Friday, February 22, 2008

Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish

Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish

By Bob Ivry

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Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.

That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents's mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

``If you're going to take my house away from me, you better own the note,'' said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven't been able to prove they own the mortgages. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.

``I think it's going to become pretty hairy,'' said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. ``Regulators appear to have ignored this, given the size and scope of the problem.''

More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethesda, Maryland-based industry newsletter. Those loans may be sold several times before they land in a security. Mortgage servicers, who collect monthly payments and distribute them to securities investors, can buy and sell the home loans many times.

Housing Boom

Each time the mortgages change hands, the sellers are required to sign over the mortgage notes to the buyers. In the rush to originate more loans during the U.S. mortgage boom, from 2003 to 2006, that assignment of ownership wasn't always properly completed, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Indiana.

``Loans were mass produced and short cuts were taken,'' White said. ``A lot of the paperwork is done in the name of the original lender and a lot of the original lenders aren't around anymore.''

More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg data.

The foreclosure rate, at 1.69 percent of all U.S. homeowners, is the highest since the Mortgage Bankers Association began tracking it in 1993. The foreclosure rate for subprime borrowers, who have bad or incomplete credit and whose mortgages typically are securitized by private banks rather than government-sponsored entities Fannie Mae and Freddie Mac, is at a four-year high, according to the mortgage bankers.

750,000 Homeowners

More than 1.5 million homeowners will enter the foreclosure process this year, said Rick Sharga, executive vice president for marketing at RealtyTrac Inc., the Irvine, California-based seller of foreclosure information. About half of them, 750,000, will have their homes repossessed, Sharga said.

Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures.

``The best thing to do is to keep people in their homes and for everybody to take steps necessary to make that happen,'' said Chris Geidner, an attorney in Dann's office. ``These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people. They become foreclosure machines.''

Lost-Note Affidavits

When the mortgage servicers and securitizing banks that act as trustees of the securities fail to present proof that they own a mortgage, they sometimes file what's called a lost-note affidavit, said April Charney, a lawyer at Jacksonville Area Legal Aid in Florida.

Nobody knows how widespread the use of lost-note affidavits are, Charney said. She's had foreclosure proceedings for 300 clients dismissed or postponed in the past year, with about 80 percent of them involving lost-note affidavits, she said.

``They raise the issue of whether the trusts own the loans at all,'' Charney said. ``Lost-note affidavits are pattern and practice in the industry. They are not exceptions. They are the rule.''

State laws generally make it difficult to foreclose because they favor the homeowner, said Stuart Saft, a real estate lawyer and partner at the New York firm Dewey & LeBoeuf LLP.

``All these loan documents are being sent to the inside of a mountain in the middle of America and not being checked very carefully,'' Saft said. ``The lenders can't find the paper. We're dealing with a lot of paper produced in a mortgage closing.''

`Waste of Time'

Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP.

``It's a gigantic waste of time,'' Naimon said. ``The mortgage may have transferred five, six, eight times. It's possible that you don't have all the pieces of paper, but it was enough to convince the next guy in the chain. There's no true controversy over whether the owner owns the loan.''

Judges are becoming increasingly impatient with plaintiffs who produce no more proof of ownership than a lost-note affidavit or a copy of the note, said Michael Doan, an attorney at Doan Law Firm LLP in Carlsbad, California.

``Things are heating up,'' Doan said.

In Ohio, where RealtyTrac reported an 88 percent jump in foreclosures last year, Dann, the attorney general, is now arguing 40 foreclosure cases that challenge ownership of mortgage notes, according to his office.

`Cavalier Approach'

U.S. District Judge David D. Dowd Jr. in Ohio's northern district chastised Deutsche Bank National Trust Co. and Argent Mortgage Securities Inc. in October for what he called their ``cavalier approach'' and ``take my word for it'' attitude toward proving ownership of the mortgage note in a foreclosure case.

John Gallagher, a spokesman for Frankfurt-based Deutsche Bank AG, said the bank had no comment.

Federal District Judge Christopher Boyko dismissed 14 foreclosure cases in Cleveland in November due to the inability of the trustee and the servicer to prove ownership of the mortgages.

Similar cases were dismissed during the past year by judges in California, Massachusetts, Kansas and New York.

``Judges are human beings,'' said Kenneth M. Lapine, a partner at the Cleveland law firm Roetzel & Andress LPA. ``They no doubt feel the little guy needs all the help he can get against the impersonal, out of town, mega-investment banking company.''

Warning Plaintiffs

U.S. Bankruptcy Judge Samuel L. Bufford in Los Angeles issued a notice last month warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies.

``This requirement will apply because developments in the secondary market for mortgages and other security interests cause the court to lack confidence that presenting a copy of a promissory note is sufficient to show that movant has a right to enforce the note or that it qualifies as a real party in interest,'' the notice said.

Quick foreclosures benefit communities because properties in default lose value and homeowners in financial distress don't maintain their houses or pay real estate taxes, said Saft of Dewey & Leboeuf.

Painted as the Enemy

``When banks originally made the loans they used people's money from pension funds and savings accounts and they should be allowed to foreclose the loan as quickly as possible before the property depreciates in value any more,'' Saft said. ``The mortgage industry has been painted as the enemy when all they did was make loans to enable people to buy homes. Now there's less money available for new borrowers to buy homes and that's what's causing the value of homes to go down.''

Lents is former CEO of Investco Inc., a Boca Raton, Florida-based developer of voice recognition software. In 2002, the U.S. Securities and Exchange Commission sanctioned Lents and others for stock manipulation, according to the SEC Web site. He lost his job, was fined and his assets were frozen. That's the reason he couldn't pay his mortgage, he said.

``If the homeowner doesn't object to the lost-note affidavit, the judge rubber-stamps it,'' Lents said. ``Is it oversight, or are they trying to get around the law?''

Washington Mutual spokeswoman Geri Ann Baptista said the bank had no comment.

Looking for Loopholes

``I can't believe the handling of notes is worse than it was five years ago,'' said Guy Cecala, publisher of Inside Mortgage Finance. ``What we didn't have back then were armies of attorneys out there looking for loopholes. People are challenging foreclosures and courts are paying a lot more attention to foreclosures than they ever did before.''

American Home Mortgage Investment Corp., the Melville, New York-based lender that filed for bankruptcy last August, said it was paying $45,000 a month to store loan paperwork and petitioned U.S. Bankruptcy Judge Christopher Sontchi in Wilmington, Delaware, for the right to toss it all. Sontchi ruled last week that American Home Mortgage could charge banks from $3 to $13 a file to retrieve documents.

The home-loan industry has had a central electronic database since 1997 to track mortgages as they are bought and sold. It's run by Mortgage Electronic Registration System, or MERS, a subsidiary of Vienna, Virginia-based MERSCORP Inc., which is owned by mortgage companies.

No Tracking Mechanism

MERS has 3,246 member companies and about half of outstanding mortgages are registered with the company, including loans purchased by government-sponsored entities Fannie Mae, Freddie Mac and Ginnie Mae, said R.K. Arnold, the company's CEO.

For about half of U.S. mortgages, there is no tracking mechanism.

MERS rules don't allow members to submit lost-note affidavits in place of mortgage notes, Arnold said.

``A lot of companies say the note is lost when it's highly unlikely the note is lost,'' Arnold said. ``Saying a note is lost when it's not really lost is wrong.''

Lents's attorney, Jane Raskin of Raskin & Raskin in Miami, said she has no idea who owns Lents's mortgage note.

``Something is wrong if you start from what I think is the reasonable assumption that these banks are not losing all of these notes,'' Raskin said. ``As an officer of the court, I find it troubling that they've been going in and saying we lost the note, and because nobody is challenging it, the foreclosures are pushed through the system.''

Florida Schools, California Convert Auction-Rate Debt

Florida Schools, California Convert Auction-Rate Debt

By Jeremy R. Cooke

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California, Florida schools and the owner of John F. Kennedy International Airport joined a growing list of municipal borrowers exiting the U.S. auction-rate bond market as record failures push taxpayer costs higher.

Thousands of auctions run by banks to set rates on the debt failed this month as investors shunned the securities and bankers refused to submit bids, sending interest costs to 10 percent or higher on some bonds. Auctions covering as much as $26 billion of bonds a day failed to attract enough buyers since Feb. 13, according to Bank of America Corp.

Florida's Palm Beach County Schools converted $116 million of the securities into fixed-rate debt this week, while the Seattle area's Valley Medical Center refinanced $170 million. The Port Authority of New York and New Jersey, which runs JFK and other airports, bridges, tunnels and sea terminals around New York City, said it would redeem $200 million next month after its weekly interest rates rose as high as 20 percent.

``We expect to be out of the auction-rate market business in six to eight weeks,'' said Steve Coleman, a Port Authority spokesman.

Rates in the more than $300 billion auction market, where local governments, hospitals, museums, student-loan agencies and closed-end mutual funds borrow, are determined through a bidding process every seven, 28 or 35 days. Auctions fail when there aren't enough buyers. That's left bondholders who wanted to sell stuck with the securities and taxpayers or other backers of the debt such as fund holders with higher interest costs.

Two-Thirds Fail

Today, 386 auctions of publicly offered bonds resulted in 258 failures, or 67 percent, according to data compiled by Bloomberg from four auction agents, Deutsche Bank AG, Bank of New York Mellon Corp., Wilmington Trust Corp. and Wells Fargo & Co. The firms are responsible for receiving orders from broker- dealers and determining the winning rate. They also perform some administrative services for the borrower.

About two-thirds of auctions have failed per day since Feb. 15, according to data compiled by Bank of America and Bloomberg.

Just 44 failures were recorded between 1984, when the market was created, and the end of last year, Moody's Investors Service said in a Feb. 19 report.

The rates when auctions fail are spelled out in documents governing the bonds, and are set as high as 20 percent or based upon money-market benchmarks.

Penalty Rates

Borrowers must pay the penalty rates until buyers support future auctions or they can modify the bonds to another kind of variable-rate debt or apply a fixed rate.

The average rate for seven-day municipal auction bonds rose the most ever to a record 6.59 percent on Feb. 13 from 4.03 percent the previous week, according to indexes compiled by the Securities Industry and Financial Markets Association.

Palm Beach school officials started working on a conversion plan in December when rates exceeded 4 percent. They reached 9.75 percent this week, short of the 15 percent penalty rate. The district's interest payment for this week's auction was about $220,000, up from $107,000 in December.

``As a public entity, that's an unacceptable level of risk for us,'' said Leanne Evans, treasurer of the 170,000-student district, one of the five largest school systems in Florida.

After converting the debt, the district will pay 4 percent through a mandatory buyback in 2011, compared with 2.63 percent for top-rated three-year fixed-rate bonds. The bonds still carry insurance from downgraded insurer FGIC Corp.

Ahead of Rest

Renton, Washington-based Valley Medical Center expanded the size of its previously planned bond sale by about 90 percent this week to refinance all of its auction-rate debt. Failed auctions sent one of the hospital's rates to 15 percent the past two weeks from 3.75 percent the first week of February.

On $65 million of the debt, that's a difference of about $142,000 in interest costs from one week to the next.

``We're 30 to 60 days probably ahead of most of the rest'' of other borrowers looking to convert, said Jeannine Grinnell, treasurer of the medical center, which borrows as King County, Washington, Public Hospital District No. 1.

California, the biggest municipal borrower, plans to replace $1.25 billion of auction-rate bonds, debt manager Paul Rosenstiel said this week. New York City's Municipal Water Finance Authority yesterday said it will pay off auction debt by selling $684 million of variable-rate demand notes on March 18.

No Support

Until this year, banks that collect annual fees of about 0.25 percent to run auctions would step in to stop failures when bidding faltered. Goldman Sachs Group Inc., Citigroup Inc., UBS AG and Merrill Lynch & Co. stopped committing capital after banks sustained at least $146 billion in credit losses and writedowns from the subprime mortgage collapse.

That's left corporate treasurers and wealthy individuals, some of whom bought the debt as cash equivalents, unable to access their money.

``The auction-rate market was not as deep or as wide as people thought it would be,'' said Christopher ``Kit'' Taylor, former executive director of the Municipal Securities Rulemaking Board, in an interview from Washington. ``People were borrowing short to fund a long-term project. Issuers were trying to take advantage of that yield curve. It didn't work out for them.''

About 87 percent of auctions on Feb. 14 failed, up from 2 percent a week earlier, according to Bank of America. By Feb. 20, the rate declined to about 66 percent.

Demand from hedge funds and other investors attracted by the higher rates helped some auctions succeed this week, especially those offering the possibility of yields above 10 percent, said Evan Rourke, a portfolio manager at M.D. Sass Associates in New York.

Emblematic Rate

The Port Authority's 20 percent taxable rate, cited by New York Governor Eliot Spitzer and U.S. Senator Charles Schumer last week as emblematic of the crisis, fell to 8 percent. That's still twice what the authority was paying in January.

For $100 million of such debt, the authority owes more than $544,000 in interest for the past two weeks, up from $156,000 during two weeks in January.

Other borrowers planning to get out of some or all of their auction-rate obligations are the state of New Jersey, New York's Nassau County, Children's Hospital of Philadelphia and utility units of Charlotte, North Carolina-based Duke Energy Corp. that sold tax-exempt debt.

Investors focused on opportunities in auction-rate bonds sapped demand for fixed-rate debt this week. Concern that ailing bond insurers will continue to lose top credit ratings also weakened municipal bonds, even as Treasuries gained.

Yields Rise

The Bond Buyer 20, a yield index of 20-year general obligation bonds, rose 19 basis points, the most in more than four years, to 4.66 percent. A basis point equals 0.01 percentage point. Municipal borrowers sold $2.3 billion of fixed-rate bonds, down from $4.5 billion last week, Bloomberg data show.

Unlike Treasuries or equities, there is no central daily source of information about auction-rate bonds. Issuers have relied on banks to be buyers of last resort when bidders couldn't be found at their auctions.

Since the first of the securities were sold in 1984 for American Express Co., the market has expanded as investors sought the bonds as a higher-yielding alternative to money- market funds, which aren't eligible to buy the debt.

Along the way, New York-based Lehman Brothers Holdings Inc. was fined $850,000 in 1995 by the Securities and Exchange Commission for manipulating auctions conducted for American Express. Almost two years ago, 15 securities firms paid the SEC $13 million to settle claims of bid-rigging in auction-rate bonds. The banks neither admitted nor denied wrongdoing.

Disclosing Knowledge

While the SEC required dealers to disclose that they may use insider knowledge to place bids, they don't have to say how frequently they bid or how much. Dealers also aren't obligated to disclose rates on auction debt when the securities trade.

State regulators are scrutinizing sales of auction-rate securities by closed-end mutual funds after investors complained they couldn't sell their holdings. Massachusetts Secretary of State William Galvin asked nine fund companies for information on failed auctions, his office said in a statement.

Ohio Attorney General Marc Dann might file lawsuits after state funds bought the securities, according to spokeswoman Jennifer Brindisi.

``Any time that there are actions which are not transparent or not in the public interest, and if they have a detrimental effect upon the carrying out of appropriate public policy, it's hurtful and detrimental,'' Ohio Governor Ted Strickland, a Democrat, said in an interview from Columbus.

IRS Rules

The Internal Revenue Service said this week that it plans to issue new rules that would make it easier for local governments to convert high-rate auction bonds to lower-cost debt. The changes wouldn't be such a significant modification that it would amount to a re-issuance of the bonds, the federal agency said.

Regulators are calling for more disclosure in the wake of the failures. The Municipal Securities Rulemaking Board, which makes rules for dealers in the municipal bond market, is considering rules that would force dealers to reveal the number of bidders and disclose how often auctions fail, Executive Director Lynnette Hotchkiss said in a Feb. 14 interview.

Mass. foreclosures rise 128% in January

Mass. foreclosures rise 128% in January

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Nearly 800 foreclosures were recorded in January, the highest number of Bay State homes lost during a single month since August 2007, the Warren Group said today.

The Warren Group of Boston is a provider of local real estate data and the publisher of Banker & Tradesman.

There were 799 foreclosure deeds in January, up 128.3 percent from the 350 deeds in January 2007, the firm said, and January 2008 also marks the highest number of deeds during any month since August 2007, when there were 1,018.

Auction announcements in January reached their highest number since the Warren Group began tracking them in 2005, the firm said, and there were 1,792 announcements in January 2008, up 77.8 percent from the 1,008 in January 2007.

Petitions to foreclose, the first step in the foreclosure process, also increased in December, signaling that Massachusetts’ problems with foreclosures are far from over, the Warren Group said.

“It might have seemed like 2007 was one of the worst years for foreclosures in Massachusetts, but the rising number of petitions to foreclose suggest that 2008, at least until midyear, won’t be much better,” Timothy Warren Jr., chief executive of the Warren Group, said in a statement.

Lenders filed 2,729 petitions to foreclose in December, up 28 percent from the 2,133 filed during the previous December, said the Warren Group, which added that the December 2007 number is up slightly from the 2,723 petitions filed during November 2007.

Petitions to foreclose do not always end in actual foreclosure because some homeowners eventually sell their homes, refinance or otherwise find a way to halt the foreclosure.

Exurban Buyers Abandon Depreciating Homes

Exurban Buyers Abandon Depreciating Homes

By Mary Kane

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Empty houses, rentals redefine new developments amid mortgage crisis.

Since the mortgage crisis began, cities have been dealing with the problem of abandoned and vandalized homes that banks foreclosed on but cannot sell. It's different in the exurbs. There aren't boarded-up windows or trash-filled yards to give away the foreclosed status of bank-owned homes in Piedmont, a housing development some 40 miles south of Washington. There's just the quiet. On long S-shaped streets that meander throughout the development, enough houses stand empty that there's little noise one morning but the fluttering of the "for sale" signs. Orange stickers in some windows announce the home has been winterized, with warnings not to turn on the water - an indication that no one has lived there for a while, and no one plans to anytime soon.

On a cold but bright day recently, Lisa Hilgenberg, 37, a trim, cheerful woman with light brown hair and an easy smile, sat at a table in her house beside a large window that lets the sun stream through. The window overlooks a grassy common area where neighborhood children can run and play while their parents watch, and socialize, from overhanging back decks or on lawn chairs. "It's really nice here for the kids," she said, pointing also to the pool, within walking distance. Hilgenberg explained that while her home value has also dropped, she's not particularly worried. Though their broker gently teased them about it at the time, she and her husband decided against an adjustable rate mortgage and stuck with the old-fashioned, 30-year-fixed loan. With two young children to raise, they're not planning to leave anytime soon, either. They're not at a crisis point, like some owners.

But they can't control what's around them, the way real estate trends come home to roost, right in their backyard. Hilgenberg pointed to the houses that surround hers: "This is a rental, so is this one, and this one, and the one over here," she said.

When the Hilgenberg family moved in three years ago, investors were flipping houses, and neighbors came and went, some of them renters, some investors, and some, well, who knows. Now that the market is falling, houses again sit empty for months, or turn over to a succession of renters. It hasn't done much for neighborhood stabilization. "So far, we've been lucky with the renters right in our block," Hilgenberg said. "But I've been hearing a lot of things that not all the renting is going so well." That's been the hard part: " You buy into a neighborhood," she said, " and you want it to maintain its quality of life."

Already, someone vandalized the tot lot down the street, tearing down the fence around it. A house nearby sat empty so long some plantings died. Renters trashed a house and skipped out on a lease. These are not things you expect in the exurbs. This is not the Hilgenberg's dream of home ownership. "I don't think this neighborhood has ever really settled," she said.

To Barton Smith, an economics professor at the University of Houston, Hilgenberg exemplifies what he considers an overlooked aspect of the foreclosure crisis: The "good guy" who pays the mortgage, stays in the home, and watches his values fall by 25 percent or more. The one who lives everyday with the sometimes devastating effects of all the foreclosures, renters moving in and out, houses sitting empty and other disruptions; the people and neighborhoods left behind when others walk away.

Smith should know. He lived in Texas during the 1980s oil and real estate bust. Thousands of houses in Houston were foreclosed on and a significant percentage involved people who walked away, Smith said, though no one has exact numbers. Neighborhoods that were once 100 percent owner occupied turned 60 percent rental. In Houston, with its lack of zoning laws, it meant that homeowner associations shrank in influence as well, and some neighborhoods began to deteriorate. At least "a couple of dozen" of Houston neighborhoods have never fully recovered, to this day, Smith said.

To him, what went missing during the latest housing boom was any mention of the fact that homeownership costs more than the mortgage. There's maintenance, taxes, and utilities - all those high ceilings mean a house costs a lot more to heat. Home ownership rates climbed to record highs of nearly 70 percent by 2004 and politicians crowed about it, without anyone stopping to question whether that was an unqualified good thing.

"We've oversold the notion of home ownership in this country," said Smith. "Not everyone should own a home. It makes for good political rhetoric. But it's nonsense."

Like neighborhoods with foreclosures and owners stuck with negative equity, the economy faces a painful adjustment ahead.

Most of the economic recovery from the bursting of the technology bubble in 2000 was overly dependent on housing, says Sherle Schwenninger, director of the Economic Growth Program at the New America Foundation, a Washington think tank. Jobs, incomes and spending grew hand-in-hand with the housing boom from 2002 to 2006. Some 70 percent of the increase in net worth during this period was tied directly to real estate appreciation.

"What this means is that for a period of time the housing sector generally is no longer going to be a driver of economic growth and consumption," Schwenninger said. "It's going to be a major drag. The problem about the deflation of the housing bubble is that it's a long process."

On the ground, that means owners will struggle for some time with too many houses built and sold at inflated prices. "In some blocks in places like Sacramento, every fourth house has for sale sign on it and none of them is moving," Schwenninger said. "Some people aren't going to be able to hold out."

And some will take it harder than others, he said. An older generation of homeowners has lived through bubbles and their aftermath before. An entire younger generation has not. Instead they grew up on the idea that housing prices always go up, especially in brand new exurban developments.

In 2002 the Arces bought their first house, in a development just down the road from Piedmont, for $277,000. In the few months it took to build the house, it appreciated by $60,000. Two years later, they sold it for $450,000. They figured this sort of thing could go on for quite a while. Plus, their fortunes were becoming tied up in housing in other ways. Trina became a mortgage broker, Pablo sold mortgage-related insurance, and they had a couple of years where each one brought home a six-figure income. When Piedmont came around, Trina recalled, she said, "Hey, let's do this one more time, and make a little more money."

It was one time too many. "I just want to move somewhere and rent really cheaply for a long, long time," Trina said.

Marie Black, a neighbor, agrees with that view. She and her family are renting a house that sold for $680,000 and now is appraised at $510,00. The owner wants them to buy, but they're not particularly interested, given those economics. Renting, these days, seems just fine. "We're just taking our time," Black said. "I don't want to move into a house and have it be worth less than what we paid for it a few months later."

For homeowners with no such options, the question of how they'll handle their negative equity remains far less clear. During the housing boom, people began to view their house more as an asset, than as shelter, noted Nicholas Retsinas, director of Harvard University's Joint Center for Housing Studies. That may influence their choices.

"People make business decisions, and business decisions don't necessarily get tied into the psychological connection to a home," Retsinas said. " If it's an asset allocation decision, it's easier to say, 'I'm not going to keep my home.'"

Given all this, some think it's not wise to push off the inevitable day of reckoning with voluntary workout agreements and foreclosure "pauses," or lower interest rates and stimulus checks. It's a 10-year bubble, and it's not going to be pretty as it bursts. Maybe it's just time to get that over with. There's plenty of blame to go around. Schwenninger ascribes the current mess to "the economy running on hyper consumer spending made possible by government policies" stretching back to the Clinton years, with the push to lower deficits and bring down long- term interest rates, continuing through the Greenspan era and its support of non-traditional mortgage products, and including the Bush administration's stimulus package.

But looking back won't do much for people trying to figure out what's ahead. Or how to end the torture of just waiting.

One day last spring, the Arces threw a birthday party for their two-year-old daughter in their backyard. In the sunshine children gleefully jumped around in an inflatable moonbounce. Guests munched on salsa and chips. Barbecue smoke wafted across the patio, one happy memory, at least, to salvage from a home that's become just a house now, and a burden too heavy to carry for much longer.

Mortgage Crisis Triggers Walk-Aways

Mortgage Crisis Triggers Walk-Aways

By Mary Kane

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Desperate decisions mark a shift in home ownership attitudes.

To understand why the next phase of the nation's housing crisis might mean financially troubled owners just give up and walk away from their homes, look no further than the winding roads and carefully tended lawns of the Piedmont subdivision in the once-booming exurbs of Washington.

Here, in Virginia farmland 40 miles south of the nation's capital, builders in the last decade carved out development after development - hundreds of homes in gated communities that sold in a snap. At Piedmont, people camped out in line to get a contract, buying into plans for 2,000 spacious, traditional-style brick homes with decorative lamp posts on every lawn. The prices - at $600,000 and up - might seem high in softer markets elsewhere in the country. But in this expensive area, they felt affordable to people willing to trade a long and trying commute for a much larger home, adjacent golf course and community pool. Helped, of course, by interest-only loans, little or no down payments, and adjustable-rate mortgages.

But Piedmont's amenities don't mean as much to many of its homeowners these days. Housing prices haven't just dropped - they've tanked, falling by as much as $200,000 to $250,000. By one estimate, some 80 percent of new listings here are either foreclosures or short sales, in which owners give their houses back to the bank at a fire-sale price, leaving their credit intact. Should the bank accept the short sale, it forgives the remainder of the mortgage. But banks often reject short sales. If owners can't wrangle one, and they still want from under their loan, they might have to bring $200,000 in cash to closing, just to sell their house at a rock-bottom price.

Think, for a moment, about the likelihood of that actually happening.

Across the country, more than 30 percent of homeowners who bought in the last two years are now saddled with negative equity, meaning they owe more on their mortgages than their homes are worth, the research firm Zillow reported recently. Those homeowners can't easily sell or refinance their way out of those loans, especially with house prices still falling. The Wall Street Journal described this as a vicious cycle, giving borrowers "an incentive to walk away from their mortgages."

It's more fodder for a blogosphere already inflamed by the prospect of widespread walkaways, prompted by Bank of America CEO Kenneth Lewis' observation that social attitudes toward default have changed, making walkaways culturally acceptable. Fear of walkways also motivated a recent plan to delay foreclosures for some borrowers. Although walkaway reports remain anecdotal so far, "I think there is a real tendency to move in that direction," Susan Wachter, a real estate professor at The Wharton School at the University of Pennsylvania, told the Orange County Register recently.

In the meantime, short sales, or at least attempts at them, are climbing as the next best thing, boosted by a Bush administration move late last year to let homeowners off the hook for taxes on the forgiven mortgage debt. Word on the cul-de-sac at Piedmont is that behind closed doors, many people haven't paid their mortgages in months, sometimes many months, but banks aren't foreclosing right away, as had been the norm. They're moving slowly, the whole system clogged by other foreclosures. In California, it takes so long for banks to foreclose that attorneys advise people simply to stay in their homes, go on with their lives, pay down credit debt and wait for the notice - a modern, upscale version of squatting. As they wait for to hear from the bank, some Piedmont owners try to pull off a short sale, work out a repayment plan or just sit tight, playing a financial game of cat and mouse that doesn't always end well for either side.

Trina Arce, 30, much to her dismay, is playing that game.

She stirs her tea while leaning on a granite countertop in the gourmet kitchen of her Piedmont home, the one she and her husband can no longer afford, the one they've listed for three months now as a short sale: "When we moved in we thought we'd spend the rest of our lives here," she said, pointing to the expansive rooms with gleaming wood floors."I used to say, 'I love our house. It's so wonderful. We're going to live here forever.''' Now I just say, 'God, I hate this place. I just want to get out of here.'"

The fact that owners here and in other overpriced markets around the country are willing and even eager to give their homes to the bank at a huge loss, or that they might consider walking away, is proof that the mortgage crisis has altered in significant ways the long-held American dream of home ownership. It's cast a pall on the once-reverent relationship between buyer and house, a shift in attitude likely to have effects for years to come, even after the housing market eventually shakes off its excess inventories and returns to normal, whatever that might come to encompass.

People once valued their homes above all. In studying consumers who filed for bankruptcy, experts found that they'd hand over their credit cards, their cars, their savings, whatever else they had, even if it made no financial sense, just to keep their homes. There was shame, or sadness, the pain of losing a long-treasured home, the embarrassment of failing on a mortgage, the melancholy of older couples leaving behind the homes where they'd raised their families. Losing a home conjured images of the Great Depression, memories of hard times shared by grandparents around the kitchen table.

Now there's just relief.

Arce and her husband, Pablo, bought their five-bedroom house in 2004 for $605,000 with an interest-only loan, watched it climb in value quickly to $750,000, and then witnessed its steep decline, beginning last year. Panicked, and worried about mortgage payments that are only going to rise, they put it on the market last summer for $550,000. No takers. Lowered it to $525,000. Then $500,000. Nothing. For the past three months, it's been at $450,000, and offered as a short sale. It's not moving.

Each morning, they say hello to neighbors out to pick up the morning paper or to enjoy a walk, who bought foreclosed homes at the bottom of the market, paying $420,000 or so for places just like theirs. So they deal with that, on top of the stress of trying each month to scrape together the mortgage payment, something they just can't manage anymore. They've got a lively two-year-old daughter and another on the way. It's either a short sale or… disaster.

They don't want to walk away and ruin their credit. They don't know what to do. And that's the hardest part of the waiting game-not being sure what might happen next, with none of the alternatives looking particularly good.

"It's crazy," said Arce, whose income as a mortgage broker took the same steep fall as housing prices. "We just want to get rid of it. It makes no sense to sit here and pay $4,000 every month for the same house that's selling down the street for $200,000 less."

If the craziness incites people to give up and walk away, no one should be too surprised, said Joel Kotkin, author of "The City: A Global History" and an expert on social, economic and global trends. Just look around. "All you have to do is go to parts of the Midwest that are filled with farms that have been left behind and abandoned and that had been there for generations," Kotkin said. "This is a capitalist system. When things don't go well, we move on."

And on. And on. Since Levittown rose from Long Island potato fields after World War II, the path to home ownership has led further and further out from the cities to new developments, with bigger and bigger homes. It's precisely those exurbs that are most vulnerable in the foreclosure crisis, Kotkin contends. Look at Stockton, Calif., or Modesto, hit especially hard by mortgage problems, far from jobs, cities, and schools. They are communities that don't really have a reason to be there, other than that's where they are. "You have places where people haven't lived for a long time and they don't have particularly strong roots," Kotkin said. "There's not a lot of reason for them to stay. It's why rootedness is becoming a very important thing."

It's also why the relentless expansion into the exurbs might stall. Even before the mortgage crisis, exurbs were coming under closer scrutiny due to the high costs of maintaining the large homes and transportation expenses, said Kenneth T. Jackson, author of "Crabgrass Frontier," an influential history of the expansion of American suburbs. Now that houses there aren't exploding in value, it makes them an even less promising place. "As energy costs go up, the ability to move further and further off is going to be impeded," Jackson said. "I think there will be a slow change, an evolution over the next 15 to 20 years. It will be a movement not just back to the city, but to higher density, and to less of a tendency to move far out on the fringe."

If Kosovo, why not Palestine?

If Kosovo, why not Palestine?

It is time for the Ramallah-based Palestinian leadership to challenge the international community on Palestinian independence

By John Whitbeck

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A
s expected, Kosovo has issued its unilateral declaration of independence, the United States and most European Union countries, with whom this declaration was coordinated, rushing to extend diplomatic recognition to this "new country". This course of action should strike anyone with an attachment to either international law or common sense as breathtakingly reckless.

The potentially destabilising consequences of this precedent (which the US and the EU insist, bizarrely, should not be viewed as a precedent) have been much discussed with reference to other internationally recognised sovereign states with strong separatist movements practising precarious but effective self-rule, such as Abkhazia, South Ossetia, Transniestria, Ngorno-Karabakh, Bosnia's Republika Srpska, the Turkish Republic of Northern Cyprus and Iraqi Kurdistan, as well as to discontented minorities elsewhere. One potentially constructive consequence has not yet been discussed.

American and EU impatience to sever a portion of a UN member state (universally recognised, even by them, to constitute a portion of that state's sovereign territory), ostensibly because 90 per cent of those living in that portion support separation, contrasts starkly with the unlimited patience of the US and the EU when it comes to ending the 40-year-long belligerent Israeli occupation of the West Bank and the Gaza Strip (no portion of which any country recognises as Israel's sovereign territory and as to which Israel has only asserted sovereignty over a tiny portion, occupied East Jerusalem). Virtually every legal resident of the West Bank and the Gaza Strip seeks freedom, and has for over 40 years. For doing so, they are punished, sanctioned, besieged, humiliated and, day after endless day, killed by those who claim to stand on the moral high ground.

In American and EU eyes, a Kosovar declaration of independence from Serbian sovereignty should be recognised, even if Serbia does not agree. However, their attitude was radically different when Palestine declared independence from Israeli occupation on 15 November 1988. Then the US and EU countries (which, in their own eyes, constitute the "international community", to the exclusion of most of mankind) were conspicuously absent as over 100 countries recognised the new State of Palestine, and their non-recognition made this declaration of independence "symbolic", unfortunately for most Palestinians as well.

For the US and the EU, Palestinian independence, to be recognised and effective, must be directly negotiated on a wildly unequal bilateral basis between the occupying power and the occupied people with emphasis laid on attaining the final agreement of the occupying power. For the US and the EU, the rights and desires of a long-suffering and brutalised occupied people, as well as international law, are irrelevant. For the same US and the EU, Kosovar Albanians, having enjoyed almost nine years of UN administration and NATO protection, cannot be expected to wait any longer for their freedom, while the Palestinians, having endured over 40 years of Israeli occupation, can wait forever.

With the "Annapolis process" going nowhere, as was clearly the Israeli and American intention from the start, the Kosovo precedent offers the Ramallah-based Palestinian leadership -- accepted as such by the "international community" because it is perceived as serving Israeli and American interests -- a golden opportunity to seize the initiative, reset the agenda and restore its tarnished reputation in the eyes of its own people. If this leadership truly believes, despite all evidence to the contrary, that a decent "two-state solution" is still possible, now is an ideal moment to reaffirm the legal existence (albeit under continuing belligerent occupation) of the State of Palestine, explicitly in the entire 22 per cent of Mandatory Palestine that was not conquered and occupied by the state of Israel until 1967, and to call on all those countries that did not extend diplomatic recognition to the State of Palestine in 1988 -- and particularly the US and the EU states -- to do so now.

The Kosovar Albanian leadership has promised protection for Kosovo's Serb minority, which is now expected to flee in fear. The Palestinian leadership could promise to accord a generous period of time for Israeli colonists living illegally in the State of Palestine, and Israeli occupation forces, to withdraw, as well as to consider an economic union with Israel, open borders and permanent resident status for those illegal colonists willing to live in peace under Palestinian rule.

Of course, to prevent the US and the EU from treating such an initiative as a joke, there would have to be a significant and explicit consequence if they were to do so. The consequence would be the end of the "two-state" illusion. The Palestinian leadership would make clear that if the US and the EU, having just recognised a second Albanian state on the sovereign territory of a UN member state, will not now recognise a Palestinian state on a tiny portion of the occupied Palestinian homeland, it will dissolve the Palestinian Authority (which, legally, should have ceased to exist in 1999, at the end of the five-year "interim period" under the Oslo Accords) and the Palestinian people will thereafter seek justice and freedom through democracy, through the persistent, non-violent pursuit of full rights of citizenship in a single state in all of Israel/Palestine, free of any discrimination based on race and religion and with equal rights for all who reside there.

Palestinian leaderships have tolerated Western hypocrisy and racism and played the role of gullible fools for far too long. It is time to kick over the table, constructively, and to shock the international community into taking notice of the fact that the Palestinian people simply will not tolerate unbearable injustice and abuse any longer.

If not now, when?

More Lies From The Bush Fascists

More Lies From The Bush Fascists

By Paul Craig Roberts

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President George W. Bush and his director of National Intelligence, Mike McConnell, are telling the American people that an unaccountable executive branch is necessary for their protection. Without the Protect America Act, Bush and McConnell claim, the executive branch will not be able to spy on terrorists, and we will all be blown up. Terrorists can only be stopped, Bush says, if Bush has the right to spy on everyone without any oversight by courts.

The fight over the Protect America Act has everything to do with our safety, only not in the way that Bush and McConnell assert.

Bush says the Democrats have put our country more in danger of an attack by letting the Protect America Act lapse. This claim is nonsense. The 30 year old Foreign Intelligence Surveillance Act gives the executive branch all the power it needs to spy on terrorists.

The choice between FISA and the Protect America Act has nothing whatsoever to do with terrorism, at least not from foreign terrorists. Bush and his brownshirts object to FISA, because the law requires Bush to obtain warrants from a FISA court. Warrants mean that Bush is accountable. Bush and his brownshirts argue that accountability is an infringement on the power of the president.

To escape accountability, the Brownshirt Party came up with the Protect America Act. This act eliminates Bush's accountability to judges and gives the telecom companies immunity from the felonies they committed by acquiescing in Bushs illegal spying.

Bush began violating the Foreign Intelligence Surveillance Act (FISA) in October 2001 http://www.msnbc.msn.com/id/10488458/ when he spied on Americans without obtaining warrants from the FISA court.

Bush pressured telecom companies to break the law in order to enable his illegal spying. In court documents, Joseph P. Nacchio, former CEO of Qwest Communications International, states that his firm was approached more than six months before the September 11, 2001, attacks and asked to participate in a spying operation that Qwest believed to be illegal. When Qwest refused, the Bush administration withdrew opportunities for contracts worth hundreds of millions of dollars. Nacchio himself was subsequently indicted for insider trading, sending the message to all telecom companies to cooperate with the Bush regime or else. http://www.crooksandliars.com/2007/10/16/former-telcom-ceo-bushs-illegal-spying-began-months-before-911-attacks/

Bush has not been held accountable for the felonies he committed and for leading telecom companies into a life of crime.

As the lawmakers who gave us FISA understood, spying on people without warrants lets a political party collect dirt on its adversaries with which to blackmail them. As Bush illegally spied a long time before word of it got out, blackmail might be the reason the Democrats have ignored their congressional election mandate and have not put a stop to Bushs illegal wars and unconstitutional police state measures.

Perhaps the Democrats have finally caught on that they cannot function as a political party as long as they continue to permit Bush to spy on them. For one reason or another, they have let the Orwellian-named Protect America Act expire.

With the Protect America Act, Bush and his brownshirts are trying to establish the independence of the executive branch from statutory law and the Constitution. The FISA law means that the president is accountable to federal judges for warrants. Bush and the brownshirt Republicans are striving to make the president independent of all accountability. The brownshirts insist that the leader knows best and can tolerate no interference from the law, the judiciary, the Congress, or the Constitution, and certainly not from the American people who, the brownshirts tell us, wont be safe unless Bush is very powerful.

George Washington, Thomas Jefferson, and James Madison saw it differently. The American people cannot be safe unless the president is accountable and under many restraints.

Pray that the Democrats have caught on that they cannot give the executive branch unaccountable powers to spy and still have grounds on which to refuse the executive branch unaccountable powers elsewhere.

Republicans have used the war on terror to create an unaccountable executive. To prevent the presidency from becoming a dictatorial office, it is crucial that Congress cease acquiescing in Bushs grab for powers. As the Founding Fathers warned us, the terrorists we have to fear are the ones in power in Washington.

The al Qaeda terrorists, with whom Bush has been frightening us, have no power to destroy our liberties. Compared to the loss of liberty, a terrorist attack is nothing.

Meanwhile, Bush, the beneficiary of two stolen elections, has urged Zimbabwe to hold a fair election. America gets away with its hypocrisy because no one in our government has enough shame to blush.

Paul Craig Roberts was Assistant Secretary of the Treasury during President Reagan’s first term. He was Associate Editor of the Wall Street Journal. He has held numerous academic appointments, including the William E. Simon Chair, Center for Strategic and International Studies, Georgetown University, and Senior Research Fellow, Hoover Institution, Stanford University. He was awarded the Legion of Honor by French President Francois Mitterrand.

GOP Aides Boycott Staff Talks on Surveillance Overhaul

GOP Aides Boycott Staff Talks on Surveillance Overhaul

By Tim Starks

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Republican staff boycotted Thursday's meetings between House and Senate aides seeking to hammer out a final version of legislation to overhaul the nation's electronic surveillance law.

Two Democratic aides said Republicans were invited to an afternoon meeting to hash out a compromise between House and Senate versions of the legislation (HR 3773) to revamp the Foreign Intelligence Surveillance Act. But none showed up.

Democratic staffers for the House and Senate Judiciary and Intelligence committees met anyway, as they had earlier this week, and planned to meet again Friday.

Republican staffers are not participating, because their bosses have objected to holding the negotiations at all. Instead, Republicans want the House to accept the FISA bill passed by the Senate, without change. That measure, passed by a bipartisan 68-29 vote, was drafted with input from the administration and has the support of the White House.

Senate Republicans objected to the appointment of conferees Feb. 14, seeking to force the House to accept the Senate bill. But House Democrats refused, and launched informal negotiations over a final measure.

"The meeting today was a silly sham to draw attention away from the fact that House Democratic leaders seem more interested in protecting the profits of their trial lawyer campaign contributors than they are in protecting the American people," said Michael Steel, spokesman for House Minority Leader John A. Boehner , R-Ohio.

"There is no need for further negotiations. The only question is when the House Democratic leadership will bring the bipartisan FISA bill to the floor for a vote."

The Democratic chairmen of the four committees assailed the GOP stance in a statement.

"In what should have been a bipartisan, bicameral meeting, staff members of the House and Senate Judiciary and Intelligence Committees met today to work in good faith to reach a compromise on FISA reform," they said. "Unfortunately, we understand our Republican counterparts instructed their staffs not to attend this working meeting, therefore not allowing progress to be made in a bipartisan, bicameral way."

The four chairmen said they and their staff would "continue to work and hope Republicans will join us to put our nation's security first."

Immunity Dispute

A key difference between the two chambers is over retroactive legal immunity for telecommunications companies being sued for their alleged assistance with the National Security Agency's warrantless surveillance program. The Senate-passed FISA bill would grant the retroactive immunity, while the House bill would not.

The administration has vowed to veto any legislation that does not provide immunity, and President Bush made clear that he sees no room for compromise on that score.

"How do you compromise on something like granting liability for a telecommunications company?" Bush said aboard Air Force One as he flew home from Africa Thursday afternoon. "You can't. If we do not give liability protection to those who are helping us, they won't help us. And if they don't help us, there will be no program. And if there's no program, America is more vulnerable."

Earlier, House Judiciary Committee Chairman John Conyers Jr. , D-Mich., wrote the White House this week to express his appreciation for its decision to allow all members of Conyers' committee to review legal documents related to the warrantless surveillance program and to renew his request for other documents from numerous previous committee inquiries.

Only some members of the House Judiciary Committee had previously been granted access to legal documents related to the warrantless surveillance program. Democrats had asserted they needed to review those documents to decide whether to grant immunity. Now all members of the Intelligence and Judiciary committees in both chambers have been granted access to the documents.

The Judiciary chairmen in both chambers have expressed the most opposition to retroactive immunity. Senate Intelligence Committee Chairman John D. Rockefeller IV , D-W. Va. has been an active proponent, while House Intelligence Committee Chairman Silvestre Reyes , D-Texas, said last week that he was still reviewing the documents.

Bush: No Compromise on Phone Immunity in Spy Bill

Bush: No Compromise on Phone Immunity in Spy Bill

By Deborah Charles

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Aboard Air Force One - U.S. President George W. Bush said on Thursday he would not compromise with the Democratic-led Congress on his demand that phone companies that took part in his warrantless domestic spying program be shielded from lawsuits.

Bush has demanded Congress protect companies like AT&T Inc and Verizon Communications from civil lawsuits that accuse them of violating Americans' privacy rights in the administration's anti-terrorism program.

The Senate approved a measure that would grant the companies retroactive immunity but the House of Representatives has opposed it. The surveillance program began in 2001 after the September 11 attacks and some 40 lawsuits are pending.

House and Senate Democrats said they would try to find a compromise even as they said their Republican counterparts refused to permit staff to meet with them on Thursday.

"I would just tell you there's no compromise on whether these phone companies get liability protection," Bush told reporters as he traveled back from a trip to Africa.

A temporary law expired this weekend that expanded the federal government's power to track communications of suspected terrorism suspects without a court order.

Bush has contended that companies would become increasingly reluctant to help U.S. intelligence agencies without immunity and he argues that without listening to those communications, the United States is in greater danger of attack.

The issue will likely be at the forefront next week when Congress returns from a 12-day recess. Bush said his strategy for breaking the deadlock will be to keep talking about why it should be passed with immunity.

"The American people understand we need to be listening to the enemy," he said.

Democrats have countered that Bush was unnecessarily whipping up fears and said last week they were searching for common ground on the matter. Suggestions have included a secret court look at companies' actions before getting immunity or holding the government liable instead of phone companies.

"While we are disappointed that today's meeting could not reflect a bipartisan effort, we will continue to work and hope Republicans will join us to put our nation's security first," the Democratic lawmakers said in a joint statement.

Forcing Medical Patients To Be Consumers Wreaks Havoc on Our Health System

Forcing Medical Patients To Be Consumers Wreaks Havoc on Our Health System

By Niko Karvounis

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One of the most common justifications for consumer-driven medicine is reduced health care costs. The reasoning here is two-fold:

  • Since they're high-deductible and low premium, consumer-driven health plans require more out-of-pocket spending. Consumers are more cost-conscious when they have to actively shell out for purchases. As a result, they will user fewer health care services -- and thus overall health care costs will fall.
  • If consumers are in the driver's seat, competition in an open market will drive prices down. For-profit providers will want to offer the best deal to get the most business. Consumers will also have better information thanks to the commoditization of medicine, which will translate medical jargon into universally comprehensible knowledge. Smarter consumers translate into less over-payment for services.

This is standard-issue free market orthodoxy at its finest. Unfortunately, this isn't the whole story. In fact, there's an even stronger argument to be made that consumer-driven health plans could lead to higher health care costs.

The Wrong Patients Forgo the Wrong Care

Research by the RAND Corporation's health insurance experiment shows that when you shift costs to the consumer, patients forgo both wasteful and effective care. And this is particularly true of the patients who cost us most in the long run -- those suffering from chronic diseases.

A 2007 paper from the National Bureau of Economic Research looked at retired California public employees on Medicare, and its findings contradict some of the basic assumptions of the consumerist movement.

The study's authors -- from Harvard, MIT, and the University of Oregon -- found that chronically ill patients who are asked to shoulder more of their health care costs deferred, neglected, or opted-out of doctor's visits and drugs when the price got too high. This short-term cost reduction led to long-term catastrophe, as their hospitalization rates were significantly higher than other patients suffering from chronic diseases. Immediate savings ultimately led to a greater -- and otherwise preventable -- use of more expensive care. Oops.

This makes a certain amount of sense. Chronic diseases are not always in-your-face. They often simply simmer. But if the disease isn't managed, ultimately it explodes. Until that happens, it's easy to ignore the problem, especially in a context of consumerism that places an emphasis on convenience above all else.

Meanwhile, chronic disease is the big ticket item in our health care system. You might think it would be cancer. But most people with cancer either die or survive -- they don't linger on, in need of continuous care, for twenty years. Ten percent of the nation's sickest patients run up 70 percent of our health care bill, and most of them suffer from one of five chronic diseases (diabetes, congestive heart failure, coronary artery disease, asthma and depression). You can't manage costs unless the system is built to manage chronic diseases. Period.

Here consumerists would point out that more transparent information would help consumers make better choices. But the reality is that no one looks at health care costs in a vacuum -- it's one of many expenditures that individuals and families have to juggle. Even if a chronically ill patient knows exactly what to do, he or she might be unlikely to do it when given the option to pay for treatment or something else. That might be the "consumer's right," but it means higher long-term costs for everyone.

Consumer-Driven Medicine Turns Health Care into a Commodity

In a market-driven health care system, businesses try to maximize revenue and minimize cost. The quickest way to do that is to market what's already out there, rather than waste time on true innovation.

Retail health clinics, for example, want to "cross-sell" by encouraging patients to pick up other products that the store sells on their way in or out of the clinic. Why? Because it's a low-cost way to increase profits: shuttle patients from the clinic to the prescription counter, no muss no fuss.

A similar reasoning prevails in the prescription drug industry. A January study from York University found that the U.S. pharmaceutical industry spends almost twice as much on promotion as it does on research and development. Again, it's easier to troll for new customers than to build a better product. Every enterprise wants to leverage existing assets for as much profit as possible rather than incur the cost of something new and risky. Volume becomes more important than quality.

Even when something new does come along, the emphasis is still on volume of consumption rather than actual effectiveness. Recall a recent post of mine on numbers needed to treat. Even though this stat is the final word on drug effectiveness, it gets no airtime in drug marketing. Lipitor, the world's number one cholesterol-lowering drug, only helps one percent of the people who use it. But this number is nowhere to be found in the drug's advertising, and despite its relative ineffectiveness it still makes up a full one-quarter of Pfizer's profit and has been prescribed to over 26 million Americans.

Admittedly, Lipitor's sales have been tanking recently, thanks to the roll out of generic alternatives. But this small victory for market logic doesn't change the fact that millions of people are taking a drug that does nothing for them. For consumers, this is not cost-effective -- but for those selling the product, it is smart business.

A more commoditized health care system will only exacerbate this pattern. Yes, early research shows that patients cut down on health care consumption when they foot more of the bill. But do we know that what's left -- what they do actually consume -- is in fact effective? If I use less total health care, but what I do use is junk, than the consumer movement isn't an improvement.

In a consumer-driven system, where marketing becomes the central principle behind our health care discourse (even more so than today), it's far from a sure bet that reduced consumption means smarter consumption.

More Inequality

Markets are not about creating equality. This may not seem problematic in most sectors, but in health care, I think, reinforcing existing disparities is a dangerous strategy.

Consider health savings accounts, which favor high-income earners because they are tax-free (richer people save more by not paying taxes). More money in the savings account means more purchasing power. More purchasing power means more health care options -- not to mention more providers falling at your feet to get your dollars.

But here's the rub: such inequality is acceptable only insofar as a rising tide lifts all boats. In other words, it's okay if the rich get relatively better health care so long as the health care of the poor improves commensurately.

This seems unlikely in a consumer-driven health care system. More out-of-pocket costs means less affordable care for the poor. Even if health savings accounts do give some consumers a little health care nest egg, the amount saved will likely follow income. If you look at stock ownership in the U.S., for example -- another investment that is consistently promised as a great equalizer -- the value of holdings is perfectly contoured to income.

In a market-driven system, health care prospects improve as you move up the income ladder. But if those at the bottom don't see a real boost, we have a problem -- socioeconomic status is a major predictor of health. Ultimately it's the poor who need access to health care that lies beyond their means.

Here is the important point: because social environment and daily living are major influences on health, the disadvantaged suffer more when they consume less care than do the affluent. And when patients have asked to have "more skin in the game," it is the poor who are most likely to forgo needed care. In 2003, the Center for Budget and Policy Priorities cited research from the RAND corporation that found "low-income adults and children reduced their use of effective medical care services by as much as 44 percent when they were forced to make co-payments, a much deeper reduction than occurred among those with higher incomes."

The RAND study also found that "cost-sharing led to poorer health among low-income adults -- including worse blood pressure and vision -- than those who were not subject to co-payments." Similarly, low-income children in families with cost-sharing obligations were more likely to be anemic and to have more untreated dental problems than children who received free care.

By contrast, when the looked at higher-income people they find no difference in health status between those who had had higher cost-sharing obligations and those who did not." Translation: the poor have much farther to fall if they miss out on care.

Whether we are talking about people suffering from chronic diseases or the poor, it turns out that consumer-driven care which shifts costs to the patient leads certain vulnerable populations to disproportionately negative long-term health outcomes.

And here, information is no panacea. Even when markets do their thing and diffuse knowledge, it's the "haves" who benefit most. A few years ago two Columbia University professors charted the trajectory of public health risks over the past thirty years to show that, even when information did circulate and spur awareness, it was the upper crust that benefited. Many years ago, smoking, HIV/AIDS, and coronary artery disease affected everyone equally. But as time wore on, the affluent became more aware of the risks and dangers. As a result, these health problems settled in at the bottom of the socioeconomic ladder.

In a market-driven system which thinks of patients as "consumers", this disparity will also get worse: information will also be commoditized, which means that the rich will be able to buy better, more current information (just as they can now for stocks, investments, or market projections).

Currently, the price tag of health care for the uninsured is over $40 billion. A system that perpetuates poor access to care for the have-nots will only drive that bill higher.