are a glut of cheaper foreclosed homes on the market) and thusly unemployment figures.
Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California's economic powerhouse, accounting for more than a fifth of the state's new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5 percent jobless rate in the two counties matches Detroit's as the highest of any major metropolitan area in the U.S.
Although there was a surge in construction employment in the U.S., and about a 50% increase in California (as a percent of total employment), construction employment doubled (as a percent of total employment) in the Inland Empire [...]
With the housing bust, the percent construction employment has declined sharply and the unemployment rate has risen to almost 10%. Is it any surprise that jobless rate in the Inland Empire matches Detroit's as the highest of any major metropolitan area in the U.S.?
Nobody is calling on the federal government to prop up a sick housing market that will not see a broad recovery for a while. But foreclosures have a disruptive effect on the greater economy. They hurt property values, they hurt banks, and they hurt employment. The crisis is only slated to grow if nothing is done, with homeowners of every income class affected. And so foreclosure aid would be a major boost to California, and it can be done both quickly and effectively. By pledging that $100 billion from the TARP program will go to limit foreclosures, Obama has already begun this effort. Ted Lieu thinks that the Obama Administration understands the nature of the problem. (over)
