Housing Crisis: “Project Lifeline” Dead On Arrival

For homeowners facing rising interest rates, higher payments, and dwindling or nonexistent equity, the roll out of “Project Lifeline” seems little more than a “dying by inches” strategy. The plan’s 30-day freeze on foreclosures seems to be the equivalent of offering a band-aid to a patient in need of an organ transplant.

Project Lifeline is premised on the notion that granting homeowners a 30 day reprieve will lead them to contact their lender and provide some new financial information that will magically alter their grave situation such that the lender will forego the completion of foreclosure proceedings.

Feb. 12 (Bloomberg) — Bank of America Corp., Citigroup Inc. and four other U.S. lenders agreed with Treasury Secretary Henry Paulson to take new steps to help borrowers in danger of foreclosure stay in their homes.

Paulson and the banks offered a 30-day freeze on some foreclosures while loan modifications are considered. The Treasury chief, with Housing and Urban Development Secretary Alphonso Jackson, said today at a news conference in Washington that “Project Lifeline” would help stabilize communities disrupted by mortgage defaults.

“If someone is willing to make a call, to reach out, there’s a chance they can save their home,” Paulson said. “As our economy works through this difficult period, we will look for additional opportunities to try to avoid preventable foreclosures.”

In a statement, the banks said the program would start with a letter to homeowners more than 90 days delinquent on payments that lays out procedures for them to “pause” the foreclosure process. The homeowner has 10 days to respond to the notice and give additional financial information so the lender is able to weigh new payment options.

Having worked in commercial real estate through the Savings & Loan scandal of the late 80’s, my cynicism was piqued by the announcement of this plan. In truth, I suspect most delinquent homeowners with some mathematical potential to save their homes have already contacted their lender in the hopes of renegotiating. Those homeowners who haven’t spoken to their lender are apt to already know they lack the financial means to forestall foreclosure or to withstand the terms of a restructure that may provide some minimal relief. Further, most lenders already know what I’ve just stated.

So the unasked question remains, “What is this plan really intended to achieve?” I’ll posit two answers. First, the lenders participating in this plan are themselves in dire straits and the Bush administration, the Federal Reserve, the U.S. Treasury, and the Department of Housing and Urban Development know as much. Given the desire to avoid expanding recessionary pressures, it behooves the government and these lenders to slow the flow of home foreclosures. More bad news on the precipice of a recession simply accelerates the speed with which the economy falls further into recession. Thus, the plan hopes to blunt the bad news.

Secondarily, banking disclosure provisions require lenders to account for bad loans and to maintain acceptable loss ratios to remain viable. Should these huge institutions fall short on these formulas, an injection of additional capital is frequently required. Absent the ability to meet these capital calls, these lenders face insolvency and regulatory intervention…the very events that preceded the S&L fiasco and the subsequent creation of the Resolution Trust Corporation (RTC)…the entity charged with the management and administration of failed S&L’s, the bad loans they held, and the liquidation of the properties associated with those loans.

Given the huge amount of capital that has already been injected to stabilize the industry, I suspect the powers that be fear the impact of announcing even more stopgap capital infusions. If my hypothesis is correct, then my characterization of the situation as “death by inches” is certainly appropriate.

There’s no doubt the governments’ hands-off approach to regulatory oversight clearly enabled the industry’s careless and shortsighted practices. Truth be told, the government and the lending industry subsequently underestimated (or chose to bury their heads in the sand) the magnitude of the crisis. Too little has been done too late to solve the problems or to quell the growing consumer fears that hasten the trajectory of the recessionary spiral. Further half-measures to right the ship will only prolong the inevitable and heighten consumer mistrust.

A look into the pipeline simply indicates more bad news is on the way.

Federal Reserve officials project about 2 million homeowners face higher mortgage rates over the next two years as their loans reset higher. Economists at the Federal Deposit Insurance Corp. estimate foreclosures this year will be about 1 million more than average, a level that FDIC Chairman Sheila Bair has said “is just too high.” They average about 600,000 in a typical year.

“This [Project Lifeline] is good, but we’ve seen this over and over again,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending in Washington. “The fact that they keep having to roll out subsequent rescue plans every few weeks underscores that each plan is inadequate.”

I’ll close with an observation relative to the 2008 election. George Bush’s pattern of ignoring the economic warnings and the opinions of his underlings…coupled with his new focus upon bolstering his “fiscal conservative” legacy…may serve to enhance the Democrats’ argument that voters can ill-afford the continuance of a Republican in the White House.

Each time the President asserts that the economy is sound and will soon weather the storm…and then has to backpedal…he risks placing his fellow Republicans in the unenviable position of asking voters to send them back to Washington smack-dab in the middle of an economic shitstorm.

Not only is Project Lifeline apt to be dead on arrival, the intransigent leader of the GOP may be unknowingly orchestrating his party’s death march…one stubborn George W. Bush inch at a time.

Cross-posted at Thought Theater

17 Responses to “Housing Crisis: “Project Lifeline” Dead On Arrival”

  1. steve Says:

    Buying a home is a serious financial event… We blame the banks, the fed… Bush but not the person that didn’t read the print in all those documents you sign at closing. Quite clearly you are told by the title company (at least here in California, where the bulk of those foreclosures are) that a rate is fixed and it will reset higher, up X amount of points a year, caps, etc.

    Being from real estate Dan, I am surprised you blame lack of regulation…

  2. Dusty Says:

    The banks knew these folks were shitty investments and in many cases bolstered the customer’s income to pass muster.. but they did it anyway Steve..how are they not culpable in this mess?

    The investors who bought these loans also knew they were subprime paper..and bought it anyway.

    Yes, the idiots who signed on the bottom line are guilty of being stupid with a capital S..but the criminal part was on the banks and the investors.

    Why in the blue hell do you think Citibank wrote off between 18-24 BILLION bucks worth of this crap? Merril Lynch between 10-27 BILLION? These are supposed to be savvy investors and business men..lol..I say they were greedy bastards and nothing more.

    The FBI however thinks its friggin criminal:
    http://www.news.com.au/dailytelegraph/story/0,22049,23131243-5001028,00.html

    SO yes Steve..lack of regulation and/or oversight is part of the problem. The banks and lenders didn’t give a rat’s ass..because they sold the loans..they weren’t going to be holding the bag when the shit hit the fan.

  3. The Sirens Chronicles » Dizzy’s Ten Post Round-Up Says:

    […] be the equivalent of offering a band-aid to a patient in need of an organ transplant”…. Housing Crisis: “Project Lifeline” Dead On Arrival–Bring It […]

  4. Jet Netwal Says:

    Sigh. Steve, lenders are in the business of risk management. If an applicant’s income and debt ratio are whack, the lender has ZERO obligation to complete the transaction. They say no. Happens all the time. Please stop trying to foist the blame of all these potentially criminally structured loans onto the borrowers. They were not the decision makers on whether or not these loans were made. These loans were written for profit and passed around in an insane game of financial hot potato.

    They forgot the music stops. I’m with Dusty. Greed kills.

  5. Daniel DiRito Says:

    Steve,

    I don’t see where I’ve said homeowners have no responsibility…but having been in real estate for many years, I know how little most people actually know about the system and how much they rely on “the experts”. Unfortunately, most of those “experts” are trying to make a boatload of coin. That includes the realtor, the broker, the appraiser, the mortgage broker, and many others involved in the sale of real property. We’re simply witnessing the excesses that these people were allowed to perpetrate due to insufficient oversight.

    If there aren’t proper regulations and oversight, human nature is allowed to run rampant. That human nature applies to everyone involved…but in this particular situation, the buyers often place their trust in the system and those who have the authority to administer it…and they do so with the belief that the government is monitoring the process to prevent inappropriate activity.

    If a lending agent assures a buyer that the interest rates haven’t gone up for many years and that there is no reason to fear they will…if a lender offering 125% loans tells a buyer not to worry, home appreciation will soon put the owner in a position of positive equity…those comments are apt to influence the buyers decision.

    If the products these agents are pushing aren’t based upon sound financial principles, the buyer has every right to expect that they wouldn’t be offered due to proper government regulation. The fact that 125% loans were ever allowed is a joke…and to argue that the government has no culpability is absurd. Isn’t this type of loan the equivalent of believing money grows on trees? If our government can’t figure this out, why should we trust them with any of our nation’s finances?

    Let me give you an example to make my point. Why do you think 7-11 has a clerk in each of their stores? They have one because they know that if their stores were based upon the honor system, they would never make a dime and people would walk out with whatever they could carry. The same oversight is required with regards to lending…unless you want the kind of situation we now face. Therefore, anyone who believes we got to this point by having a responsible clerk at the counter is either too naive to know better or too stubborn to face the facts.

    Regards,

    Daniel

  6. manapp99 Says:

    Daniel, what kind of regulations would you suggest that would prevent this from occuring again?

  7. Daniel DiRito Says:

    manapp99,

    Well I certainly wouldn’t allow lenders to write mortgages that exceed the value of the underlying real estate. I would also tighten the access to loans by requiring better scrutiny of credit worthiness. The loosening of credit criteria fueled the sub-prime fiasco. Also, debt ratios need to be tightened and mortgage payments should be a lesser percentage of gross income.

    All of this happened because it made money for those who sold the products. Worse yet, they turned around and packaged and sold these loans on the same basis by which stocks are hyped and traded. 15 years ago, it was rare for one’s mortgage holder to change on a regular basis. Recently, borrowers might see their mortgage sold several times in the course of a few years. That activity was all about speculative trading and far removed from sound equity analysis.

    Further, I wasn’t in favor of the Federal Reserve creating artificially low interest rates because it was evident they couldn’t be sustained. I think the Federal Reserve needs to be apolitical and I’m of the opinion that it has become another tool in a president’s arsenal…and it is thus being used to win political points at the expense of sound economic policy.

    I’m not saying the President makes the decisions for the Federal Reserve, but the appointment process has muddled the use of prudent criteria for too many government positions. The whole wink-wink, you scratch my back and I’ll scratch yours needs to be eliminated. The policing of arms length transactions and the prevention of conflicts of interest isn’t being upheld…both within the government sector as well as within the industries monitored by the government.

    Lenders and brokers will use every inch of the rope they are allowed…and unless they are reigned in, they will game the system. The fact that Congress is filled with lawyers has turned the legislative process and government oversight into a maize of loopholes and smoke and mirrors.

    If you want to understand the degree to which the government is bought and sold, look no further than the number of elected officials leaving office in order to avoid the new guidelines requiring more time between the point at which an elected official leaves office and becomes a lobbyist. The last time I looked, I think nearly thirty Republicans have opted against running for reelection. I also think that number is approaching an all time record.

    I could go on and on. Truth be told, Washington is broke. Cash is king and ethics is a dirty word. Capitalism is a good system so long as its participants show restraint and opportunity is available to all. Once the system gets stacked and corrupted, it feeds upon itself. I suspect we are fast approaching the feeding frenzy period and unless the system is restored to balance, we’re on course to witness the end game of greed and graft. At some point the weight of the inequity will cause the system to collapse upon itself.

    The free for all…every man and woman for themselves mentality is gaining steam. Whether we’ll reconsider is the 64,000 dollar question…unless, of course, you adjust for inflation. Game on!

    Regards,

    Daniel

  8. mr bigstuff Says:

    all the talk about what caused the foreclosure problems in this country forgets the main reason for this mess. HIGH FUCKING GAS PRICES. how many homes were foreclosed on when gas was $1.19/gallon before that damn fool w invaded iraq? then ask yourself, how many homes were foreclosed on when gas was $3.29/gallon? it’s so very fucking simple.

  9. Dusty Says:

    Man, thats a stretch..gas prices created the subprime mess? Care to expand on that theory?

  10. Dusty Says:

    Since MrBigggie isn’t going to expound on his theory..let me put in a link to someone that knows the how’s and why’s of this debacle:

    http://www.washingtonindependent.com/view/part-two-the-united

    The current credit and financial crisis, unusually, is almost entirely the creation of the financial services industry.

    Financial services now dominates American business to an astonishing degree. Though the industry accounted for only about 16 percent of corporate output in 2007, it racked up more than 40 percent of corporate profits. From 2000 through mid-2007, total American stock market value grew about 6 percent, while the value of financial services stocks grew by 78 percent. And though total corporate profits roughly doubled, business investment was almost flat.

    Its a good read, and I highly recommend it. :)

  11. manapp99 Says:

    Daniel:

    “Well I certainly wouldn’t allow lenders to write mortgages that exceed the value of the underlying real estate. I would also tighten the access to loans by requiring better scrutiny of credit worthiness. The loosening of credit criteria fueled the sub-prime fiasco. Also, debt ratios need to be tightened and mortgage payments should be a lesser percentage of gross income. ”

    So specifically as to what the government could have done regulation wise to have prevented this crises would you:

    Regulate that the loan amount cannot exceed the appraised value? I bought my business in 95 and my first and only home in 96. I bought a warehouse for the business in 98. Each time I had to have the property appraised and was told that I could not get a loan for more than the appraised value so was unaware of folks getting a loan for more than value. I am aware of jumbo and super jumbo loans as properties here are commonly over the fannie may and freddie mac limits imposed for conforming loans. But still the appraised value must be there and even then loans are often written for less than appraised value. If the home loses value immediatly after the loan is made I don’t see how you can predict that with any certainty. However I would not be adverse to a regulation saying that the loan value must be equal to or less than appraised value. If that is what you are suggesting.

    Regulate better scrutiny of credit? How exactly would you regulate this? Would it be based on FICO scores or loan value to income less expense? This is o.k. but it would exclude many who have to used stated income because they are self employed. I have always had to go this route even with excellent credit due to being self employed. The first loan I got in 96 for my home I had to get PMI (mortgage insurance) due to the short time I had owned the business. I also pay a slightly higher interest rate due to stated income loans.

    Would you regulate the actions of the feds as to credit rates? If so, who would decide? Congress?

    Would you put a cap on income vs house note like say 15% or 25% of income? This would be a problem for the self employed who’s income is realized in many forms such as items expensed to business but are really dollars spent that are beneficial to the household, therefore income. Like gas for vehicles. If you think that all expensed vehicle use is stricly business your nuts. This benefit will not show up as income. Health insurance premiums are another that can be expensed to the business but mean less coming out of the family budget and therefore is income. However it does not show up that way on tax returns.

    I am afraid that if you regulate to harshly you will exclude many on the bubble who can and will pay their loans and will not be able to own due to the regulations.

    Defaut rates for subprime according to this article is 24% which is huge, but also means that 76% who got a sub prime have paid. I do not want to limit the opportunities of people like them that have a shaky credit past but have turned it around and want to own.

    Defaults for all loans is at 7.3%, which is high but reflects the 92.7% of the rest of us who pay on time.

    I fear an over reaction to this which will put home ownership out of reach for all but the most credit worthy.

    As far as the selling of loans go, I do not know about 15 years ago but I do know that 12 years ago my note was sold quickly after we closed each one I have had since (with the refinances we did to get out of PMI and get lower rates) has been sold.

    I would be curious to see a SPECIFIC set of regulations that would have prevented the crises we have now and what should be regulated going forward. I am not against all regulation I just suggest caution so that we do not get so draconian that only a few can be allowed to own.

  12. Dusty Says:

    From a Bloomberg article:
    http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aC9LdDcv4.Wc
    A five-year housing boom that ended a year ago was fueled in part by the growth of mortgage products marketed to borrowers with poor credit histories. Now, as defaults on subprime loans surge to a seven-year high, more than 20 lenders have closed or sought buyers since the start of 2006. The survivors are raising their lending standards.

    “We estimate that the effect of looser lending standards could translate into another 533,000 homes coming onto the market as borrowers default — an unwelcome phenomenon given the existing supply surplus,” Sarah Rowin and Frank Lee of bond research firm CreditSights wrote in a March 1 report.

    The glut of homes on the market has led potential buyers to hold off purchases on expectations that prices will fall. Tighter lending standards may also hurt the housing recovery as people who could previously qualify for a mortgage can’t get one now.

    About 10 percent of subprime loans were more than 60 days delinquent or in foreclosure as of Dec. 31, up from 5.4 percent in May 2005, according to data compiled by Friedman Billings Ramsey Group Inc. of Arlington, Virginia. The rate was the highest in seven years, according to the report.

  13. manapp99 Says:

    From a NYT’s article:

    http://www.nytimes.com/2008/02/12/business/12credit.html

    An example of the spreading credit crisis is seen in Don Doyle, a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition.

    Mr. Doyle, 52, is now worried that he will have to file for bankruptcy, because he cannot afford to make the higher variable payments on his mortgage, and he cannot sell his home for more than his $740,000 mortgage.

    “The whole plan was to get out” before his rate reset, he said. “Now I am caught. I can’t sell my house. I’m having a hard time refinancing. I’ve avoided bankruptcy for months trying to pull this out of my savings.”

    Do you think we should have not allowed Mr. Doyle to borrow against his house? Should we bail him out?
    He gambled and lost.

    Also this:

    About 7.1 percent of auto loans were in trouble, up from 6.1 percent.

    Should we regulate auto loans?

    My question is what is the role of government in regulating consumer borrowing? Perhaps we should not allow a person to own more than one credit card and have limits set to $1000. Maybe we should not allow a family of four to have more than one car loan at a time?

  14. mr bigstuff Says:

    dusty,
    the vast majority of the subprime loans were underwritten at a 50-55% debt to gross monthly income ratio. try to follow this math. $3000 in gross monthly income leaves approx. $1500 to cover house payment, taxes, insurance and all other debts reported on the credit report. this leaves around $500-$600 for everything else, now, at $1.19/ gallon for gasoline most people were spending $100/month to travel to and fro daily. at $3.29/gallon that expense goes to $300/ month. this $200 loss in spending power can be absorbed for a few months, but after a year or so it’s bye bye house. before you blame the subprime industry for allowing 50-55% debt ratios, understand that a conventional conforming loan will allow a 65% debt ratio with good enough credit. how is this so hard for you to understand? is your calculator broken? the people who bought homes with these subprime loans deserved to be homeowners. what they didn’t deserve was to be betrayed by that goddamned fool w who destroyed this economy by invading iraq and made a purchase of anything of substantial value impossible for those with incomes below $7000/month. the housing industry and many americans ability to buy and maintain homes are not the only things decimated by the sordid alleged administration of that damn fool w. go to a car lot and ask them how sales have been since gas hit $3.00/gallon. how much for a gallon of milk? how bout that pizza delivered to your house. the boating industry sure is kicking ass under w’s alleged administration. every business in america and every american is suffering because of that damn fool w’s idiotic policies. how fucking hard was it in 1999 after hearing that fool w try unsuccessfully to string three words together to understand that he would be the worst president in american history? all the other alleged reasons for this mess that w has created are just a bunch of bullshit by those who voted for that fool to place the blame elsewhere. if you voted for that fool w, you are to blame for the problems that idiot has caused. furthermore, if you voted for w, you are dumber than w, as impossible as that may seem. so dumb in fact, that i wonder how you can remember to breathe when you wake up in the morning. is there a sign above your bed with the message “don’t forget to breathe”?

  15. manapp99 Says:

    Bigstuff:

    “the vast majority of the subprime loans were underwritten at a 50-55% debt to gross monthly income ratio.”

    If the “vast majority” of these loans were such as you state, how do you account for the fact that the vast majority of subprime loan holders are paying the note. 75% are NOT in default. That is the ‘vast majority”

  16. Dusty Says:

    Manapp..you can’t regulate stupidity..or common sense. What happened to Mr. Doyle is sad and depressing but he is a victim of this debacle..as are many others. Some folks, by their own hand of course. Regulating industry standards is a no-brainer but our brand of Reaganomics says let the market be free to do as it pleases with as little regulation as possible..which provides the framework for fraud and greed, which we are seeing unfold now.

    Biggie..I don’t need your lecture Dude..save it for someone that actually gives a hoot about your logic..thanks and have a great day! Btw..are you aware of paragraphs and how to utilize them? They are your friend ;)

  17. Jet Netwal Says:

    I’ll interject that Doyle is just one story out of many. Framing the argument that he is the typical sub prime sob story is unsupported. The fact is the majority of sub prime loan failures fall disproportionatly on single women and lower middle class borrowers. I wrote on this earlier, in a post called Sub-Prime Primer.

    When I was a realtor in the 1980’s, the debt ratio was 35 -38%. Lending based on a 50 -55% debt raio is irresponsible and lenders who did so knew it. They just hoped they”d get the paper sold before it started to smell.

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