Loan Bailout Rips Off Middle Class

FEB. 13, 2012


In a modern version of one of Aesop’s classic fables, a whooping crane swoops down and gobbles up a frog. But the frog reaches an arm out of the crane’s mouth and grabs its throat so that the bird can’t swallow him. The crane says: “O unhappy me who have found in that which I thought was a happy windfall the source of my destruction.”

Last week State Attorney General Kamela Harris was reportedly whooping up what the Wall Street Journal calls an “election windfall” for California from the Obama Administration’s new $25 billion foreclosure settlement with commercial banks.

Reportedly, $18 billion of this shadow bailout will be for California.  Only $5 billion will be in actual cash. The rest will be in loan write-downs.  Of the $5 billion, only $1.5 billion will be to compensate borrowers who suffered foreclosures from 2008 to 2011.  This will be in the form of $2,000 “gifts” having no connection to the unpaid balance on loans or anything else.

The other $3.5 billion will be for state and local government regulatory programs. So government will end up getting 70 percent of the cash. Big whoop!

Liberal columnist Michael Hiltzik of the Los Angeles Times calls the Obama foreclosure bailout “the Big Whoop” –- a slang term sarcastically meaning “big deal,” typically used in the negative to indicate something is not a big deal (“So you got $2,000 from Obama four years after you lost your house? — Big whoop!”.)

How these $2,000 retroactive payouts don’t violate the California Constitutional prohibition against giving a gift of public funds to private persons is anyone’s guess.  But hey, in California, they’ve been giving developers gifts of private property for decades. So the line between what’s yours and what’s mine has all been blurred anyway. The law and social “reality is what I can get away with.”

Here’s more of why there is little to “whoop” about.

Cranes Will Swoop Up More Frogs by Foreclosure

The loan write-offs are likely to eventually lead to more, not fewer, foreclosures. Forgiven homeowners will face the reality that they still can’t make payments even on lowered loan balances with even lower interest rates.  Without incomes from well-paying jobs, all this will be is a tax write-off for commercial banks. Banks will no longer be delaying foreclosures to appease politicians and will begin filing more Notices of Default.  With the national election over in November and unpaid loans paid off for the “rentier class,” it will be full speed ahead with foreclosures. If Obama loses the election, the proverbial “Plague of the Frogs” will be inherited by the new president.

There is an indication that banks have already begun processing foreclosures in preparation for Obama’s “Big Deal.” In the fourth quarter of 2011 in California, 61,517 Notices of Default were filed, according to the Dataquick real estate data service. Of these, 60,289, or 98 percent, were homeowners who were delinquent on multiple loans, such as a primary mortgage and a home equity loan. Those who were using their homes as a piggybank during the Mortgage Bubble are not coincidentally having their homes put into pre-foreclosure right before the bailout. The proverbial frogs are going to be fattened up before the banks swallow them up.  But the frogs have long arms.

And loan-defaulted homeowners with Fannie Mae and Freddie Mac loans cannot participate in this bailout, which may lead to more voter outrage.  If you’re name is Froggie you can have your loan wiped off the books.  If it’s Freddie or Fannie, you can’t because your loan was so sliced and diced up and sold to so many foreign lenders that it is impossible to figure out how to forgive it.  So, ironically, maybe Fannie and Freddie may make out better than poor Froggie.  Who knows?

Who Gets the Built-Up Future Equity: The Cranes or the Frogs?

Another huge problem with the foreclosure bailout program is the component to help those with “underwater” mortgages — meaning the loan is more than the market value of the home.

Any public housing agency in California is required to include a clause in any subsidy program that any increase in value of the property has to go to the agency.  Otherwise, it would be a violation of the “gift of public funds” prohibitions.

According to, the average amount of unpaid loans on homes in default in California is $19,950.  That apparently does not include unpaid taxes, interest and accrued late payment penalties.

The median California home price as of December 2011 was $246,000 and the average mortgage for homes in foreclosure was $333,036.  That reflects about an $87,000 gap on average on an underwater mortgage.

At $87,000 a pop, the $10 billion in loan write-downs authorized under the Obama Foreclosure Bailout law would help about 115,000 homeowners. That would reflect about 1 percent of all the underwater mortgages in California as of mid 2011. It will be interesting to see what zip codes are selected by the Obama-Harris team to get bailed out of underwater mortgages — Whoopville or Froggie Town?

From this writer’s experience in working in affordable housing programs for public agencies, it would not be surprising if many homeowners with underwater mortgages refused a bailout if it meant foregoing any future equity buildup in their home.  Once again, the frogmen have long arms and may want revenge, not government help.

The Resurgence of the Tea Party Frogmen

Harris’ equivalent of an ancient Roman giveaway of “bread and circuses” to the peasants will likely only galvanize the Tea Party all the more. This is because the loan write-downs come at the expense of savers, investors and pensioners.  As Georgetown Law School professor Adam Levitin is quoted in the L.A. Times, most of the settlement “is being financed on the dime of MBS (mortgage-backed securities) investors such as pension funds, 401(K) plans, insurance companies, and the like — parties that did not themselves engage in any of the wrongdoing covered by the settlement.”

The frog feeders will be punished.  But whooping will go unpunished.  This is justice in the Obama administration’s topsy-turvy world of “social justice.”

The investor class has only been allowed “near zero” percent returns on their investments and pensions while monetary inflation has been running at 3 percent or so.  In the meantime, banks have reaped a windfall from Federal Reserve borrowing policies that now can be used as a bailout for California. This may buy votes for California Democrats.  But it is likely to lead to voter blowback in swing states such as Ohio, Missouri and Florida in November. Even those who do not like the Tea Party are more likely to agree that such shenanigans only ended up making them and everyone else worse off.

The original Boston Tea Party was a direct action by British colonists, the frogmen of their time, against the monopolistic East India Company and the British government.  The Tea Party frogmen boarded the East India Company ships and threw the tea into Boston Harbor.  But will the frogmen be able to throw the Party of Government out of office in November?

Beware of Frogmen with Prescription Snorkeling Masks

What the Obama Foreclosure Bailout may mean is a clarifying moment to average people who haven’t got a clue to what caused the Mortgage Meltdown, the loss of their jobs, the wipeout of the equity in their homes, or the loss of their homes by foreclosure.

In the Big Whoop Foreclosure Settlement, they can see clearly how government uses Big Banks to do their bidding.  This isn’t conspiracy talk. It is happening right before their very eyes from where they live on fictional Lily Pad Lane in Lake Wobegon.

The U.S. Federal Reserve has been allowing commercial banks to accumulate huge reserves since Obama came into office.  By policy, investors have been only allowed returns at less than monetary inflation. Now, at the end of his four-year term, it is time for Obama to cash in his chits and capitalize on the political capital of his Kleptocratic state.  As defines a Kleptocracy, it is “a form of political and government corruption where the government exists to increase the personal wealth and political power of its officials and the ruling class at the expense of the wider population, often without pretense of honest service. This type of government corruption is often achieved by the embezzlement of state funds.”

Obama has run around Congress and the U.S. Constitution to create his own foreclosure bailout slush fund. Who needs a Congressional appropriation if you can control the banks through the Federal Reserve?  Obama is for the separation of religion and state, but not banks and the state.

Maybe even the “Occupiers” — those mutant one-eyed crabs who clawed their way into the Port of Oakland — can now see that it wasn’t just Wall Street that corrupted government. It was government social and financial engineering policies that provided an incentive structure for institutional “greed.”  But we’re hearing little outrage from the Occupiers about Obama’s “Big Whoop.”  They believe it is social justice for insurance companies, pension funds, and 401(k) plan investors to have their savings plundered because they are members of the wrong Bourgeoisie Capitalist class.

We’re hearing little outrage from the Occupiers because Obama and Harris can control “emotional” communication.  They can make people feel good that the little guy is being given justice.  And for those who feel alienated by Big Banks and Wall Street, they only care that people like themselves — the rentier class — have been symbolically compensated.  If those who invested their money in Wall Street are the losers so much for the better is the logic.  This is more akin to Leftist bourgeoisie Maximilian Robespierre’s “reign or terror” than it is to any exercise of U.S. Constitutional rights.  Whatever happened to the Fifth Amendment to the U.S. Constitution and prohibition against the taking of property without just compensation?  It is government policy, not markets, that have given investors a return less than monetary inflation. And the public purpose behind this policy isn’t to fight a war to protect the nation but to create a slush fund to buy political patronage.

Perfect Storms, Black Swans, and Bad Faith

The Republican candidate who can capitalize on this voter resentment may find some traction at the polls. As Obama boasts about loan bailouts for a few Californians, Republicans only have to ask: “How is that bailout working out for the rest of you?” A lot of government paid loan counselors in California will be making a windfall. But how about everyone else?

Voters vote with their proverbial pocketbook. And when they figure out that what was pickpocketed out of their pocketbook was given to others for pure political gain, they may want to vote against more social engineering of their investments. This is why the Federal Reserve is reviled by libertarians.

The metaphor of a “black swan” was used by statistician Nassim Taleb in his famous book, “The Black Swan: The Impact of the Highly Improbable,” to describe the supposedly unforeseeable Mortgage Meltdown of 2008 right before the last national election. Such metaphors of chance and statistical probability are often used as a way to explain away human responsibility.  During the California Energy Crisis of 2001, it was the “perfect storm” metaphor that was employed to cover up government complicity. These are metaphors in what might be called “bad faith” that denies human responsibility for man-made disasters.

The term “black swan” goes back to a Latin expression from the Roman Empire. The Roman satirist Juvenal wrote: “a good person is as rare as a black swan.”

Without good leaders a society must depend on sound laws and legal institutions.  Whoever ascends to be the next president of the United States or attorney general of California must restore the rule of law and its institutions in its classical framework and not the social justice ideology of the Community Reinvestment Act or the Obama Foreclosure Bailout if there is to be any economic recovery.

Beware the revenge of amphibious frogmen at the polls in November.


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