Since the peak of the financial crisis, both the Bush and Obama administrations have been trying to rescue both large banks and homeowners, often announcing programs for both in the same press conference. The programs for large banks have gone well, from the beneficiaries’ perspective (but not for small banks); programs for homeowners, not so much. As more people walk away from underwater mortgages, Assistant Treasury Secretary Herb Allison recently said, “We haven’t yet found a way of dealing with this that would, we think, be practical on a large scale.”
The failure of the Obama administration so far to come up with a working solution to the problem of mass defaults and foreclosures may be due to practical barriers, such as lack of capacity among mortgage servicers or legal uncertainties regarding securitization trusts. Alternatively, however, it may simply be that the administration doesn’t care that much. Perhaps the primary goal of homeowner assistance all along was to detoxify the toxic assets on large banks’ balance sheets; now that those banks are off of life support, maybe the mortgages themselves don’t matter that much.
Congressman Brad Miller’s proposal in The New Republic should put that question to the test.*
Miller says we should stop expecting the mortgage lenders, securitizers, and servicers who created this mess to be the ones to clean it up. Instead, the government should create a new Home Owners’ Loan Corporation, modeled on the one created by FDR in June 1933 (three months after taking office), to buy up mortgages and modify them. The HOLC could pick and choose the mortgages it buys and modifies, so it could focus on mortgages that could be successfully modified to keep the homeowner paying something and give the HOLC a small profit. I spent half the article wondering how the HOLC cold avoid overpaying for the mortgages (since the banks would try to hold it up for a high price), and then Miller suggested the solution: eminent domain. (The idea would be to take market data about mortgage prices and force banks or trusts to accept that in exchange for the mortgages, instead of letting them demand the inflated prices they may be keeping those mortgages at on their books.)
Both administrations, and the Federal Reserve, took absolutely extraordinary measures to rescue the financial system, simply shoving the private sector out of the way and, for example, buying over one trillion dollars of agency bonds and mortgage-backed securities in order to prop up prices in the market. By contrast, the homeowner assistance measures have been tentative, based on “nudging” private sector actors to do the right thing through small cash incentives. Those measures have largely failed; the cash incentives seem to be motivating mortgage servicers to “extend and pretend,” stringing homeowners along to keep them paying something without ever making the principal reductions that are necessary for a real solution.
Will the administration take bold measures — either those suggested by Miller, or something else commensurate with the steps taken to save large banks — to keep homeowners in their houses and stop the wave of foreclosures? Or is it content to pretend that its half-measures are working?
* Note that as far as I can tell Miller actually writes his own articles (and blog comments, even), as opposed to many public figures.
Update: Paul Kiel at ProPublica has yet another story on the challenges facing homeowners trying to get their mortgages modified through the government’s program. Among other things, modification trial periods were supposed to last only three months, yet 475,000 homeowners have been in trial periods for longer. That’s a lot of people. This is the problem that Miller is trying to fix. The administration may not agree with his solution, but I think something similarly bold is necessary.