Gosh... who could have seen this coming?

NY Times story today:

Democratic lawmakers insisted that the Treasury use its authority to help restructure many subprime mortgages so that at least some troubled homeowners could avoid foreclosure.

But the Treasury’s auction plan will make that difficult. More than 90 percent of all subprime mortgages are part of giant pools, or trusts, which sell mortgage-backed securities to investors around the world.

Before the government would be able to modify any mortgage that was in a trust, securities experts said, it would have to acquire agreement from 100 percent of the bondholders. But a senior Treasury official said the government would probably want to buy no more than half of the securities tied to a trust, which would hamper winning agreement from all investors.

But it's going to be okay, because a staffer for Jesse Jackson, Jr. told CNN that Jackson  "received assurances from (Sen. Barack Obama) that, if elected, his administration will aggressively use authority in the bill to prevent foreclosures and stabilize the housing market."

I'm looking forward to hearing more from the Obama campaign about what he has in mind.

I live in Cleveland, Cuyahoga County, Ohio.

If history is any guide, Cuyahoga County will cast about 8% of Ohio's votes on November 4.  A quarter of Ohio's new voter registrations this year have happened here. The Obama campaign is banking on getting a big turnout and a very big share of the votes in this county to help squeak out an Ohio win.

Since January 1, over 9,900 foreclosures have been filed in our county court.  The monthly filings dipped below 1,000 in August, but seems to have bounced back to the 1,200 mark in September... which means 2009 will probably be this county's third straight 14,000-foreclosure year. 

So far this year, over 5,000 of those foreclosures have resulted in actual sheriff's auctions. So by the end of the year, we'll almost certainly have added 7,000 vacant houses to the huge number we already had at the end of 2007.

About 4,600 of those foreclosures and 2,500 of those sheriff's sales to date have been in the battered city of Cleveland. The majority of the county's foreclosures now take place in the suburbs: Euclid, Cleveland Hights, Garfield Heights, Warrensville Heights, Bedford, Shaker, South Euclid.

The overwhelming majority of Cuyahoga County's forceclosures are filed by trustees for securitized investment vehicles -- notably Deutsche Bank, US Bank, Wells Fargo, HSBC and Citi.  Deutsche Bank has never made a loan here, but they serve as trustee for dozens of securitization pools created by the defunct Argent Mortgage (bought out by Citi in 2007) and other national subprime peddlers who dominated the local mortgage market from 2003 through 2007.

The huge pile of local mortgages created by this predatory feeding frenzy is embedded in hundreds of SIVs whose bonds ("mortgage backed securities", or MBSes) are now the main target of the bank bailout bill -- the "toxic assets" that would be dumped on the Treasury in exchange for our $700 billion.

Viewed from Cuyahoga County, the failure of Democrats in Congress -- especially Senators Obama and Biden -- to insist on real foreclosure relief for Cuyahoga County (and Dayton, and Toledo, and Detroit, etc., etc.), as the price of their support for bailing out the banks and investment houses holding these toxic assets is utterly inexplicable.

Obama constantly invokes help for "homeowners and distressed communities" as a condition of his support for a bailout deal. But the "bipartisan bill" rejected yesterday by the House contained no guarantee of real foreclosure relief for people whose mortgages are embedded in MBSes bought by the Treasury, and no help at all for communities like Cleveland to deal with the deluge of foreclosed vacant properties owned by the same securitized mortgage pools.

Essentially the same bill is apparently heading for a vote tomorrow in the Senate, where Obama and Biden (and McCain) will be squarely in the spotlight. What will Obama's "conditions" mean to people in Cleveland if he votes for it, or dodges the vote?

Even more disturbing are new reports from the LA Times and Bloomberg that Obama personally intervened to get Chris Dodd and other Democrats to drop mortgage-bankruptcy reform from their negotiating agenda because it's a "deal-breaker". 

I'm a Democrat, an Obama supporter and a militant pragmatist when it comes to national politics. But how the hell does the Obama campaign think  this oblivious brand of "statemanship" is going to help win Ohio or Michigan?

It sure isn't going to do anything for the turnout in Cuyahoga County.

New York Times.

Speaker Pelosi's description.

The Times article says: "[The agreement] requires the government to use its new role as owner of distressed mortgage-backed securities to make more aggressive efforts to prevent home foreclosures..."

The Pelosi statement says: "The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year."

What do these words mean? 

Will the bill give the government new statutory power to compel the corporations servicing the mortgages pooled into mortgage-backed securities to make better deals with mortgage payers? Is the government being required (allowed? encouraged?) to demand that authority by contract before it agrees to buy up a bank's securities?

Does this include mortgages already in foreclosure? Can the government tell the servicers to stop foreclosing homes while they go back and try to rework the loans according to the government's new guidelines?  What happens if the servicers fail, or refuse, to do so?

Pelosi refers to the government's "power as the owner of mortgages and mortgage backed securities to facilitate loan modifications."  If the government buys the mortgages themselves, no question, that power is real. 

But buying real mortgages isn't what this bailout deal is about. It's about buying the banks' nonperforming securities -- i.e. bonds, not ownership shares -- that were issued by "structured investment vehicles" backed by pools of thousands of actual mortgages. In most cases a specific bank or investor won't own all the bonds issued by any specific pool, and inno case do those bonds give their holder actual ownership or management authority over the underlying mortgages.

So if the government takes a bunch of these securities off the bank's hands, what "power as the owner" is it buying?  None at all, unless...

a) there's something specific in the law to create such power,  or

b) the government simply refuses to buy the securities unless the seller can arrange  to transfer management power over the mortgages in the pool, by amending the underlying pooling and servicing agreements.

Based on the discussions of the past week, and what I heard from Sherrod Brown's staff on Thursday, I  don't believe either of these possibilities has ever been on the table.  In fact, I'm not sure anyone on the Democratic side has ever really given them much thought. After all, there are no lobbyists at the table for troubled mortgage payers, are there?

So I really doubt that the nice-sounding phrases in the Times story and Pelosi statement mean  much of anything in the real world, where mortgage pool servicers like Citi Residential and Wells Fargo and their armies of foreclosure-specialist attorneys will go right on raping Cleveland neighborhoods, after their parent companies have dumped the financial consequences on us.

And incidentally, I don't hear anyone talking about new government power to affect what  happens to the hundreds of thousands of already-vacant foreclosed houses in the inventories of those mortgage pools, under the control of the same servicers.

But I guess we'll have to wait to see the language.  Maybe even before  they vote on it.