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Should Obama push lenders to lower mortgages
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The New York Times yesterday reported that the Obama administration intends to put more pressure on mortgage companies to lower mortgage payments for troubled homeowners. The Treasury Department's Making Home Affordable program is having problems meeting its goal for permanently modifying three to four million homeloans that are at risk of foreclosure.
According to The New York Times, the Treasury Department will use "shame" in order to persuade lenders to lower mortgage payments. Arguably there is a lot for a mortgage lender to be ashamed about. For one thing, throwing people out of their homes into the winds of increasing unemployment, whipped up by a still shaky economy doesn't look good. What makes it extra distasteful is some of these very lenders have been enjoying increases in their stock prices since the market bottomed in March 2009
The good times in the market, fueled by a devalued dollar and low interest rates, see investors borrowing at these low rates and buying stock and other assets, particularly in the foreign markets. Some of these firms, such as Goldman Sachs, are allegedly rolling the dice dealt by the federal government in the form of TARP (Troubled Asset Relief Program) and other financial bailout plans and enjoying the benefits while struggling homeowners are left to ask, "where is my bailout?"
Henry J. Paulson, the Treasury secretary under President George W. Bush, and Federal Reserve chairman Ben S. Bernanke argued in October 2008 that the bailouts were needed to unfreeze the credit markets; to get banks lending to other commercial enterprises again. In short, there was a market failure that justified the intervention.
According to the Treasury Department, the Making Home Affordable modification plan commits $75 billion to keep 3 to 4 million Americans in their homes by preventing avoidable foreclosures. Unlike the TARP bailouts afforded to the likes of Citigroup and AIG, there was no market failure in housing. Although the government enjoys painting its modification program as a housing market stabilization plan, the problem the Obama administration was allegedly trying to resolve was keeping people in their homes versus helping people enter the market to buy a home.
In other words, it is important to study how the administration defined the housing problem and determined a need for a modification program. By failing to properly frame the issue, the administration now finds itself in a situation where the program is not working.
Its biggest problem was phrasing the foreclosure dilemma as a market problem versus a social welfare crisis. Arguably defining a loan modification program as a welfare plan may not have gone over well with the majority of homeowners who are paying their mortgages but at least it would have been more direct and honest.
In addition, by phrasing the foreclosure problem as a market problem, it laid the ground work for implementing the wrong policy approach. By making it a market problem, it meant making the alleged market culprit, the lending industry, a partner in resolving the problem.
Bad idea. Lenders have no interest in modifications simply because modifications would result in less revenues being collected. It's no surprise then that lenders are basically nonresponsive to consumer attempts to modify their loans, whether it's by losing hardship packages submitted by consumers or simply not returning phone calls.
If the Obama administration wants to stabilize its foundering modification program, its best bet is to make direct cash payments of one year of mortgage payments or $25,000, whichever is less, to three million consumers who can document that they have lost the jobs or the sources of verifiable income they had when the received their home loans. At $25,000 a head, we are looking at approximately $100 billion. All that left over TARP money could cover that.
The modification program was poorly premised from the beginning but it can still be saved by calling it and treating it as what it is: a social welfare program.
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