Elizabeth Warren Says U.S. Foreclosure Rate Threatens Entire Economy

Depression in the USA caused by foreclosures?

An official report on foreclosures released on March 6th by the Congressional Oversight Program (C.O.P for short) warns that the rate of foreclosure in the U.S. is now three times higher than at any other time in recorded history and threatens to completely tank the American economy.

In an interview today with National Public Radio’s Terry Gross, C.O.P. Director Elizabeth Warren likened the number of foreclosures in 2008 to the equivalent of “three Hurricane Katrinas” in terms of the number of Americans displaced by home loss. The foreclosure report comes as states with the worst foreclosure rates are just now starting to report the formation of ‘tent cities’ to house residents left homeless by the crisis.

A photo essay showing a tent city of 1200 that is currently growing outside Sacramento was posted today at MSNBC. ‘Tent cities’ sprang up during the Great Depression and were nicknamed ‘Hoovervilles’ by residents who blamed the policies of former President Herbert Hoover for pushing the country into financial crisis. Hoover, like modern day Republican critics of the Obama administration, believed that government should pull back on spending in the wake of the financial crisis that followed the crash of 1929.

The Congressional Oversight Program was created to track the controversial Troubled Asset Relief Program (TARP), under which Treasury Secretary Henry Paulson (during the Bush administration) was supposed to buy up the bad mortgaged-backed securities clogging the books of major banks and thereby stabilize the U.S. financial system.

So far, about $300 billion of the $700 billion TARP grant has been spent, all of it with very little transparency or accountability on Paulson’s part. During the interview Warren said that when asked, Paulson sent a letter to the commission describing how the money was spent. Upon further investigation, the brief letter turned out to be very deceptive, cloaking the fact the assets were purchased at rates so low they amounted to cash subsidies to major banks. Banks in the worst trouble (like Citi) got the biggest subsidies.

Depression era tent cities formed to house the displace and were called "Hoovervilles" after then-President Herbert Hoover.

The commission also discovered that at the same time Paulson was buying up these assets at artificially low rates, individuals in Middle Eastern countries such as Saudi Arabia were paying premium prices for the exact same assets: prices that resulted in a profit for the banks holding the assets. Paulson was using the purchase of assets as a cover for basically recapitalizing the banks at taxpayer expense.

Elizabeth Warren is a former law professor at Harvard University, an expert on bankruptcy, and a long time consumer advocate. Warren does not have any power to prosecute as head of the oversight committee. Her sole task is to uncover information about how government bailout funds are being spent and provide that information to the American public.

The C.O.P. foreclosure report is available at the C.O.P. website for anyone to read. It is a deeply disturbing document. As bad as things appear on the surface, the document makes the case that they are actually much, much worse than that. Warren also remarked in her interview with Gross that, although the TARP program has committed $700 billion in taxpayer money to clear up the books at failing U.S. banks, FDIC and the Federal Reserve have committed over $2 trillion (in addition to the $700 billion in TARP), and neither the FDIC or the Fed are subject to public scrutiny.Most of the tainted mortgage-backed securities are still weighing down major banks, many of which are likely insolvent.

Warren found that even getting accurate information about subprime loans was seriously hampered by the disarray of the originating documents and the relative lack of professional organizations set up to track such data. Operating on the best information available, the Warren foreclosure report estimated that one in nine U.S. homes will be foreclosure by 2010, and that the current program put forth by the Obama administration to work around some mortgage loans to prevent foreclosure will not help most of the people experiencing this loss.

The reason for this is the Obama program does not address homes that are “underwater”; meaning, homes that have seen such a dramatic drop in value that the mortgage is for much more money than the home is now worth. In states like CA, FL, and Nevada, home prices in some areas have already fallen 50% or more, leaving people who got 100% financing during the boom badly upside down on their loans. No bank will refinance these homes. Warren estimates that as many as onei n four mortgages in the U.S. are now upside down.

Worse, even homes eligible under the program can only be refinanced at the discretion of the lender and the servicing agent for the mortgage (usually not the same entity because of the way the mortgages were packaged and sold). In most cases, the servicing agent benefits more from foreclosure than from a refinance work-around. Servicing agents are under no requirement to comply with the work-around program.

Complicating the problem even furhter is the fact that many, many failing mortgages are combined with home equity loans and lines of credit that must be renegotiated before any attempt can be made to touch the underlying bad mortgage. During the boom, HELOCs and HELs were often combined with subprime mortgages so that buyers could obtain 100% financing on properties in the most inflated markets.

Conditions in the U.S. real estate market are likely to deteriorate fairly severely in 2009 and into 2010 unless more drastic measures are taken quickly: Something that there currently seems to be very little political will to do.  The COP foreclosure report and the interview with Warren came on the same day that bilionaire Warren Buffet declared very publically that the U.S. economy had “fallen off a cliff,” sending the DOW down another 79 points.