This goes on while major national banks and sectors of Wall Street, the culprits that caused most of this grief, are now prospering big time. The reason they are prospering is because of American taxpayer’s money given to them by the US Government, otherwise known as bailouts.
The current mortgage crisis began in the 2006-2007 time-frame, when there was a large increase in mortgage defaults and foreclosures; particularly with so-called “sub-prime” mortgages. By late 2008, the crisis grew to the point where it threatened the existence of several leading Wall Street banks, and incurred the possibility of dragging the entire U.S. economy into collapse should these banks fail. The term “too big to fail” became the watchword echoed throughout the media. The crisis led to the worst downturn in the U.S. economy since the Great Depression of the 1930s. As a result, the stock market dipped severely, unemployment greatly increased, and the housing foreclosure crisis continued to grow.
In a move to prevent a cataclysmic financial meltdown, in late 2008 the George W. Bush administration hastily prepared plans for a taxpayer-funded bailout of the financial industry, along with a few other ailing sectors. Congress authorized the Treasury Department to borrow up to $700 billion from the Federal Reserve in a program known as the Toxic Asset Relief Program (TARP), in order to bailout ailing Wall Street banks. The program was also extended to insurance giant A.I.G., and carmakers Chrysler and General Motors. The bailouts caused widespread public outrage, and helped spawn the Tea Party movement in 2009 (The New York Times, December 10, 2010). The outrage continues today with the Occupy Wall Street movement.
One of the congressionally mandated goals that came with TARP was that the legislation was also intended to protect home values and preserve home ownership. The Treasury Department told Congress that TARP would be used to purchase up to $700 billion worth of toxic mortgages, with the Treasury Department working to modify these mortgages to assist struggling homeowners. Instead, Treasury shifted hundreds of billions of dollars directly to financial institutions, with no conditions on how the money was to be used. The result was the failure of this program to assist a great many homeowners facing foreclosures. By the end of the first-quarter of 2011, slightly more than a half-million mortgages had been modified, while foreclosures in the millions continued to mount (Barofsky, Niel M., March 29, 2011).
After being bailed out, the banks actually increased their rate of foreclosures. In August of 2011, officials from Nevada sued Bank of America (BoA) for violating the agreement to provide loan modifications to eligible borrowers, and instead initiating foreclosures while consumers’ modification requests were still pending. The California Attorney General opined that there was a significant gap between the relief promised to troubled home owners and what was actually delivered; and mechanisms to hold BoA accountable were not in place (Glantz, Aaron, November 10, 2011).
Between when this crises began in 2007 through 2009, an estimated 2.5 million foreclosures happened. However, an estimated 5.7 million foreclosures are imminent. This will eventually result in around 8.2 million total homes lost to foreclosure. However, these statistics may not be consistent with experience, and the numbers may be way understated. As the recession continues to take its toll on families who are facing unemployment/underemployment, with many people using up savings or maxing out revolving credit sources just to stay afloat, there could be tens of millions more foreclosures than previously anticipated (Johnson, Doug, December 29, 2011).
The bottom line is that while Wall Street banks benefitted greatly from being bailed-out by the benevolent U.S. Congress, homeowners were largely left out in the cold. As a result, foreclosures continue, housing values are plummeting, people with underwater mortgages are now doing strategic-defaults (also called “walking away”), and things will likely get worse before they ever get better. Written by John F Smalley
Barofsky, Neil M., (March 29, 2011). Where the Bailout Went Wrong. The New York Times. Retrieved from: http://www.nytimes.com/2011/03/30/opinion/30barofsky.html?_r=1&ref=bailoutplan
Glantz, Aaron. (November 10, 2011). Mortgage Settlement: Many are Left Behind. The New York Times. Retrieved from: http://www.nytimes.com/2011/11/11/us/mortgage-settlement-many-are-left-behind.html?ref=foreclosures
Johnson, Doug. (December 29, 2011). Do You Know the Severity of the Foreclosure Crisis. Ezinearticles.com. Retrieved from: http://ezinearticles.com/?Do-You-Know-the-Severity-of-the-Foreclosure-Crisis&id=6785616
The New York Times. (December 10, 2010). Credit Crisis—Bail Out Plan (TARP). Retrieved from: http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/bailout_plan/index.html