Posted on Friday, November 5, 2010
One of the Federal Reserve's top economists denounced the Obama administration's approach to stemming the growing foreclosure crisis, saying it's part of "three years of failed policies" intended to help homeowners avoid losing their homes.
"We can't prevent millions of foreclosures using the tools people are currently using," Paul S. Willen, a senior economist and policy adviser in the research department of the Federal Reserve Bank of Boston, said Monday during a mortgage and housing finance conference held at the Federal Deposit Insurance Corporation in Arlington, Va.
Those tools -- government programs that did little to change the fundamental incentives driving mortgage companies, lenders and investors -- have been "the roadmap for three years of failed policies," said Willen, an expert in household finances and home mortgages.
"The lenders foreclosed on borrowers because it's in their financial interest to do it. Modification is an expensive and ineffective medicine," he added.
To the experts in the audience, Willen's statements did not come as a surprise. The Obama administration designed a $75 billion program to ease the pain of the housing crisis by promising to pay mortgage companies, mortgage owners and the homeowners themselves if they successfully modified the terms of a delinquent borrower's mortgage. The Home Affordable Mortgage Program (HAMP) is the biggest part of that plan. Obama promised in February 2009 that the program would help three to four million homeowners.
Rather than allowing millions of homeowners to lose their homes, the administration tried to stem the rising tide of foreclosures by getting mortgage companies to lower borrowers' monthly payments. If borrowers have a more manageable payment obligation, the logic goes, they're more likely to stay current, or become current, because the mortgage is no longer seen as unattainable.
But it hasn't worked. Many have called it a "failure."
Obama's foreclosure plan has been widely panned by industry experts. If anything, it's likely to prolong the pain by stretching out the housing crisis, they say. And for most homeowners, it's made things worse.
More homeowners have been kicked out of HAMP than have benefited from lower monthly payments. The vast majority of these homeowners now owe more on their home than when they signed up for Obama's plan, because of the fees and surcharges that have been rolled into the mortgage.
For those who successfully navigated HAMP and ended up with five years of promised lower monthly payments, they, too, now typically owe more on their mortgage than they did before. In fact, the typical homeowner in HAMP is "underwater," meaning they owe more than their home is worth, and were pushed further underwater by HAMP.
Homeowners who are underwater are far more likely to default on their mortgage than other homeowners, academic and government research shows.
By stretching out the crisis, hoping all the while it will self correct, many have termed Obama's plan a giant "extend and pretend" scheme, in which the administration extends the time line to achieve success.
Willen said that calling on mortgage companies to voluntarily modify mortgages would not even make a "modest dent" in the foreclosure crisis.
He did, though, offer a different solution:
"To prevent foreclosures we must pay lenders or borrowers a lot of money or force lenders to modify loans even when they don't want to," the Fed researcher said. "The idea we can go forward and all we need to do is tweak things a little or change a rule here or there or even change a lot of rules and give some incentive payments -- that is not enough.
"If we want to prevent foreclosures, and that is a...political consideration, not really an economic consideration, then we know how to do it. In essence what I'm trained to say is we know how to prevent foreclosures. We just need to be prepared to spend the money and to decide who we think needs that money and who we think deserves help rather than trying to come up with some way we can do something for free [that] helps all of the right people and punishes all the wrong people."
If the administration chooses instead to pursue what many believe to be the only viable solution -- widespread mortgage principal writedowns -- then policymakers had better be ready to restructure the nation's largest financial institutions, said Adam J. Levitin, a professor at Georgetown University Law Center who's served as special counsel to the Congressional Oversight Panel, a watchdog created to keep tabs on the bailout.
Making the nation's biggest banks forgive mortgage principal would force them to recognize losses. The losses would be so enormous that the government would likely have to step in and take over the lenders.
"Whether we have the courage as a country to bite that bullet, I don't know," Levitin adde