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With today’s scheduled announcement by the Treasury Department of new efforts to pressure lenders to lower mortgage costs, progressive economists, advocacy groups and legislators are pushing for tougher measures to keep homeowners in their homes – and to force banks to take losses on their exploding mortgages.

In contrast, the Obama administration’s response to a crisis that is causing two million families a year to face the loss of their homes has been widely derided as ineffective. The programs so far have been voluntary plans that proved too costly for homeowners, too cumbersome for all parties involved and have offered few effective incentives. As a result, only a tiny fraction of homeowners at risk of foreclosure – as little as 3 percent for some programs – have been helped in any way.
Yet the administration instead is going to focus on a new drive to “shame” the shameless bankers and financial institutions that have already gouged trillions in bailouts and guarantees from the taxpayer. This is the same industry that has also torpedoed or weakened mortgage and financial reforms in Congress. Still, the New York Times reported:
“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.”
Mr. Barr said the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments. The Treasury Department also will wait until reductions are permanent before paying cash incentives that it promised to mortgage companies that lower loan payments.
“They’re not getting a penny from the federal government until they move forward,” Mr. Barr said.
Liz Ryan Murray, the policy director for National People’s Action, a network of community advocacy groups, said bluntly of the announcement, “It’s a joke. There’s still no talk of reforming the program, or using TARP money to bail people out. It’s just a plan to make servicers feel bad.”
And as Dean Baker, co-director of the Center for Economic and Policy Research and a proponent of a “right-to-rent” approach to aid at-risk homeowners, told Truthout, “We need to change the law rather than haranguing lenders. When someone’s running drugs, we don’t try to shame them – we put them in jail.”
Unfortunately, getting tougher on crooked lenders – then and now – doesn’t seem to be a priority, either. Some reform-minded legislators, especially Ohio Democrat Marcy Kaptur, have contended that homeowners should stay in their homes in part because many of the loans were fraudulent and deceptive. In addition, she’s been seeking additional law enforcement resources devoted to prosecuting lending fraud. As she told The Nation recently:
“Mortgage fraud is at the heart of the housing crisis, which is at the heart of the financial crisis. After 9/11, the FBI redeployed financial special agents to anti-terrorism, but they have yet to replace those agents in the White Collar Crime Division – even though the division had warned in 2004 of the threat of a mortgage fraud ‘epidemic.’ We were under the understanding that [the Department of] Justice was under 200 prosecutors and investigative agents in the area of mortgage and securities fraud, and so we were pushing to increase that number. Our goal was 1,000 agents – we didn’t come anywhere near close to that – but 1,000 agents is the number that were in place during the savings and loan crisis back in the late eighties.”
Equally troubling, in the absence of any real mortgage reform, is the spread of bogus foreclosure-assistance companies that are stealing yet more money from homeowners under the guise of renegotiating their mortgages.
Even as criminal lenders and scam artists remain unpunished, the program the administration is hoping to salvage has several built-in flaws that could doom its ability to help the millions needing it – especially with one in four homeowners now owing more than their homes are worth. That’s a sign of potential foreclosures to come. For instance, as Dean Baker and other experts point out, the HAMP initiative was designed for employed homeowners who were victimized by predatory, subprime loans they just couldn’t afford to pay in full. It excludes today’s struggling homeowners who are unemployed and who are “underwater,” faced with paying off a mortgage that is worth far more than the house’s now-collapsed value. “If you owe $300,000 on a house that’s worth $200,000,” Baker notes, “the banks won’t write down that much.”
The government’s weak incentives so far – and verbal tongue-lashings being promised today – aren’t likely to remedy this crisis. It’s not just that it took quite a while for Treasury Secretary Tim Geithner’s department to realize it wasn’t such a bright idea to essentially pay all the renegotiating incentive money up front to financial institutions still determined to kick people out of their homes. On top of that, the amount of fees that mortgage companies can generate by servicing delinquent loans often exceeds the incentives the government offers out of its floundering $75 billion program. As the New York Times reported back in July, “Many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.” The paper noted:
Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue – fees for insurance, appraisals, title searches and legal services.”
The lack of meaningful pressure on financial institutions to either increase lending or renegotiate mortgages has hampered everything from the wasteful $700 billion TARP bailout to the bungled foreclosure programs.
As I had earlier reported in In These Times, and widely noted by everyone from the New York Times to the Congressional Oversight Panel on the TARP program, the current programs have flopped so badly they’ve only reached – let alone permanently helped – as few as 3 percent and, at best, less than half of eligible homeowners.
The programs include a now-abandoned fiasco in HUD that only aided a few hundred homeowners in its early months, and the better-known “Home Affordable Program” (HAMP) and a related refinancing effort in Treasury that have offered permanent aid to only a few thousand homeowners. As The New York Times reported Sunday:
From its inception early this year, the Obama administration’s program, called Making Home Affordable, has been dogged by persistent questions about whether it could diminish a swelling wave of foreclosures. Some economists argued that the plan was built for last year’s problem – exotic mortgages whose payments increased – and not for the current menace of soaring joblessness. Lawyers who defend homeowners against foreclosure maintained that mortgage companies collect lucrative fees from long-term delinquency, undercutting their incentive to lower payments to affordable levels.
Last month, an oversight panel created by Congress reported that fewer than 2,000 of the 500,000 loan modifications then in progress had become permanent under Making Home Affordable. When the Treasury releases new numbers next month, it is expected to report a disappointingly small number of permanent loan modifications, with estimates in the tens of thousands out of the more than 650,000 borrowers now in the program.
Yet another program in Treasury is even more of a failure, if that’s possible. As The Washington Post reported last month:
A seven-month-old government program to help homeowners with little or no equity refinance their mortgages has so far reached fewer than 3 percent of those targeted, with many struggling borrowers deciding that the benefits of a new loan aren’t worth the closing costs.
This lackluster performance reflects the difficulty of helping the growing segment of “underwater” homeowners – those who owe more than their home is worth.
The program is a key component of the Obama administration’s efforts to stabilize the housing market and arrest the nation’s growing foreclosure rate. But the initiative has received far less public attention than its companion, a loan modification program that pays lenders to lower the payments of delinquent borrowers who are in imminent danger of losing their homes.
The refinancing program targets borrowers who are not in trouble on their mortgage now but, because they are underwater, are at risk of falling into trouble later.
Dean Baker and other reformers, including leaders of the National People’s Action advocacy network and the Center for Responsible Lending, are promoting what could be better ideas. They aim unabashedly to keep homeowners in their homes and force financial institutions to take losses on their loans, but so far there has been little Congressional or administration action on them. Nor are Washington insiders willing to take on the financial industry on this issue, even as they’re trying to pass often loophole-laden financial reforms against a lobbying blitzkrieg by Wall Street.
Baker’s right-to-rent proposal, he argues, offers benefits that even other reform ideas don’t necessarily provide. For instance, earlier in the spring, a law designed to spur “cram-down” decisions by judges to force lower mortgage payments failed in the Senate after passing the House. Senator Dick Durbin (D-Ill) said of the fierce financial industry lobbying that defeated the bill: “Frankly, they own the place.” Yet Baker’s approach to allow homeowners to pay fair-market rent rates doesn’t depend on hoping that a bankruptcy judge after a drawn-out process will finally give a homeowner a break.
Nor does Baker’s proposal require an elaborate bureaucracy, armed with fee incentives, to prod profit-driven mortgage service companies to lower required mortgage payments. “It doesn’t involve the taxpayers’ money and it doesn’t involve a bureaucracy,” he notes. “You don’t need a bureaucracy to guarantee that people can stay in their homes.” Yet while it’s costly to neighborhoods and even to banks to have homes remain empty without a sale after families are forced out, banks are still counting on either government guarantees or the market’s rebound to make it worth the wait to resell the homes, rather than take any losses.
So, as with other reforms, “the banks hate it,” Baker admits.
As previously reported in In These Times, reform groups are offering a wide-ranging agenda for mortgage relief that is largely being ignored. For instance, at its Save the American Dream web site and in other materials, National People’s Action has outlined the basic principles of reform, including fixing HAMP. Few of them appear to be on their way to being effectively implemented:
IMMEDIATE RELIEF TO KEEP FAMILIES IN THEIR HOMES
Mortgage industry must:
• Disclose ownership of loans before foreclosure.
• Modify loans to be permanently affordable.
• Halt massive interest rate hikes.
• Allow servicers the greatest flexibility to modify these loans.
• Create a refinance loan for homeowners stuck in unaffordable loans.
• Employ salaried loan officers, not commissioned-based loan officers.

The Treasury Department Must Dramatically Improve HAMP

Servicers must be pressured to increase dramatically the number of permanent modifications being made.

Treasury must mandate principal reduction as a primary tool to solve foreclosures, not just as a last resort.

HAMP cannot be a ‘one-strike’ program. Families need the ability to reapply to the program if and when their situations change.

Treasury must make the HAMP process more transparent and implement a true appeals process so families in foreclosure can see how to qualify and have recourse if they are rejected by their servicer.

Instead of such tough-minded reforms of current practices, the administration is instead primarily relying on “shame” to prod the financial services industry to change its ways and save homeowners. As former Labor Secretary Robert Reich declared on his blog Sunday:
The $75 billion federal program designed to bribe banks to modify mortgages has been a bust. No one knows the exact number of mortgages that have been modified (that will be reported next month) but housing experts I’ve talked with say it’s a tiny fraction of the number of homeowners in trouble. Seems that the big banks can’t be bothered. “Some of the firms ought to be embarrassed,” Michael Barr, the assistant Treasury secretary for financial institutions told The New York Times. Barr says the government will try to use shame as a corrective, publicly naming institutions that have moved too slowly.
Shame? If we’ve learned anything over the last year, it’s that Wall Street has none. Eight months ago Wall Street lobbyist beat back a proposal to give bankruptcy judges the right to amend mortgages in order to pressure lenders to reduce principal owed, just like Wall Street lobbyists are now beating back tough regulations to prevent the Street from causing another meltdown. Goldman Sachs, attempting to pre-empt a firestorm of public outrage when it dispenses its $17 billion of bonuses, is setting up a crudely conceived $500 million PR program to help Main Street.
Shame won’t work. Only political muscle and courage will.
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