Administration officials blame the mortgage servicers charged with carrying out the mortgage modifications and refinancing under the federal program. Many of their Democratic allies on Capitol Hill back them up, but others are criticizing the White House for fumbling the execution. Whatever the reason, the program hasn’t stopped the rising tide of foreclosures: Experts predict that at least another 2 million homes will be lost this year, and the administration’s plan has so far reached only about 160,000 of the 3 million to 4 million homes it was supposed to protect over the next three years.
That’s bad news for the economy — and bad news for the Democrats.
The Democrats’ political and policy fortunes rest on their ability to persuade voters that they’re fixing the economy. But experts say that rising foreclosures will only exacerbate the nation’s economic woes, pushing down home prices, slashing state and local tax revenues and imperiling consumer confidence.
“Everybody understands that getting out of this broader crisis requires that we stabilize our housing market and stem the tide of foreclosures,” Senate Banking Chairman Chris Dodd (D-Conn.) said in a hearing Thursday. But in unusually harsh words for a Democrat, Dodd said that the Obama administration’s progress in stopping foreclosures has been “disgraceful” so far.
“It’s just hard to explain to the working families in America how it is we could move so fast with extraordinarily complicated deals with the huge financial institutions, and we are moving so incredibly slowly, mired in paperwork, in rules, in talking to banks back home,” said Sen. Jeff Merkley (D-Ore.).
The foreclosure listing service RealtyTrac Inc. reported Thursday that the number of homeowners in foreclosure in the first six months of 2009 was up 15 percent from the same time period a year ago.
The Center for Responsible Lending, a nonpartisan research and policy organization, projects at least 2.4 million additional foreclosure starts this year, causing nearly 70 million surrounding households to lose a combined $500 billion in property value.
The group estimates there will be 9 million foreclosures through the end of 2012, at the cost of $2 trillion in lower home values — enough to pay for the House Democrats’ health care plan, twice.
The White House realizes the stakes. Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan took the 27 participating servicers to task in a July 9 letter to their CEOs, telling them to add more staff, improve training, create an appeal path for borrowers dissatisfied with the service and fulfill other measures to do more modifications, better.
The servicers were told to designate a liaison with the administration who will meet with Treasury and HUD on July 28. The servicers have to tell the administration by July 23 what specific steps they’re taking to improve performance.
In addition, the administration announced that next month it will start publishing company-by-company results, including how many modifications each servicer has made and how quickly. At the least, that will give policymakers ammunition to shame recalcitrant lenders.
“We think that that type of disclosure, servicer-by-servicer, will be important to spurring greater activity on their part,” Herbert Allison, assistant treasury secretary for financial stability, told Dodd’s committee.
But assurances that the administration is paying attention were not enough to satisfy senators on either sides of the aisle — and Republicans are ready to make the case that slow progress on the foreclosure front is just one more example of the Obama administration overpromising and overspending.
“I see these extravagant promises in just about everything that happens here, ... and then I see this terrible execution,” said Sen. Mike Johanns (R-Neb.). “The stimulus money isn’t getting out, you’re not getting on top of the foreclosure numbers, you know, and that has nothing to do with what you inherited. Execution is what you do every day.”
“I’m not happy where we are at, and I think there is a lot more to be done,” Republican Sen. Mel Martinez, whose home state of Florida has the third-highest foreclosure rate in the country, told the Treasury and HUD officials there to testify.
“What’s your Plan B?” he asked later.
That’s exactly what some outside experts are asking; they say that the situation requires more drastic action than the modifications the White House is pursuing.
Many housing advocates argue that Obama’s plan was fatally flawed from the start because Congress refused to pass a controversial measure to allow bankruptcy judges to modify primary residential mortgages — recommended by the White House as the one stick in its plan, which is chock-full of carrots for servicers and borrowers.
“You have got to have some leverage, something to hold people’s feet to the fire,” said CRL spokeswoman Kathleen Day. “If you tell the industry this [judge] can do the loan mod if you don’t, that is going to get their attention.”
Andrew Jakabovics, a housing expert with the left-leaning Center for American Progress, believes revisiting bankruptcy is a political nonstarter. But he says there are other sticks the administration could consider, including taking away the tax advantage enjoyed by the trusts that hold mortgage-backed securities if the investors refuse to allow modifications.
“That’s a pretty big stick,” he said.
And while it was the Senate that killed the bankruptcy measure, the White House took flak for not spending a single cent of its political capital on getting it through the upper chamber.
Economist Mark Zandi — whose advice congressional Democrats relied upon during the stimulus debate — has argued that the Obama plan was too complicated. His recommendation for a Plan B: a simple program that covers any homeowner who took out a mortgage between 2005 and 2008 that was clearly unaffordable when it was made, with straightforward criteria to determine that.
Zandi and others argue that the modifications should focus on reducing struggling homeowners’ outstanding principal on homes that have lost much of their value. A major criticism of the Obama housing plan was that it failed to aggressively encourage principal write-downs, focusing instead on reducing homeowners’ monthly payments, largely through interest rate cuts.
But other experts say there’s not a whole lot the administration can do directly on the housing front anymore — and that might be the worst news of all for the White House.
Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies, said that while the Obama plan was well-crafted for the issues at hand in February, the cause of foreclosures has changed. Now they are less about the creative, variable-rate loans that buried many homeowners and more about an unemployment rate that has even those with fixed-rate loans struggling to keep up.
“The issues have changed, and in some ways the solutions haven’t kept up with the problems,” Retsinas said. “The most effective intervention would be to put people back to work.”