Principal reduction remains a more controversial route, but one that many experts on both sides of the political spectrum have argued is necessary to truly reset the housing market and hasten stability. Martin Feldstein, a conservative economist at Harvard University who served on Obama’s Economic Recovery Advisory Board, was one of the first to call for broad-scale principal reduction as a way to help underwater borrowers and arrest the deterioration of home prices. His plan called for the government and lenders to share the cost of writing down mortgage principal, and he assigned a price tag between $156 billion and $400 billion, based on the size of the underwater loan pool. “It was too big to do,” Swire said, especially in light of the $787 billion stimulus package that the Obama administration had just gotten from Congress.
For Obama’s team, the possibly negative optics involved took precedence over the potential, and frankly unknown, economic benefits. “There was not a lot of extra political capital that was available to be spent on the cramdown provision,” said Michael Barr, who was Treasury’s assistant secretary for financial institutions and one of the main architects of the housing programs. “Getting the stimulus package done was much more important to the economy.”
Moreover, Geithner and Summers were motivated time and again by a heartfelt need to support banks still struggling to emerge from the financial crisis, and to contain the losses faced by lenders and bond investors—groups with palpable influence inside the debt-selling Treasury Department. “Many of the private mortgage-backed investors are the same people who buy government debt,” said Sheila Bair, former chairman of the Federal Deposit Insurance Corp. “So they are very important constituents for Treasury.”
A FAILURE OF EXECUTION
Once the scale of the administration’s response to the housing crisis was established, Treasury and HUD pushed ahead to get loan servicers on board with the voluntary modification and refinancing programs. And it was, in fact, an all-out push.
The administration had ambitious goals to reach. Treasury pledged that the programs would aid 7 million to 9 million borrowers, with HAMP reaching 3 million to 4 million and HARP helping 4 million to 5 million. In addition to those hard numbers, insiders had softer goals. Among them, Obama’s housing-policy team wanted to see 500,000 trial loan modifications by November.
To hit that target for trial modifications, the administration needed mortgage servicers to ramp up quickly. So officials began inviting industry representatives to Washington to talk about HAMP, address obvious challenges, and put the pressure on. The first of these “fly-ins” was on July 28, 2009, in an unfinished office space at 1801 L St. NW.
A handful of core officials—at least one each from the White House, Treasury, and HUD—bought coffee and doughnuts and then wheeled chairs into an empty conference room. They listened to the loan servicers’ concerns and questions, discussed the complexity of their operations, and hammered home what servicers needed to do.
One of the main questions centered on up-front documentation: Did Treasury want the process to happen so rapidly that servicers should put mortgagees into trial loan modifications based on verbal statements alone? Yes, the officials said. Don’t worry about the documents. Just put loans into the “trial mods” and then get the documents in order before the time comes to make the changes to the loan permanent, they said. “Just do it,” was the message.
“They insisted to us they could not do this program, they were not ready to do this program, and we told them they had to,” said Treasury’s Tim Massad, then chief counsel in the department’s financial stability office.
The intention—to get help to as many people as quickly as possible—was laudable. But the decision led to significant problems when mortgage servicers were unable to collect the necessary documents or when those documents revealed that the borrower didn’t qualify for the modification in the first place. A wave of cancellations followed over the remainder of 2009, as servicers could not make trial mods into permanent ones, sealing negative perceptions of the program. By the time the administration backtracked and required up-front documentation for any loan modification, a year had gone by. The pace of trial mods fell off, and, by the end of 2010, half of all trial modifications had been canceled, according to TARP’s special inspector general.
The failures betrayed the administration’s difficulty in unraveling the mortgage-securitization business—the consolidating and selling of the loans as debt instruments. Administration officials frequently cite “frictions” in the mortgage market, noting that their initial housing efforts were hamstrung by opaque connections among different pieces of the mortgage market on every single loan, and by the conflicts between mortgages and second liens—the piggyback debt that many borrowers took on when they didn’t have enough money for a down payment. The administration also simply misread the industry’s capacity to handle demand for modifications, officials said.
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