After more than a year of ineffective attempts to stem the foreclosure crisis, the Obama administration this week may be edging toward acknowledging reality.
This sick housing market isn’t going to heal itself, and won’t get better with the band-aids they’ve applied so far. The stakes are high not just for the homeowners: without some stability in housing, the rest of the economy can’t heal either.
The administration announced today that it would begin to encourage banks to write down the principal when modifying borrower’s underwater mortgages. Bank of America also said this week it would tiptoe into principal reduction.
Time, and follow-through will tell whether the administration intends the principal write-downs as another band-aid or something more substantial. Time will also tell whether the administration will fight for write-downs or wilt in the face of the inevitable backlash. It’s also important to note that all of the administration’s foreclosure initiatives rely on the voluntary cooperation of lenders, with modest incentives paid by the government.
There is every reason for healthy skepticism of the administration and the banks’ ability to tackle the problem. As John Taylor, president of the National Reinvestment Coalition testified before a congressional panel this week: “We rush to give banks tax breaks, but we dawdle to help homeowners who through no fault of their own lost their jobs because of the economic crisis or bought defective loans that caused the economic crisis.”
Two dozen House Democrats wrote to Treasury Secretary Tim Geithner earlier this week. They didn’t mince words. “The government’s failure to take effective actions to manage the avalanche of home foreclosures is one of the great public policy failings of our time,” the congressmen wrote.
The administration embraced principal reductions Friday only after another scathing report detailing the inadequacies of its Home Affordable Modification Program earlier in the week from the special inspector general of the bailout, Neil Barofsky. Though administration officials promised that HAMP would help 3 or 4 million people, it has provided modifications for less than 170,000. The program has been plagued by unclear guidelines, sloppy paperwork and understaffing at the banks.
But the health insurance reform battle also offers a hopeful reminder of what happens when people mobilize. Whatever the flaws of the final bill, it wouldn’t have passed without the coordinated efforts of thousands of people making phone calls. That fight also showed that the president can still summon the fire and the drive of his campaign when he wants to.
That passion has been missing so far from the administration’s efforts to fix the economy for Main Street or to rein in Wall Street excesses. The president and the Democratic leadership have spouted tough rhetoric one day only to offer compromises and half-measures the next. It’s a curious lack of leadership and focus on the issue that voters have been most upset about (Wall Street) and the issue that will determine whether voters reward them with reelection or toss them out (jobs and housing).
One of the reasons that the mortgage modifications haven’t worked so far is that those offered by the banks haven’t been sustainable or realistic. Principal reductions are at least a step in recreating loans based on the current value of the property. Banks can create mechanisms within the modified loan to recover their money if property returns to its earlier value.
Time is running out for this administration, however, to show results in tackling the foreclosure crisis. For their part, the two dozen congressmen aren’t banking on the Obama administration’s voluntary loan modification programs to fix the problem They’re calling for a much more ambitious approach: creation of a new government program modeled on the Great Depression-era Home Owners Loan Corporation that could purchase troubled mortgages outright instead of relying on servicers to voluntarily modify loans.