The Santelli Screed Hits Wrong Target on Mortgage Bailout
Commodity trader Rick Santelli made himself into a national hero of sorts with his televised diatribe about being forced to pay the mortgages of "losers" who could not afford, or would not pay, the full cost of their mortgage. Santelli apparently hit a chord among those who want to blame deadbeat homeowners for the country's economic woes.
At the risk of spoiling a promising artistic and commercial venture, people should know that Mr. Santelli is firing at the wrong target. The big gainers from the latest plan to help homeowners are not "loser" homeowners, but rather banks and investors, who will earn far more on their loser loans than would otherwise have been possible.
This is easy to see if we just adhere to the most basic rule in policy analysis: follow the money. When we follow the money, we see that the government checks do not go to homeowners.
The government checks are all made out to banks and loan servicers. In millions of cases where homeowners were not keeping up with their mortgages, the government will send checks to banks and investors that make up for much of the shortfall. In addition, the government could send them several thousand dollars more for their efforts in allowing people to stay in their homes.
While this policy is supposed to help homeowners, in many cases the best thing for these homeowners would be to move into one of the millions of vacant housing units. In most markets, they would pay a much lower share of their income for housing if they were renters rather than owners.
Furthermore, with house prices dropping at more than a 20 percent annual rate, the Cubs have a better chance of winning the World Series than these folks have of accumulating any equity in their home. Most of the homeowners who have their mortgages subsidized under this program are looking at short sales in two, three or four years.
Santelli's screed is part of a continuing effort to blame the poor and minority communities for the economic meltdown. There are millions of people who think the Community Reinvestment Act (CRA) was responsible for bad mortgages, when most of these mortgages were either made by institutions that were not covered by the CRA or were loans that would not have been covered by the Act even if the institution was covered. Of course, the idea that government bureaucrats were forcing banks to make loans that were hugely profitable at the time is laughable on its face.
At some point Santelli and his followers are going to have to deal with reality. The problem is not poor and moderate-income homeowners or African-Americans or Latinos. The perps in this case were rich bankers, the vast majority of whom were white males.
Their enablers in policy circles were not the bleeding hearts trying to help the poor, but the Wall Street envoys from both political parties; people like Henry Paulson, Robert Rubin and, of course, Alan Greenspan. The people who sank the economy were the rich and powerful, not the poor and minorities.
If Santelli wants to really be the friend of hardworking homeowners struggling to pay their mortgages, he might try yelling about the bank bailouts. According to the latest news reports, the taxpayers just sent another $30 billion to AIG, almost half as much as President Obama set aside to subsidize mortgage payments.
The checks to AIG and other financial institutions may be necessary to keep the banking system operating, but we certainly have the right to demand that the shareholders and bank executives don't profit from the bailouts. It would be great if Mr. Santelli would speak up about the real beneficiaries from these scams - the bank executives and wealthy shareholders. But the big-mouthed commodity trader probably doesn't have the courage to attack anyone with real power.
Dean, what do we do? Your argument is absolutely correct and here it's really well written too, but... it doesn't compete with Santelli screaming in front of a bunch of meat-head commodities traders who are all eager to blame their neighbors for the country's troubles.
They have a very effective meme at work -- we're helping losers. What do we do? How do we get the truth out?
March 2, 2009 1:29 PM | Reply | Permalink
Might it also be that the big-mouthed trader is working for the people with real power, who need as much smokescreening and covering fire as they can get?
March 2, 2009 1:42 PM | Reply | Permalink
The Obama housing plan is supposed to provide these payments only to banks that agree to modify loans, which specifically includes a reduction of the principle.
Not, as you claim, to make up the defaulted payments.
Then you're taking Santelli's stupid scream and turning it on its head. Santelli was actually talking about taking responsibility for one's own decisions, not relying on taxpayers to bail you out.
So, apart from being a convoluted mumbo-jumbo that tries to hit every note, your piece hits none and it doesn't make much sense.
Laughable on its face, as you would say. But I'll give you this: you're great on dishing blame.
March 2, 2009 1:52 PM | Reply | Permalink
Well, not exactly. The lender has to reduce the principal such that the payment will not exceed 38% of the borrower's income. In many cases this would exceed the amount the lender could obtain by selling the house, and so the lender is being subsidized by the difference between the amount of the write-down and the actual market value of the property. The government then pays half of the amount required to reduce the monthly payment to 31% of the borrower's income. So the lenders potentially get a very large subsidy, particularly in markets where housing prices are off 50% from peak, while the homeowner gets a small, and precarious, subsidy.
What Dean doesn't take into account, though, is that many foreclosure victims have a great deal of trouble obtaining rental housing. And those who do often rent houses that are about to go into foreclosure, after paying huge deposits and many months rent in advance. So people may be willing to take the "deal" because the alternative is so much worse.
March 2, 2009 2:30 PM | Reply | Permalink
Precisely. And the purpose of this is two-fold: keep people in their homes and avoid the bottom falling out from the housing market when lenders forclose and glut trying sell at firesale prices.
But that wasn't the point Dean was trying to make.
He's trying to find a way to link the banks, the rich and Santelli and then pitch them against the poor and the minority.
March 2, 2009 2:54 PM | Reply | Permalink
Don't forget those of us that have been scapegoated by Obama himself.
I own three properties, not because I thought I was going to be some big time investor or speculator. But family needs.
I couldn't get rid of one of the house’s (my fathers original), that needed to be moved from because of a home invasion, then the tweekers (the meth addict night crawlers) leaving their paraphernalia and punched holes in the walls.
As the market was going down and unable to sell
Now I'm stuck making the payments.
Father about to go into assisted living, (Alzheimer’s). That’s the other house payment. The one I purchased so my folks would be safe.
And also the payment on my personal residence.
As a reluctant landlord, of the first house. I now worry about renters, who can meet the reduced rent and security deposit. All the while Sheriff Joe' rounding up potential renters.
I receive the first month’s rent and some security deposit to be paid up within two payments. Then play hell to evict for damages and lack of payment on the second month, because the renter now loses their job.
Now I’m the bad ass, trying to evict some jobless person.
Then get no help because I’m the speculator who got screwed by the government, who would rather help the banks, who are dumping their toxic debt, depreciating my asset.
So much for helping others, and then watch the government Tax me in order to help the bank.
Hooray for them but for me I'm told I'm a "scumbag speculator” who caused this mess.
March 3, 2009 2:24 AM | Reply | Permalink
A thief with power and authority is still a thief. So far, the thieves at the top are winning in every way. They can even threaten to hire their right wing militia to harass us with impunity. No end to bull shit coming out peoples mouths. Whatever is coming out of their loud speaker, the brain washed will always believe. Next thing you know they be calling for us to round up the losers and burn them in ovens, they'll say it was the humane thing to do. If they cow the majority into silence, they turn America's military on the world. Funny thing is they don't care if they win or lose, they'll just move somewhere else or have a new puppet government installed to do their bidding.
March 2, 2009 2:27 PM | Reply | Permalink
I agree that Big Finance is a parasite that absconds with the money and shifts locations as needed, leaving the host empty and broken.
Most people either don't know, forget, or conveniently forget that most busted mortgagees were tricked, cajoled, and otherwise strong-armed/persuaded into their contracts in order to finance part of the largest fleecing in history, to no real or lasting benefit to them.
Anyway, NON-subprime loans make up the vast majority of the bad loans and financial instrument wagers out there.
Blaming poorer people was either ignorant or scapegoating on Santelli's part, or more likely both, making him a cynical bully. The same is true here about the commenters supporting Santelli's rants.
March 2, 2009 10:43 PM | Reply | Permalink
Santelli's screed is part of a continuing effort to blame the poor and minority communities for the economic meltdown. Dean Baker
This charge is unfair to Santelli.
Santelli is reacting to Barney Frank, Chris Dodd, and President Obama, all of whom are, according to Dean, hypocrites who are rewarding investors while claiming to be populists with hearts of gold.
In the middle of his rant Santelli showed where HIS heart is. He's going to have a Chicago Tea Party. What's he going to dump in Lake Michigan? "Derivative securities."
Not many subprime borrowers are big investors in structured financial products, eh wot?
March 2, 2009 3:07 PM | Reply | Permalink
The horse's anatomy itself says
Which boils down to "Liquidate, liquidate, liquidate!" I guess, unless I have misunderstood the latter.
Happy days.
March 3, 2009 10:33 AM | Reply | Permalink
I agree that Rick Santelli's ire re the housing "bailout" was misplaced. But unless this particular rant was scripted, and the subsequent hyping of it by CNBC and NBC was pre-planned, I don't really blame Mr. Santelli for it.
Rick Santelli is generally one of the smarter voices on Bubblevision, er, CNBC. And a previous rant of his back in the summer of 2007 -- about how ungregulated derivatives trading in CDSs and CDOs was totally out of control -- helped convince me to get my money out of stock market back then. This has saved me a ~50% haircut (so far).
So this was just Rick Santelli doing what he does. The rest of the GE machine took it and ran with it. (Perhaps this was a diversionary tactic on their part -- I notice that GE's stock is down under $8 and that some think they are now insolvent, too.)
Even Mr. Santelli knows that the true fault doesn't really lie with the homeowners. And he has been consistently against all of the bailouts proposed and undertaken by the government. It's just that his other comments and rants haven't make so much "news".
So I agree with most of your points, Dean. I just don't think Rick Santelli should be the poster boy for all these wrongheaded views. There are many things said on CNBC daily (hourly), by many other anchors and guests, which are at least as bad as those you are associating with Mr. Santelli.
-- ARG
March 2, 2009 3:10 PM | Reply | Permalink
Rick stuck his neck out there, who are we not to whack it off?
March 2, 2009 4:14 PM | Reply | Permalink
Baker finds a convenient whipping boy in Santelli, but he mucks things up worse. Santelli's tea party would toss overboard derivatives.
Baker also mucks up macro and micro views. The macro view is that homeowners in effect ripped off investors for trillions. This happened in two ways: Equity loans and house sales. The cash from investors flowed via those mechanisms into the general economy, inflating the whole economy. There is no blame here, it's a macro view.
The micro view per Baker is correct enough. Most individual home owners did not rip anyone off. The ripoffs were in complicated mortgages and some outright frauds. But the fact remains that a huge fraction of homes bought going into the peak of the bubble were not only not bought by first time homebuyers moving from rentals into ownership, they were bought as investment properties.
While I can sympathize with someone who got caught out in a lousy speculative investment, I see no reason to bail them out since they still have roofs over their heads. To the extent that homeowners end up living on the street, then I'm willing to consider offering the use of existing safety nets. But as noted by Baker, rentals are available and are currently attractive.
I've proposed (since October) that some homeowners be given a lease-option exit from a bad deal mortgage situation. Baker seems to be getting close to this micro virtue which could work as macro too.
As for Baker's view of AIG, it is sadly old hat. Funneling government cash flow through AIG to gamblers and crooks is just wrong. Lumping non-banks in with banks and then letting the non-banking parts dictate bank regulatory and clean-up conduct is just wrong.
Why isn't Baker saying this explicitly?
March 2, 2009 4:41 PM | Reply | Permalink
"huge fraction"
hum
Pass the jumbo shrimp.
March 2, 2009 4:52 PM | Reply | Permalink
jumbo loan, you mean!
Are you asking a question about my unstated data?
March 2, 2009 5:02 PM | Reply | Permalink
I think Bwakfat is simply noting that "huge fraction" seems like an oxy-moron, that is, a self-contradictory phrase, like "jumbo shrimp" or "military intelligence".
Not to speak for the big rooster, but I think he was just making a snarky point for the humor value.
-- ARG
March 2, 2009 5:41 PM | Reply | Permalink
I got the "snark" part, but wasn't clear about its aim, and didn't get your "just" as in "merely"!
March 2, 2009 5:49 PM | Reply | Permalink
=D
You win.
March 2, 2009 5:53 PM | Reply | Permalink
No eds. I'm a hen, btw. I'm just trying to get you to smile.
March 2, 2009 5:52 PM | Reply | Permalink
:-)
It's hard work being serious, sometimes!!
March 2, 2009 6:21 PM | Reply | Permalink
I figgered!
=D
March 2, 2009 6:30 PM | Reply | Permalink
I don't always "smile out loud" when posting comments. Not sure why not, maybe that "precision" thing combined with my born-again moralism... and a usually dry if not subtle sense of humor!
Ya think there might be a "radio market" for a progressive moralist message? Not that I want to emulate Rush... but the cash would help, might even get me to buy a house thus helping the macroeconomics shift positively a tiny bit!
March 2, 2009 7:29 PM | Reply | Permalink
I'm a hen, btw.
Sorry, Bwakfat. I'm pretty much a city boy. (But I suppose I should have noticed the... um... nice breasts.)
-- ARG
March 3, 2009 10:07 AM | Reply | Permalink
Naturally when Dr. Analysis speaks of "ripped off," she has not the least intention of crudely blamin' anybody.
Happy days.
March 3, 2009 10:41 AM | Reply | Permalink
If you're going to go to the trouble of using blockquotes, why not copy paste what I actually typed in, when you make stupid reply?
March 4, 2009 4:28 AM | Reply | Permalink
It's funny, this rant is exactly the same as Santelli's; Dean just blames different people.
It is true, as Santelli says, that millions of homeowners were shockingly irresponsible (that's why they're broke). These people signed on the dotted line and they deserve what they get. It is also true, as Baker says, that millions (okay, thousands) of bankers were shockingly irresponsible. And they deserve what they get (well, not bailout money, but pink slips anyway).
Baker is also correct that this new money is going to benefit banks more than homeowners. To the banks, it's a new income stream. To the homeowners, it's money they wouldn't have paid being paid. It gets rid of a bad debt; a debt they'd erase through BK anyway, and many of them still will.
So the losers are those of us (and yes, I ount myself in this group) who acted responsibly.
So much for a reward for virtue.
March 2, 2009 5:39 PM | Reply | Permalink
Virtue is not its own reward??
I wonder what the net fraction of future taxpayer costs can be applied to the virtuous responsible parties. So far it looks like about $30,000 per taxpayer, or so. That's a lotta loose change!
Do you have any constructive solutions? The drift I get from your comments is just shy of laissez-faire nihilism.
March 2, 2009 6:28 PM | Reply | Permalink
Laissez-faire, perhaps, although not in the modern knee-jerk vein, but not a nihilist. Just because I don't happen to believe there is anything constructive to do that will avoid all the pain and suffering our collective irresponsibility has inflicted on ourselves doesn't mean I don't believe it will all work out.
We have to take our medicine. Americans, rich and poor alike, have been pretending to be richer than they are for some time. That has to stop. It's going to HURT.
But that's okay. My comments boil down to this advice to our policymakers and the pundits who feed on them:
"When you find yourself at the bottom of a hole... stop digging."
Oceans of government debt will not solve the problem of oceans of private debt. Bankruptcy will.
March 3, 2009 12:10 PM | Reply | Permalink
That's fair to middling advice if read right, bad advice otherwise. I guess you like to speak in ungrounded riddles.
Government borrowing to build general productivity (stimulus) is quite difference from consumer borrowing which merely churned the economy, however well or poorly it works out.
March 4, 2009 4:33 AM | Reply | Permalink
Entitlement-think runs amok!
But perhaps the Virtuous cease to be virtuous as soon as they start wanting to be paid for it?
Happy days.
March 3, 2009 10:53 AM | Reply | Permalink
A few years ago, my wife and I nearly took on a mortgage we couldn't afford in order to buy a house we couldn't afford. The reason? We had a choice between buying a house we couldn't afford or renting an apartment we couldn't afford. I wish people would stop assuming that folks who bought overpriced houses were being "irresponsible". The market was overvalued because greedy real estate investors were flipping houses for an easy profit--at the expense of people like my wife and me. We didn't end up buying a house because got lucky and found a decent apartment at a decent price, but many others got lured into buying. I'm not surprised because we almost fell for the scam too. At the time, everyone was telling us that housing prices were going to continue to rise. We were beginning to believe the hype. And we were beginning to believe that if we didn't buy soon, home ownership would quickly be out of our reach.
The choice was never about buying an overpriced house or not living anywhere at all. It was about paying too much for a house, and at least having the tax advantages of ownership, or paying too much for an apartment. Real estate flippers suck, and their greed screwed all of us.
"Those who buy and sell goods for a profit are the lowest class, because they contribute nothing to society and instead make their living from the work of others."
Miyamoto Musashi
"The Book of Five Rings"
March 4, 2009 5:07 AM | Reply | Permalink
When the Government interfered, and gave a bailout, the banks had NO incentive to work with the homeowners or Investors of that asset class.
Why should they.
If there had been no Government bailout what options would the banks have considered? I guess we’ll never know.
I tried to exchange property, thinking what a great opportunity to relocate into a better neighborhood. Willing buyer/willing seller, or a Trade, except the transaction needed a facilitator.
I tried to trade a lower value home, easily affordable for some prospective homeowner or new renter. I would be trading up into a home of more value that I could afford to make payments on. A Win/Win for the bank with fees paid.
Instead the banks opted for auctions and foreclosures, when they could have worked at being a facilitator as in a 1031 Exchange program or designed some like program.
March 2, 2009 8:06 PM | Reply | Permalink
Keep in mind that the rich are in control thru the use lobby and campaign finance. So basically the government did what the rich asked them to do. You are just not high enough on the totem pole to get what you want.
March 2, 2009 8:49 PM | Reply | Permalink
Was it not the government bureaucrats at Fan and Fred that changed the rules of the game back in the 90's to purchase and bundle inherently risky no money down mortgages?
They did nor "force" them, but by creating a market for highly risky mortgages with a government stamp of approval these government bureaucrats certainly played there part.
March 3, 2009 11:57 AM | Reply | Permalink