Late on your mortgage? Did you know you might be able to negotiate a 20 percent reduction in what you owe? Josh Rosner, a financial analyst specializing in mortgage-backed securities, says that lenders know that if a home goes into foreclosure, the lender will lose 60 percent or more. So what's stopping them? The banks that hold the second mortgages. Those banks routinely block such requests because debt reduction for a borrower would spell instant losses for them. And Treasury is letting them get away with it.
It's enough to make most people furious, and a recent New York summit that brought together the rock stars of power-to-the-people financial reform-everyone from TARP watchdog Elizabeth Warren, Nobel Prize-winning economist Joseph Stiglitz, and investor George Soros to Rosner, ex-New York governor Eliot Spitzer, and MSNBC's Dylan Ratigan-one message came through loud and clear: The American people are mad as hell about a financial system that puts them last, and aren't going to take it anymore.
"Americans understand the game and don't like the game," said a steely Warren. "This is a dispute of families versus banks." Instead of creating the strong and independent Consumer Financial Protection Agency Warren has called for, Senate leaders now want to to set it up inside the Federal Reserve. That's like putting the chicken coop inside the fox hole. Though the Fed has been making up for it recently with new consumer-friendly regulations, it spent years enabling the booming subprime lending industry.
That's just how their lobbyists want it, said Warren: "Banks are fighting to kill the consumer agency so they can keep the fine print, write all the rules, and keep the contracts unreadable."
But consumers may have a lot more power than they realize. Rosner calculates that banks have $900 billion in second mortgages on their books – home equity loans, down payment helpers and such that are at best worth 40 cents now for every dollar the banks lent out. Just four big banks – Wells Fargo, Chase, Bank of America, and Citigroup – are on the hook for half of those loans. And right now, Rosner told the crowd, it's payday time for the Big Four, which have been blocking debt reductions for borrowers who badly need them.
So why has Treasury been letting the banks get away with blocking real debt reduction for consumers? "Banks are massively under-capitalized on second lien exposure," Rosner warned the crowd. If homeowners actually got the debt reductions they should be getting, "regulators would have egg on their face, the banks would be right back in TARP, it would seriously reveal the weaknesses of [Treasury's TARP] stress tests, and we'd be right back where we started" – with big banks on the brink, in need of massive bailouts. Rosner estimates that the banks have at most $225 million in reserves to cover such losses. By allowing those same banks to pay executives huge bonuses, "The government, I would argue, is tacitly or explicitly a partner in securities fraud."
Rosner says that borrowers have power to fight back, especially in "non-recourse" states where lenders can't go after their assets following a foreclosure. That's right – he's joining the chorus telling borrowers to take a stand and walk away from their mortgages. If enough do it, he says, banks will have to respond.
"Once people start making inbound calls and overwhelming servicers," suggests Rosner, "they'll be forced to decide – who should get a write-down, who should do a short sale, who should just keep making payments."
Just 15,000 calls demanding mortgage debt reductions, Rosner expects, could make all the difference.