On the one hand, the dismal failure of the Administration’s cosmetic responses to the foreclosure mess is so evident that the New York Times is willing to acknowledge it, via a first page article titled, “Cautious Moves on Foreclosures Haunting Obama.” On the other, what the story offers is a whitewash, not an analysis.
The Times puts forward a long form apology for the Administration’s failure to face the housing crisis head on. It admittedly does start off as if it might be a hard-hitting piece:
After inheriting the worst economic downturn since the Great Depression, President Obama poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy.
But he tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.
During his first two years in office, Mr. Obama and his advisers repeatedly affirmed this carefully calibrated strategy, leaving unspent hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity.
But even here, you can see the deck being stacked in Obama’s favor. He “inherited” the housing mess, so how much can we blame him. Bold measures were “unpopular”. Really? “Controversial” is a better word. Helping millions and boosting the housing market would have been more “popular” than letting stressed homeowners twist in the wind and the home values, and the economy, continue to stagnate.
The excuse for the inaction? The servicers were even more screwed up than the Administration thought, so even if they had pushed really hard, it’s unlikely things would have been different. That’s a convenient cover for what was really at work: a belief by Geithner, who was driving this train, that the banks needed to be coddled, which aligned with Obama’s disinclination to ruffle powerful industry incumbents.
Yes, it’s true the big servicers are incompetent. But that didn’t mean there weren’t alternatives. First, there are specialized servicers (known as “combat servicers”) who are set up to do “high touch” servicing. Distressed debt investors have been buying mortgages and using combat servicers (who typically have five times the staffing for the same number of loans as a traditional servicer) to restructure them (and no, I don’t mean Ocwen, it’s already too big and running too many standardized operations to do this job). There was and is a lot of capacity in combat servicing precisely because they believed the big servicers would have to offload some of their delinquent loans to them to see if they could be modified. Bank of America is required as part of its pending $8.5 billion settlement to offload all of its servicing of delinquent loans, which is proof that this was an option all along.
In addition, there are other approaches that would have taken pressure off the servicers’ lousy operations. One was developed by NACA, which was to have borrowers bring income documentation and provide their household expenses, and a NACA staffer would upload images of the documents to a server (no more “Honey, I lost your W-2”) and input the data into a spreadsheet so that someone at the servicer could see the borrower’s income, expenses, and other debt charges. Admittedly, NACA itself did not obtain all that many mortgage modifications. I’ve never gotten a good answer as to why; my sense is servicer lack of motivation was a big contributor, and NACA was also pushing for deep mods (which we and others have advocated) which also reportedly annoyed servicer personnel.
So the real issue here was one we’ve stressed all along: servicers were set up to foreclose, and they make money from foreclosing. They are not set up to do mods and don’t feel they are paid enough to do them. The Administration has finally decided to bribe them enough to get them to take interest, but this is still too little, too late. By contrast, the Administration had tons of leverage and could easily have made it clear they would make their lives miserable if they failed to do what it took to do to give more mods to viable borrowers. (The banks have a weak argument that they might have been sued by investors. The reality is investors have been remarkably unresponsive despite being on the wrong end of tons of abuses).
The biggest way they could have messes with the servicers was by threatening to enforce REMIC rules. REMICs, or real estate mortgage conduits, get pass through treatment (meaning the trust itself is not taxed, only the investor in it is when income is received). Among the requirements are that they be passive, which among other things meant all the mortgages had to be in the trust as of a specified date not long after trust closing. In addition, only performing loans can go in a REMIC. We’ve since learned that many if not most mortgages in the post 2004 securitizations weren’t conveyed to the trusts properly, and the servicers have taken to trying to convey defaulted loans into the trusts in order to foreclose. The penalties for prohibited acts under REMIC is a 100% tax on income. As we wrote in 2011:
Knowing of this background, in the blogger meeting with Treasury last August, when someone we will euphemistically call as senior official argued that the Treasury had little power over servicers, I objected, and said it depended on whether they construed of their power narrowly or broadly. I pointed out that a Pacer scrape on foreclosure filings would find thousands of violations of REMIC rules that were subject to punitive charges, and that that was an important leverage point to bring the industry to heel. (Yes, this is an example of using tax as a tool of policy, as opposed to merely enforcing the rules……that was by design). He sidestepped the reference to REMIC both in my initial question and follow up.
Steve Waldman, who was also at the session, was as skeptical of the exchange as I was. From a message last August:
Re REMICs: The reaction to your probing was very suspicious.
It’d have been one thing if he’d said they hadn’t looked into the issue. But that wasn’t how he responded. He started talking about how he’d had his staff “look for leverage”, against servicers I think, but found there was nothing there. In other words, he didn’t want to leave the issue open. He wanted to neutralize it.
One possibility is that the truth is face value, but I doubt it. After all, we’d just had staffers describe using the government’s leverage in creative ways to protect taxpayers or serve other public purposes as “extra legal”. Yet here was [the senior official] apparently on a fishing expedition for leverage, no doubt desperate to persuade servicers to facililitate mods to help homeowners. Yeah. Right.
If I’m not misunderstanding you, your core point is that the paperwork on many boomtown mortgages is invalid, and therefore various sorts of transactions, from foreclosures to bundling into REMICs, cannot be legally done, at least not without a lot of expensive research and recertification. In other words, your line of thinking would put a question mark beneath the value of a whole lot of bank assets. That would obviously not be in the national interest according to Treasury. So of course they’ve already looked onto the story and there’s nothing to it.
As Waldman indicates, there is a blindingly obvious reason why the IRS inquiry is a coverup. If the IRS were to find any of the questionable practices to be violations, they’d lead to widespread and large assessments against mortgage investors. That in turn would spawn the mother of all litigations by investors against the originators and trustees. That would blow up the mortgage industrial complex and put us back in a financial crisis. That is the last thing the officialdom wants to happen.
And this is EXACTLY why the Treasury had leverage. It had at least one nuclear weapon it could aim at recalcitrant servicers and tell them it was only out of their generosity that they weren’t throwing the book at them, and in return, they had better get off their duffs pronto and get religion about rescuing borrowers that could be salvaged. And if that cost them money, too bad.
And that brings us to the Big Lie in the piece: that the Administration was too conservative and didn’t want to be seen as helping undeserving borrowers. The reality was that all Treasury cared about was the banks. As Neil Barofsky points out:
And if you know the terrain, you can see how skewed the reporting is. HAMP, the abortion of a program that had people who might have been able to keep their homes, admittedly under strain, told to default by servicers and often losing their homes as a result, isn’t mentioned by name. There is an interactive graphic, but the omission of the word “HAMP” looks an awful lot like a deliberate effort to steer clear of the issue most often discussed in connection with HAMP: not how few were helped, but how many were affirmatively harmed.
Nor is the heinous “get out of liability for almost free” card known as the mortgage settlement. How can you talk about Obama’s housing policy and dodge the two biggest programs undertaken on his watch? Instead, the article depicts a HOLC-style massive mortgage program and bankruptcy cramdowns as the only alternatives. And it does present the waving off of cramwdowns a mistake, but again offers excuses:
But he also repeatedly pressed the pause button. When proponents sought to add a cramdown to the Emergency Economic Stabilization Act in September 2008, Mr. Obama, who had flown back to Washington from the campaign trail, persuaded them to postpone the “partisan” effort as an example to Republicans, who said the measure would violate existing contracts.
This is stenography masquerading as reporting. First, bankruptcy is a court of equity, not law. Contracts ARE put aside in bankruptcy; that’s the whole purpose of the exercise. Second, as for borrowers who had not declared bankruptcy, the servicers are specifically obligated to service the loans in the best interests of the certificateholders. A real threat of bankruptcy by specific borrowers would change the servicer’s obligations. And I strongly suspect that the real issue was bankruptcy cramdowns would lead more borrowers to declare bankruptcy, which would lead to more second mortgages being wiped out…which would lead to more questions about the solvency of the banks, particularly Bank of America.
What’s appalling about this story isn’t just the spinelessness and dishonesty of the Administration. It’s that it’s matched by many of the reporters on this beat.