Or, to ask the question in a more sophisticated way, who are the "strategic defaulters"? The LA Times asked that question:

Who is more likely to walk away from a house and a mortgage -- a person with super-prime credit scores or someone with lower scores?

The answer may surprise you -- especially if this was your narrative:

[OBAMA] In the past, if you found yourself in a situation like this, you could have sold your home and bought a smaller one with more affordable payments. Or you could have refinanced your home at a lower rate. But today, home values have fallen so sharply that even if you made a large down payment, the current value of your mortgage may still be higher than the current value of your house. So no bank will return your calls, and no sale will return your investment.

"You can't afford to leave and you can't afford to stay. So you cut back on luxuries. Then you cut back on necessities. You spend down your savings to keep up with your payments. Then you open the retirement fund. Then you use the credit cards. And when you've gone through everything you have, and done everything you can, you have no choice but to default on your loan. And so your home joins the nearly six million others in foreclosure or at risk of foreclosure across the country, including roughly 150,000 right here in Arizona.

Except that's not what is happening. At all.

"Mortgage Servicers Behaving Badly":

The New York Times has a story tonight, “Judges’ Frustration Grows With Mortgage Servicers,” which narrowly speaking, is not bad, but illustrates a frustrating propensity of the budget and time constrained MSM to fail to dig into the meaty issues behind its articles.

The piece is yet another sighting in the Servicers Behaving Badly saga. Earlier installments included Servicers Show Up in Court With No Proof That They Really Own the Mortgage, Services Go Missing in Action When Customers Try to Straighten Out Errors, and Mods? You Must Be Joking.

Today we learn Judges Try to Shame Services...

Times editorial today:

Four months into the Obama administration’s antiforeclosure effort, the White House’s best guesstimate is that “over 50,000” at-risk loans have been modified so that homeowners can afford their payments and keep their homes. A Treasury official told The Times’s Peter Goodman there is no precise data because a tracking system has yet to be completed. Still, the official predicted that by the end of August, the program would modify 20,000 bad loans a week.

That would be an enormous jump. But even 20,000 weekly modifications, starting two months from now, would most likely be too few.

Unless substantially more relief is forthcoming, Moody’s Economy.com projects that some seven million homes will fall into foreclosure this year and next.

Problem: 7,000,000. Hope and change solution: 50,000. Yay!

Calculated Risk:

Walking away (what the researchers call a "strategic default" and the mortgage industry call a "ruthless default") is when the borrower decides to stop paying a mortgage even though they can still afford the payment. This has always been difficult to quantify. ...

[O[ne of the key points in the research are changing social norms - the more people a homeowner knows that he believes "walked away" the more open the homeowner will be to mailing in their keys. ...

This research suggests that this is happening in significant numbers. ...

This has led many people to suggest principle reductions (as opposed to payment modifications) is the only solution.

Yeah, that would have been HOLC (check the tag, above), which never got onto the same continent as the table, let alone actually on it. Wouldn't want to give the good people of this country the impression that anybody other than the banksters deserves a break or bailout, would we?

Bernanke Bid to Lift Housing Scuttled by Rising Rates, Defaults.

Just asking. McClatchy covers Timmy's newest improvisation:

The Obama administration unveiled new programs Thursday designed to make it easier for homeowners who owe far more than their houses are now worth to sell those homes at a loss and have their remaining debt forgiven.

Remember HOLC? Cleaned up the banks' balance sheets? Kept people in their homes? Turned a profit by the end of its life? Apparently, programs like that are off the table. Why?

I am not an economist, but I can do arithmetic.

George Soros in The Financial Times:

The hard choice facing the Obama administration is between partially nationalising the banks, or leaving them in private hands but nationalising their toxic assets. Choosing the first course would inflict great pain on a broad segment of the population – not only on bank shareholders but also on the beneficiaries of pension funds. However, it would clear the air and restart the economy.

The latter course would avoid recognising and coming to terms with the painful economic realities, but it would put the banking system into the same quandary that proved the undoing of the government sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac. The public interest would dictate that the banks should resume lending on attractive terms. However, this lending would have to be enforced by government diktat because the self-interest of the banks would lead them to focus on preserving and rebuilding their own equity.

Political realities are pushing the Obama administration towards the latter course. It cannot go to Congress and ask for the authorisation to spend an additional $1,000bn on recapitalising the banks because Mr Paulson has poisoned the well in the way he demanded and then spent the money for Tarp. Even the second tranche of Tarp – the remaining $350bn – could only be pried loose by a congressional manoeuvre. That is what is leading the Obama administration to contemplate reserving up to $100bn of that tranche for the “aggregator bank” solution.

The stock market is pressing for an early decision by putting pressure on financial stocks. But the new team should avoid repeating the mistakes of the previous one and announcing a programme before it has been thoroughly thought out. The choice between the two courses is momentous; once made, it will become irreversible. It should be based on a careful evaluation of the alternatives.

President Barack Obama can fulfil his promise of a bold new approach only by establishing a discontinuity with the previous team. Congress and the public are right in feeling that too much has been done for the banks and not enough for beleaguered householders. The government ought to take the GSEs out of limbo and use them more actively to stabilise the housing market. Having done so, it could go back to Congress for authorisation to recapitalise the banking system the right way.

Funny thing:

Useless:

Frank Says Congress to Release $350 Billion in Deal For Homeowner Relief
Dec. 20 (Bloomberg) -- [House Financial Services Committee Chairman Barney Frank said in a telephone interview yesterday that] said legislation is being drafted that will set the conditions on spending the cash after Paulson used almost half the $700 billion Troubled Asset Relief Program to boost bank capital. Paulson resisted calls to support foreclosure relief.

Frank, a Massachusetts Democrat, said in the interview he’s drafting legislation with Senate Banking Committee Chairman Christopher Dodd that would release the remaining $350 billion in exchange for foreclosure help, aid for General Motors Corp. and Chrysler LLC and provisions to hold banks accountable for stepped up lending to consumers.

The measure would adopt a Federal Deposit Insurance Corp. foreclosure plan, revamp the Hope for Homeowners loan-relief program that has attracted few lenders and support a Treasury program to cut rates on some fixed-rate home-loans.

There's a proposal on the table that nobody will talk about except those who actually want to help homeowners. It's called HOLC (explanation). It was an FDR program that saved homeowners, cleaned up the balance sheets for the banks, and actually made a small profit for the country at the end of its life. Why do I have the feeling that the Village would rather not see the banks' balance sheets at all, and would do anything to stiff homeowners to avoid it?

Frank and his fellow Villagers are just tinkering around the edges as far as any solution that does anything more than help Big Money. Why a "deal"? Where's the need for a fucking quid pro quo? Why treat the lamest of lame duck Bush administration as if they had any kind of leverage? As of today, they've got thirty days in office? And the Dems are negotiating with them?*

But what would you expect when Big Money gets two trillion NOW NOW NOW, with no plan, and no accountability?* Bloomberg:

Dec. 4 (Bloomberg) -- Timothy Geithner, President-elect Barack Obama's choice for U.S. Treasury Secretary, is seeking to push Federal Deposit Insurance Corp. Chairman Sheila Bair out of office.

Geithner, president of the Federal Reserve Bank of New York, has argued Bair isn't a team player and is too focused on protecting her agency rather than the financial system as a whole, according to two congressional officials and a person familiar with his thinking. Bair has battled with Geithner and fellow regulators over aid to Citigroup Inc. and other emergency actions, making her enemies in the Bush administration.

“The idea of having an independent actor [which, legally, Bair is; last I checked, the FDIC didn't report to the Fed -- or Obama] on the stage with you who might not be singing the same tune can make you nervous,” said Wayne Abernathy, a former Treasury official who is now executive vice president with the American Bankers Association in Washington. “They recognize that she's a very independent person.”

It isn't clear that Obama would ask Bair to step down. Such a move would be fraught with political risk for the new administration, especially on Capitol Hill, where Bair's campaign to rework mortgages for struggling homeowners has won respect from top lawmakers, including Senate Banking Committee Chairman Christopher Dodd and Barney Frank, his counterpart in the House. ...

There you have it. For Big Money creatures like Geithner, if you defend homeowners and households, you're not on the team, and in the Village, that's the ultimate Bad Thing To Be. Can't these guys listen to Elizabeth Warren? "Any effective policy has to start with the households"?

So, Geithner's the bad cop. Now, for the good cop, Obama:

Obama's interview with 60 minutes is interesting, and I recommend studying it; as usual our famously free press gives short shrift to news while focusing on fluff about the very personal nature of yadda yadda yadda. Working from stories on segments of the transcript, I've already posted that, in detail, I think Obama's comments on both torture and housing are weak. Reading the full transcript gives a better view of the man; my impression is that he's holding his cards very, very close to his chest, probably an entirely rational strategy.

Let me single out four passages on Klein, HOLC, the post-partisan shtick, and FDR.

First, the Naomi Klein echo:

Kroft: Does doing something about energy is it less important now than…
Mr. Obama: It's more important. It may be a little harder politically, but it's more important.

Kroft: Why?

Mr. Obama: Well, because this has been our pattern. We go from shock to trance. You know, oil prices go up, gas prices at the pump go up, everybody goes into a flurry of activity. And then the prices go back down and suddenly we act like it's not important, and we start, you know filling up our SUVs again.

And, as a consequence, we never make any progress. It’s part of the addiction, all right. That has to be broken. Now is the time to break it.

Well, that raised my antenna, since the process Obama describes does, after all, describe the Shock Doctrine process exactly: The Powers That Be use the trance period following the shock to impose policies that would otherwise not be possible, politically -- as in the the Patriot Act, AUMF, the bailout.

To be fair, Obama's used the same phrase since 2005 (here, and here), so it's clear that Klein's formulation could not have influenced Obama's initial, accurate perception. The missing piece of the puzzle is, of course, the political use of the trance period; Obama doesn't go there in the interview. Then again, what sane politician would? So, I'd chalk the whole thing up as a case of independent invention, were it not for the fact that the passage of the bailout, in which Obama was instrumental, looks like a classic case of Shock Doctrine tactics, which is what the NOW NOW NOW was all about.

Second, Obama's tea on HOLC is even weaker than I thought:

In a transcript for tomorrow's 60 Minutes:

[OBAMA] We have not focused on foreclosures and what's happening to homeowners as much as I would like…

And who's responsible for that? And what you mean, "we"? The bailout is the Bush + Reid + Pelosi + Obama + Paulson bill, and though we don't expect anything from Bush or Paulson, I think we had the right to expect a little "change" from Obama, especially, since he was making calls to get the bill passed -- and is now the Leader we've all been waiting for.

More bandaids, bubblegum, and baling wire. Why don't the Beltway Dems figure out a way to slap Obama's name on HOLC -- which is proven to work, please read the detail -- and pass it?

Anyone would think they wanted to give the bankers trillions, with no accountability, and then keep the little people enslaved to debt for the rest of their lives. Because that's how things are working out right now, and at some point, people are going to figure out that what keeps happening isn't an accident.

It's almost like things were set up so homeowners could NEVER be rescued... From the invaluable McClatchy's Most Recently Answered Questions on the economy:

Q: In regards to the recent new plan to help out homeowners with Fannie and Freddie secured loans .. how would one tell which loans are secured by either one of them. thanks.
Submitted by ti hon from garden grove, ca

A: The loan servicer, the company who collects your payment, knows this answer but often won't tell you. I'd call and ask, but they may tell you to write and formally ask for this information. It's one of the many ways servicers have not acted in good faith with homeowners. Their interest lies with the trustee that answers to the investors in the complex mortgage backed security and not the homeowner. There were many ways in which the entire mortgage process has put the homeowner at the back of the line.

Answered 11/13/08 12:35:24 by Kevin Hall and Tony Pugh

I'm betting, though, that if the mortgage is not secured by Fannie or Freddie, it's a lot hard to figure out the complexity.

Online WSJ:

Meanwhile, the Treasury has clarified life insurers are eligible to participate in its capital-infusion program, provided they are or apply to become a federally regulated bank or thrift. A significant number of insurance companies in the U.S. would qualify as they operate banks or thrifts.

Motivations to participate range from strengthening balance sheets to securing a source of money for acquisitions.

If you're Big Money, all you've got to do is fill out an application to turn yourself into a bank, and the Fed will hand you taxpayer dollars! Come on down!

Hey, maybe that's how homeowners could get some help? Apply to become banks?

Yea verily, so sayeth Obama.

I'm guessing No, since big-bank representative Paul Volcker doesn't want it, and Obama offers only weak tea on it, even though the American people support it (and it's good policy). Via Housing Wire:

Illinois Senator and Democratic presidential candidate Barack Obama’s proposal to fix the housing market is a four-pronged plan to “protect homeownership and crack down on mortgage fraud,” according to his campaign Web site.

He promises to create a 10 percent universal mortgage credit — an average of $500 for 10 million homeowners — to homeowners who don’t itemize their tax deductions. Obama’s campaign also promises to increase government action in preventing mortgage fraud, saying that he wants to “ensure more accountability in the subprime mortgage industry.” (That, of course, might require the existence of a subprime lending industry, which has largely imploded amid a burgeoning economic crisis.) ...

The Democratic presidential hopeful also said he would look to allow so-called cram-downs of mortgage debt in personal bankruptcies...

Critics, however, say that while Obama’s plan is geared to prevent fraudulent loans in the future, it does not offer specific aid to homeowners already struggling with bad loans. “Obama continues to promise that everything will get better once he is president, but does not explain how his programs and governing philosophy will adjust to new economic realities,” the New York Times’ Patrick Healy wrote Wednesday.

Although McCain’s plan essentially reiterated language in the current $700 billion rescue legislation, it addresses specific actions by the government to buy and rewrite bad mortgages to aid the struggling housing market, rather than the more general “encouragement” included in the Act itself.

While largely panned [since the press has called the election already] since it was first introduced, a study by Rasmussen Reports found on Friday that 52 percent of voters supported McCain’s plan to bail out mortgage holders, with just 35 percent opposed to it. Interestingly, the study found stronger support for McCain’s proposal among Democrats than Republicans, as well.

Well, sure. But what does the Democratic base have to do with anything?

Wow! McCain's asking for my vote! Why, the audacity! Bloomberg:

Republican presidential nominee John McCain's plan to stabilize the housing market would rely on government funding already authorized by Congress to buy mortgages directly from distressed homeowners.

The plan wouldn't require approval of lenders, McCain senior policy adviser Douglas Holtz-Eakin said on a conference call today. The direct cost of the plan would be about $300 billion, according to a statement from the campaign sent yesterday.

``The initiative would rely on authorities that have been provided in recent months by the Congress,'' Holtz-Eakin said. ``It could help literally millions of people. We don't have a precise estimate.''

McCain's proposal would use $300 billion in funding for the Federal Housing Administration to insure [??] new fixed-rate loans to distressed homeowners, plus part of the $700 billion financial rescue plan approved last week. It would also use the government's new authority over Fannie Mae and Freddie Mac, the nation's largest mortgage buyers, which were taken over by federal authorities in early September.

Here's where my weakness in finance -- heck, in money -- kicks in. I don't think that McCain's "insurance" proposal is the same as a HOLC-style cramdown that actually purchases the assets or rewrites their terms. But I'm not sure. Readers?

Nice catch, BTD

That's not to hard to parse, is it? Obama's speech from the Senate floor at Big Orange:

We should encourage Treasury to study the option of buying individual mortgages like we did successfully in the 1930's.

Well, alrighty then.

Yalies Jonathan G.S. Koppell and William N. Goetzmann on WaPo's Op-Ed page:

The theory underlying the bailout plan stalled in Congress is that rescuing the finance industry will restore market stability and that the benefits will eventually trickle down to average Americans. Thus, solving the subprime mortgage crisis has morphed into a much larger challenge: reassembling the architecture of the financial markets, which seemingly requires giving the Treasury secretary nearly a trillion dollars and extraordinary latitude to pick winners and losers.

There is an easier and more politically palatable fix: Pay off all the delinquent mortgages.

The financial crisis is a liquidity crisis, yes, but it is ultimately a product of homeowner failures to pay. Unless this fundamental problem is fixed, we will continue to see -- and need to treat -- the symptoms. The proposed bailout ignores this. Yet the sum being demanded from taxpayers is almost certainly more than sufficient to pay off all currently delinquent mortgages.

Academics.... Look, there's only one problem here, as the infestment bankers running the "crisis" scam see it: The American people have a trillion dollars, which they would otherwise foolishly throw away on things like universal healthcare, or SUPERTRAINS, or solar and wind power. And the infestment bankers want that trillion, so that the American people don't make such unwise decisions. And to that end, they're inflicting financial shocks on the American people, until they give it up. It's really that simple.

Now that we've cleared the opportunistic behavior of Our Betters out of the way, we can replace outright thievery (as enacted by the Bush + Reid + Pelosi + Frank + Obama + Paulson plan) with actual public policy. This our academics understand quite well, and advocate forcefully:

Howell Jackson (the budget Dean at Harvard Law) writes:

Build a better bailout
The good news is that there is a very promising alternative to consider – one that could be grafted onto the Paulson plan. It represents a much better investment of $700 billion, it's been used successfully before, and it would help troubled homeowners more directly.

At the heart of this crisis lie two sides of the same coin: Heads are the bad home loans. Tails are the toxic securities that financed these mortgages. The former is what's pushing many homeowners into foreclosure. The latter is what's sinking Wall Street.

The Paulson plan primarily deals with the tail side of the coin – the investors who got burned handling hot subprime securities. A better plan would start with the head – the bad loans themselves.

Yeppers.

Hillary Clinton:
[W]e must address the skyrocketing rates of mortgage defaults and foreclosures that have buffeted the economy and ignited the credit crisis. Two million homeowners carry mortgages worth more than their homes. They hold $3 trillion in mortgage debt. Nearly three million adjustable-rate mortgages are scheduled for a rate increase in the next two years. Another wave of foreclosures looms.

But wait -- it isn't here yet. And it need not come at all, if we approach this crisis with some sense. Look at the facts NPR found:

[For more on HOLC, also supported by Nouriel Roubini, who has correctly called the shots on this Clusterfuck over and over again, see here.]

[UPDATE HOLC is also a Gen-X/Gen-Y play, did they but know it. Via new homeowner Atrios.]

Speaking of "principles":

[HILLARY: T]here are several principles that must be part of a broader reform effort that begins this week and continues in the coming months.

 Read more…

[I'm leaving this sticky because I think it's still the litmus test, and because of the impassioned comment thread. --lambert]

Here's a litmus test for whatever Congress comes up with as they huddle with the finance boiz over the weekend: HOLC good, RTC/RFC bad.

I may not understand this class warfare finance stuff, but I can sure quote people who do! Nouriel Roubini:

The most important policy action ... is rather the realization that a generalized debt and solvency problem required a solution that leads to significant debt reduction.

Let me explain in detail how we now need bold policy action to resolve this most severe financial and economic crisis…

Households in the US have too much debt (subprime, near prime, prime mortgages, home equity loans, credit cards, auto loans and student loans) while their assets (values of their homes and stocks) are plunging leading to a sharp fall in their net worth. And households are getting buried under this mountain of mounting debt and rising debt servicing burdens. Thus, a fraction of the household sector – as well as a fraction of the financial sector and a fraction of the corporate sector and of the local government sector – is insolvent and needs debt relief.

When a country (say Russia, Ecuador or Argentina) has too much debt and is insolvent it defaults and gets debt reduction and is then able to resume fast growth; when a firm is distressed with excessive debt it goes into bankruptcy court and gets debt relief that allows it to resume investment, production and growth; when a household is financially distressed it also needs debt relief to be able to have more discretionary income to spend. So any unsustainable debt problem requires debt reduction. The lack of debt relief to the distressed households is the reason why this financial crisis is becoming more severe and the economic recession - with a sharp fall now in real consumption spending – now worsening. The fiscal actions taken so far (income relief to households via tax rebates) and bailouts of distressed financial institutions (Bear Stearns creditors’ bailout, Fannie and Freddie and AIG) do not resolve the fundamental debt problem for two reasons. First, you cannot grow yourself out of a debt problem: when debt to disposable income is too high increasing the denominator with tax rebates is ineffective and only temporary; i.e. you need to reduce the nominator (the debt). Second, rescuing distressed institutions without reducing the debt problem of the borrowers does not resolve the fundamental insolvency of the debtor that limits its ability to consume and spend and thus drags the economy into a more severe economic contraction.

So of the five possible uses of fiscal policy – income relief to households (the 2008 tax rebate), rescue/bailout of financial institutions (Bears Stearns, Fannie and Freddie, AIG), purchase of assets of failed institutions (an RTC-like institution), recapitalization of undercapitalized financial institutions (an RFC-like institution), government purchase of distressed mortgages to provide debt relief to households (an HOLC-like institution) – the last option is the most important and effective to resolve this severe financial and economic crisis. During the Great Depression the Home Owners’ Loan Corporation was create to buy mortgages from bank at a discount price, reduce further the face value of such mortgages and refinance distressed homeowners into new mortgages with lower face value and lower fixed rate mortgage rates. This massive program allowed millions of households to avoid losing their homes and ending up in foreclosure. The HOLC bought mortgages for two year and managed such assets for 18 year at a relatively low fiscal cost (as the assets were bought at a discount and reducing the face value of the mortgages allowed home owners to avoid defaulting on the refinanced mortgages). A new HOLC will be the macro equivalent of creating a large “bad bank” where the bad assets of financial institutions are taken off their balance sheets and restructured/reduced; thus it will be the macro equivalent of the “bad bank” that Lehman tried to create for its bad assets.

Creating a new HOLC mechanism is likely to be more effective than creating a new RTC (whose purpose was to buy and dispose over a number of years of the assets of already failed S&Ls): we need to provide debt reduction to households well before hundreds of banks failed as working out the bad assets only after banks have failed is costly.

Bottom line: Households first, then the banks (which, in the end, turns out to be better for the banks, too).

And HOLC, while Obama is still waiting for word from his finance guys to scroll up on his teleprompter, is the solution Hillary has already advocated: