The epidemic of home foreclosures has been made far worse than necessary due to the banks' unwillingness to work with homeowners. Although Congress has passed numerous laws to force the banks to assist homeowners, the banks have found ways not to comply. The banks also brazenly break other laws to further their profits at the expense of homeowners, most recently by falsifying interest rates in the LIBOR scandal.
Regular middle class Americans everywhere have unjustly lost their homes to foreclosure. They ended up in homes they could not sell due to the Federal Reserve Board, not their own actions. The Fed manipulates interest rates in order to grow or shrink the economy. It kept rates artificially low several years ago for a lengthy period of time. At the same time, Congress relaxed the laws on lending. The Obama administration ordered banks to lend to risky borrowers or face lawsuits. Many people with poor credit bought homes who were clearly risky borrowers. A large number were issued subprime loans they could not afford, ensuring their default.
Once the defaults began in 2007, the abandoned homes flooded the housing market, driving down home values for everyone. This left most homeowners unable to sell their homes, since most homeowners have a sizable mortgage. Someone who bought a home with a mortgage for $200,000 saw the value of their home dip to as low as half of that. Upside down, there is no way for someone to sell their home without owing the bank a considerable amount.
As people began losing their jobs due to the recession, they could not downsize to a smaller house or apartment because of being upside down on their mortgages. Many tried to short sale their homes, in the hopes of walking away without owing anything. In order to force the banks to accept a short sale, homeowners had to play chicken and stop paying their mortgages. Other homeowners stopped paying their mortgages in hopes of getting a loan modification, relying upon laws that were passed requiring banks to work with homeowners on loan modifications.
Very few of these homeowners were able to save their homes from foreclosure. The banks routinely turned down their requests for loan modifications, for trumped-up excuses like not turning in enough information or ironically missing mortgage payments, a catch-22. The banks turned down their short sale offers, for equally invalid excuses like claiming perfectly reasonable offers were not a good deal, or losing their paperwork. Finally, when some homeowners began to see their home values bounce back this year, allowing them to sell, the banks would not give them a payoff amount but went ahead with foreclosure.
Under Obama's Homeowner and Stability Plan of 2009, the banks were given bonuses for each loan modification they implemented; $1,000 to the bank and $1,500 to the servicer. The banks put some homeowners in temporary “trial” loan modifications, collected the bonuses, then ultimately rejected the homeowners from permanent modifications and foreclosed on their homes. Half of the homeowners who entered the program were booted out. It soon became apparent that the program had been implemented to stave off foreclosures until after the 2010 election. Treasury Secretary Timothy Geithner, architect of the 2009 Troubled Asset Relief Program, TARP, cruelly referred to the program as homeowners "foaming the runway" for the distressed banks looking for a safe landing. Neil Barofsky, former special inspector for TARP, has written a book exposing the fraud, entitled “Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.” Barofsky is a Democrat and contributor to Obama, but was so appalled by what he encountered that he went public with the scandal.
Of the $46 billion in federal aid directed to distressed homeowners under TARP, only 10 percent has been distributed. One of the programs, which allocates $2.7 in TARP funds to encourage lenders to write down or eliminate second liens when refinancing, has not helped a single homeowner. The Treasury Department never bothered establishing any goals for distribution of the funds. The Obama administration's Home Affordable Modification Program, HAMP, put into place to force banks to reduce the interest rate on homes for those who could not afford their mortgages, has helped hardly anyone. Fewer than one million homeowners are in the program, even though millions need assistance. It has been such a failure that House Republicans voted to terminate HAMP last year.
Meanwhile, as innocent people were losing their homes, the Obama administration awarded billions of dollars in bailouts to real estate speculators. The $700 billion government bailout intended to stabilize the economy, known as the Emergency Economic Stabilization Act of 2008, has gone almost entirely to the banks, not homeowners.
There is no such thing as a free market in the housing industry. The Fed regulates the banks by manipulating interest rates, and Congress, the president and the Treasury regulate what banks can and cannot do. It is painfully clear that the banks will behave unethically and illegally if they can get away with it. The banking system has become big government doing the bidding of big business. America is fast becoming more like Russia than the capitalist free market economy it once was.
The solution is to abolish the Fed. Without its manipulation of interest rates, the housing market will not have wide fluctuations, since people who cannot afford to buy homes will face free market interest rates, not artificially lowered ones. Fannie Mae and Freddie Mac, the government-run lenders with a history of financial corruption, should also be abolished. Instead of Congress passing failed laws regulating the banks, banks should not be bailed out if they choose to issue risky home loans. Then when a bank goes under, innocent homeowners should have some kind of recourse to protect their homes, such as class-action lawsuits.
Americans who did nothing wrong are losing their homes as a result of irresponsible government enabling the banks. It is difficult to see how Obama can win reelection when one in seven homeowners is in default or foreclosure.