This is the second of what now appear to be three columns about how we as a people allow ourselves to be victimized, whether by unscrupulous computer hackers or unscrupulous computer bankers. This part is about the bankers — the guys whose bonuses were too big to be discontinued.  Part three will present a possible solution to this specific systems problem…

A year ago I wrote a sad little column about my friend Ralph and his difficulty getting his mortgage adjusted.  Ralph had lost his tech job, there was this federal program to help people in his position lower their mortgage payments, but for some reason it just wasn’t working. His lender kept losing the paperwork, forcing Ralph to reapply three times. Twelve months later Ralph is now working hard at a tech startup that can’t yet afford to pay him, he’s thankful his wife has a good business reselling children’s clothes, but their mortgage still hasn’t been modified, though Ralph keeps trying.

Here are the numbers so far, according to Ralph:

He has dealt with 11 different bank negotiators
He has applied for either 8 or 10 modifications (depends who you ask)
He has made 50 phone calls
He has sent 35 FedEx shipments
He has faxed the bank 300 pages
He scanned 70 pages to PDF and sent by e-mail
He initiated one Congressional inquiry

Understand here that Ralph isn’t an outlier.  He is not in foreclosure. He’s precisely in the intended sweet spot for this federal loan modification program — just the sort of customer who ought to easily qualify — and has qualified several times only to have the deal fall apart every time.

Recently Ralph’s modification request was again denied. “I was told my modification was closed,” Ralph explained, “because they were waiting on information from me per the FedEx letter I have attached dated July 21, 2011. Nowhere does the letter ask for more information. It asked me to call Tawanna Banks  but lists the wrong number for her. The letter was not even written on bank letterhead! I found the correct number 877-430-1431, extension 276004, called and left a few messages. She never called back.  I kept calling and eventually talked to a new person who verified my information over the phone. It took a long time, but everything was supposedly fine. Then they dropped me anyway.”

The loan servicer in this instance is Bank of America. In my previous column on this I blamed the problem on IT glitches, possibly at Freddie Mac, which guaranteed the loan.  A year later my view of the situation is different: I’d say Ralph is getting the runaround from BofA, which appears to have no real interest in helping him.

Is an organizations that asks for extensive paperwork then loses it as many as eight times simply incompetent or are they evil?  My money is on evil.

In the bank’s communication with Ralph they make the point over and over that “assistance isn’t guaranteed.”  Looking at the numbers above it might be more accurate to say “assistance is unlikely.” It is very hard to see this as negotiating in good faith.

Maybe the bank is just pretending — faking it in hopes that Ralph will eventually get the implied message and go away.  They don’t know Ralph.

Just lately Bank of America has been having a hard time of its own.  The bank’s stock is down and it has even been rumored to be at risk of going under. Then last week Warren Buffett came through with $5 billion in new capital from Berkshire Hathaway to shore-up BofA.  Too bad for Ralph, who would certainly be better off if the bank goes under, allowing some other organization to take over servicing his loan.

There are many lessons to be learned here, but what are they?  Don’t lose your job?  Don’t believe your government or your bank? Resistance is futile?

Then it came to me in a pair of blinding realizations.  First, Ralph is insane.  Second, we have all been looking at this mortgage finance problem absolutely backward.

There’s a quote I’ve seen attributed to Sigmund Freud, Mark Twain, and Benjamin Franklin that “the definition of insanity is doing the same thing over and over again expecting a different result.”  No matter who said it first (apparently it actually surfaced in a book from the group Alcoholics Anonymous) this clearly applies to Ralph.  The poor guy just keeps doing as he has been told and what happens?  He gets screwed over and over again.

So Ralph is crazy, but more than that we are all crazy, because here we sit rooting for him to get the damned mortgage modification when it is obvious BofA isn’t going to let it happen.

But why won’t they?

That’s when we come to the other side of this mortgage mess. Instead of concentrating on who is being hurt by it, let’s look at who is profiting.  And a lot of people are profiting. Financial bubbles eventually pop, that’s the rule. But this historic housing bubble from 2001-2007 we’re still recovering from hasn’t popped for everyone, at least not yet.

The first thing to notice is that most homeowners aren’t in Ralph’s position.  For all the mortgage distress out there only about 14 percent of U.S. homeowners are behind in their payments or in foreclosure.  While this is a huge number (something in the range of nine million mortgages) it still leaves 86 percent of U.S. mortgages intact and being repaid.  With interest rates at historic lows you’d guess that most of that 86 percent have recently refinanced to take advantage of lower payments.  No, they haven’t.

A quarter of those homeowners in good standing have no equity left in their homes at all and the rest have significantly less than they once did — often not enough to qualify for a new mortgage. So they just keep paying on the old one, which is at a significantly higher interest rate.  That’s why we saw a refinance flurry in 2008 that has since, for the most part, vanished.

Rates are down, sure, but qualifying rules are stricter and there are at least 30 million U.S. homeowners who are literally trapped in their old mortgages. A few walk away, but most don’t because they worry about ruining their credit. And this means that while new 30 year mortgage rates are in the 3-4 percent range, the average rate paid by these trapped homeowners on their old mortgages is twice that.  And since their loan initiation overhead was amortized years ago, their actual yield is even higher.

Are you making seven percent on your money?

What we have here is an astounding corruption of the mortgage market. This game is rigged, yet everyone in government from President Obama down pretends that it isn’t. And don’t blame just Obama: the Republicans might be even worse.

Over the last 30 years the average American home was refinanced every three to four years. That was the life expectancy of your 30-year loan in the mind of the guy at the bank who approved it, when, six years ago? But these underwater and zero-equity ghost mortgages have become essentially perpetual, since they can’t be refinanced and nobody will buy the houses.

This is all you need to know to understand the stalled U.S. housing market: it is stalled because a class of investors has found a way for their investments to not only live on after the housing bubble popped, they are actually making more — in some cases a lot more — than they were on that money when the loans were originated.  They are doing so well, in fact, that they can’t imagine a circumstance under which they would ever allow the ghost mortgages to go away, no matter the cost to the economy or the nation.

So the ghost loans aren’t going away. And the longer this unnatural situation lasts the more all the rest of us are being hurt.

Understand that we are talking about at least $2 trillion in ghost loans that really ought to have been refinanced but weren’t because of these structural issues and because the banks — who clearly know what’s happening — don’t have the guts to stand against their investors. But that’s nothing new.  And it’s not going to change until someone at the very top does something about it.

Next, what can be done to fix this mess at no financial cost to the nation…