Recently, an edited-into-“gotcha!” series of comments made by Stephen Lerner about how underwater homeowners need to put political pressure on the largest banks was been picked up by Glenn Beck who called it economic terrorism. It struck me as pretty standard stuff when taken out-of-context, in what I assumed was presented in the least coherent way possible by Beck’s editing staff. If people renegotiating bad debts is economic terrorism, better up the terror color code – here’s Tishman and BlackRock Inc. defaulting on the $4.4 billion debt used to help finance the deal for Stuyvesant Town, an example Tom Adams likes to bring up. Renegotiating debts gone bad happens everyday for regular corporations. It happens in a way that is considered natural for a functioning economy.
But a follow-up interview with Lerner at Dylan Ratigan’s webpage made me think he is onto something quite smart and even necessary: collective-bargaining for households. Interview:
LERNER: And what people are so frustrated about is for a couple of years now, people have been trying to figure out how do we write down principle, how do we modify mortgages? And the banks, as you know, have – they’ve stopped legislation, they’ve stopped cram-down, they use their political power to interfere with this again and again. And so a lot of mainstream economists, a lot of people have said, “Wait a second; when a business is in trouble, they renegotiate their debt.”…
Well, I would say it’s not even organizing. It’s an early discussion of saying, “What if a bunch of people all agreed to say to the banks –”. Maybe what people would say is, “We’re going to put our money escrow, even.” But we’re saying we want you to negotiate with us on principle, and we think a lot of us are all going to say at the same time, “Listen, we’re going to sign up, we’re going to say, “You should negotiate with us.” And when we get enough people who are signed on to saying the banks should negotiate, we’d say, “Well now we’ve evened the score a little bit. You’re the biggest, richest guys in the world, but a lot of us have signed up and said we’re ready to potentially walk away. Why don’t you negotiate on reducing the principle?” So what we’re talking about is people making a commitment to each other saying if enough other people agree to it, we’ll demand the banks negotiate and then if they’re not willing to negotiate, then people can take appropriate action and walk away if that’s what makes sense.
But even more than that, what we’re really talking about is encouraging people to make a good business decision because more and more business writers and other people have written, and they’ve written time and time again, that if a business was in the situation of most homeowners, they would walk away. And so what – we’re saying two things. One, we want the banks to negotiate and we want to fix it. But second, we’re saying people should be rational about their financial life. And as you said, the amount of money that people wasting on a home that they’re not going to be able to stay in because they’re stuck in a bad mortgage versus that it may be a good business decision to say, “I’m leaving and I’m going to rent an apartment.” So we’re trying to do two things: help people make a good financial decision for themselves; and second, do it in a way that’s together that maybe we can start fixing the housing problem. And I’d take it a step farther; I don’t know how we fix the economy unless we stabilize the housing market. And we’re not going to stabilize the housing market if we don’t write down principle.
To put it more specifically, he’s calling for a kind of collective bargaining for homeowners. The banks are gathered through associations like the Financial Services Forum. What is the equivalent for homeowners? Is there anything?
It’s an open secret that most “credit counseling” agencies are in-part funded by banks, credit card companies or other parts of the financial industry. And even churches aren’t as trustworthy as they used to be for people seeking fair advice on financial decisions. And the banks look to escalate their pressures on homeowners. Where can homeowners go for information, and where can they pool their grievances, and where can they have a space where they have equal footing as the banks?
Because let’s talk about a success story for a homeowner hit by servicer fraud. Tom Cox recently noted:
JPMorgan Chase, the country’s third largest mortgage lender, confessed that it has overcharged over 4,000 active duty troops on their mortgages and improperly foreclosed upon 14 military families. Only three days before that, reports came out that JPMorgan had just experienced a 47% jump in profits for the previous quarter and 2010 profits reached a record level of $17.4 billion.
The story of the violations of the Servicemembers Civil Relief Act was forced into the open by a Marine fighter pilot. He kept all of his payments current, but due solely to the fault of JPMorgan Chase, his mortgage was placed into default status. His wife reports collection calls (sometimes three a day) coming on Saturdays, Sundays, holidays and even at 3:00 in the morning. It took over two years and the hiring of a lawyer to get JPMorgan to back off and finally admit that he had fully paid his mortgage obligations on time.
Notice the power differential here: a Marine had to go through two years of hassle, hiring a lawyer out of his own personal cash, worried that any day he and his family might have their stuff thrown out on the street, in order to prove that he paid his bills, which he had. This is from JP Morgan Chase, which is rolling in cash. But from the servicing bank’s point of view, it’s just business as normal. Every month is more fees, which adds to the principal, which they get a cut of, so the more struggling the better off the servicing bank’s books are. And their lawyers are already have the lawyers on staff.
Collective bargaining is the cure to this kind of power differential – give consumers access to the same expertise that businesses would draw on in these circumstances. Explicit in unions are that a small fee up front gets you full representation later – an insurance fund against fraud and exploitation, something that Marine could have used when paying lawyer expenses by the hour out of pocket. It also creates organizations for putting political pressures on what are clearly political problems.
Because this is, at its core, a distributional issue. If we had let the banks fail then these mortgages could have been sold off for a fraction of what they were worth, and the principal writedowns could have happened efficiently. Instead we backstopped their losses, didn’t force writedowns, tried to push programs like PPIP which would have used FDIC money to inflate the value of these mortgage bonds, and in general have hoped the banks could become whole by recapitalizing through earnings. The only way to do that is to keep extensive pressure on homeowners and consumers.
To put it a different way, these losses have happened. They are here. It’s just a matter of how they get shared. We’ve done everything we can to protect the banks on this. Meanwhile, unnecessary foreclosures are running rampant across the country, putting balance-sheet pressures on neighborhoods, hurting municipality budgets and hitting investors and making residential and business investment difficult. And on the other side, one of the most durable pieces of the safety net created in the United States, the bankruptcy code, something that manages the distribution of losses when debts go horribly wrong, is broken when it comes to first mortgages. Bankruptcy court can temper moral hazard by making both sides take an upfront hit and share any appreciation later on, but Obama and the Treasury team have had no interest in making these adjustments.
Our normal mechanisms for consumer protection are broken, investors are weak at being able to investigate the servicing model, and the government’s regulatory infrastructure is in full see-no-evil mode. Giving power to homeowners directly is the most responsible answer here.