very little help for troubled homeowners -- 6/17/14

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Today's selection -- from Stress Test by Timothy F. Geithner. Seven years after the beginning of the Great Recession, close to ten million homes remain underwater -- a drag on economic recovery that may last a generation. Programs designed during the crisis to help homeowners, such as the Home Affordable Modification Program (HAMP), never got much traction, but more importantly, Tim Geithner and other architects of the recovery simply never believed that directly helping homeowners, as opposed to helping banks, was important. Instead, their belief was that the surest way to help homeowners was to reinvigorate the economy. That belief, while partially true, missed a larger point -- having millions of underwater mortgages is a huge part of what is currently holding the economy back, since households struggle to pay bloated mortgages using funds that would otherwise be spent on goods and services and help power the economy forward. And so the problem of underwater mortgages remains:

"By the fall, it was clear that HAMP's reliance on the broken infrastructure of the mortgage servicing industry was a serious problem. This was probably unavoidable; we didn't have the authority to start up a new government agency or hire thousands of loan specialists ourselves, and even if we'd been able to get the authority from Congress, it would have been a long and messy process. But the servicers, many of them owned by banks, had little experience modifying loans, and nowhere near the capacity or the resources they would need to modify millions of loans. They had been completely unprepared for the housing crisis, and had laid off staff in droves after the bubble popped. Now we were asking them to conduct a challenging and time-consuming form of triage, and they were terrible at it -- slow to hire, slow to figure out how to provide relief, just slow. In fairness, many of the borrowers they were supposed to track down were hard to find and harder to engage; homeowners also struggled to find every required document. But many incompetent servicers found ways to lose those documents multiple times.

"As the disappointing numbers rolled in that fall, and it became clear that many homeowners in the trial period wouldn't or couldn't produce the documents they needed for permanent relief, we discussed whether we should just grant a permanent loan modification to everyone with a trial modification, to help as many homeowners as possible. But we decided that could produce too much opportunity for scandal and abuse that would threaten support for the entire program; we had seen the dangers of 'no-doc loans' and 'liar loans' during the boom. We were spending the public's money, and we had an obligation to protect the integrity of the program.

"The President kept urging us to think big, to think bold, to consider anything that would help homeowners in distress. We even revisited our debates about broad-based principal reduction. But as I testified before Warren's panel in December, the biggest driver of the foreclosure crisis wasn't underwater mortgages. It was the weak economy. Too many unemployed and underemployed workers were having trouble making their mortgage payments. We could spend hundreds of billions of dollars paying down negative equity without changing that reality. It wouldn't matter how many mortgages we modified if the borrowers didn't have income. We couldn't fix the economy by housing, but we could do the reverse.

"'Our judgment is the best thing we can do is to help get the economy growing again, bringing unemployment down as quickly as we can, and to continue to make sure we're providing overall stability to using market,' I told Warren.

"The most important thing we could do to fix our housing problems -- other than stabilize the real estate market, keep mortgage rates low and provide targeted foreclosure relief, which we were already doing -- was to help promote an economic recovery that could create more jobs and income for average Americans. I had once told the President -- and he often quoted this back to me -- that if he had another $100 billion to spend on the economy, we wouldn't recommend spending it on housing. It would make much more economic, moral, and practical sense to provide relief to families through tax cuts, unemployment insurance, or safety net spending, or to save the jobs of teachers and first responders via aid to states, or to finance infrastructure projects that would put people to work building schools and fixing roads and creating a smart electric grid. Housing programs are pretty weak job creation and income support programs, while the opposite is not the case; job creation and income support programs are excellent ways to help families afford their mortgages or rent."