WASHINGTON -- A key government panel keeping tabs on the bailout strongly criticized the Obama administration Wednesday for its apparent failure on a variety of housing-related fronts, from its ineffective foreclosure-prevention initiatives to its refusal to acknowledge the growing crisis sparked by widespread evidence that mortgage companies frequently take their customers' homes via fraud.
Faced with increasingly heated criticism from the Congressional Oversight Panel, the administration's representative -- the Treasury Department's housing rescue chief, Phyllis Caldwell -- hunkered down, refusing to answer basic questions.
It was a familiar scene.
As the housing market continues to flirt with the risk of falling into a double dip -- prices are already heading downward, and the Federal Housing Finance Agency forecasts prices to return to their June 30, 2010 level in the fourth quarter of 2013 -- the Obama administration continues to face assaults on its attempts to fix the crisis threatening Americans' most valuable asset.
Some independent experts, while critical overall, praise the administration for its role in spacing out the negative shocks from the record home repossessions taking place, lessening the chances of the economy suffering a fatal blow. Others say the administration's efforts have simply prolonged the crisis and delayed the recovery. Either way, the consensus is that the administration hasn't pursued the right policies to jumpstart the recovery.
During Wednesday's hearing, members of the Congressional Oversight Panel said Treasury's foreclosure-prevention programs "failed to provide meaningful relief," generated "false expectations," and have been a "major disappointment." COP is an independent, nonpartisan commission created by Congress.
More than 20 months after President Barack Obama announced a plan to "enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure," just 640,300 homeowners remain in the program. Nearly 729,000 struggling homeowners have been kicked out.
"We are faced with a choice here," said Damon Silvers, a member of the panel who also works as director of policy and special counsel at the AFL-CIO. "We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks. We can't do both."
The commissioners were just as critical when it came to assessing Treasury's response to the growing crisis emanating from mortgage companies' use of fraudulent paperwork to foreclose on homeowners.
That consequences of that, though, may pale in comparison to the risk faced by the nation's biggest banks when it comes to demands for them to buy back the faulty home mortgages that they bundled and sold to investors as securities. Estimates from Wall Street analysts range well into the hundreds of billions of dollars.
The Federal Reserve Bank of New York is part of a group of investors that sent a letter demanding Bank of America buy back some $47 billion in dodgy mortgages. The New York Fed owns the mortgage debt as a result of its 2008 bailout of Bear Stearns, the fallen global investment bank.
The administration and financial regulators are conducting a review, though it's unclear how comprehensive it is or how many people have been devoted to it. Administration officials say that thus far "there is no evidence of systemic risk."
Not taking that for an answer, Silvers bore into Caldwell.
"I'm concerned about Treasury making representations categorically that you don't see a systemic risk," Silvers told Treasury's chief homeownership officer. "And let me walk you through exactly why."
"That letter asks for $47 billion of mortgages -- of mortgage- backed securities to be repurchased at par," Silvers went on. "Do you know what those mortgages are currently carried at ... the market value of those bonds today?"
Caldwell declined to comment.
"OK, fine. Let me tell you what the Fed says they're worth. The Fed tells us they're worth 50 cents on the dollar. So if the Fed's request to Bank of America is honored, right, Bank of America, assuming they are carrying these bonds, assuming when they buy them back they mark them to market, Bank of America will take a $23 billion loss.
"The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities -- meaning they have not been chosen...because they're particularly bad. They believe they are of a common quality with the rest of Bank of America's underwritten mortgage-backed securities. There are $2 trillion [worth] of Bank of America's underwritten mortgage-backed securities.
"Five such deals -- five such requests, if honored to Bank of America...will amount to more than the current market capitalization of Bank of America, which is $115 billion.
"Now do you wish to retract your statement that there is no systemic risk in this situation? And the word is 'risk' -- not 'certainty' -- but 'risk'? And I would urge you to do so, because these things can be embarrassing later."
Caldwell repeated her earlier claim that it was still early in the review. She added that Treasury is working "very closely" with "11 regulatory and federal agencies," and that the administration is "watching this every day.
"And that at this stage there appears to be no evidence of a systemic risk -- but again it is early and it is something we are monitoring daily," Caldwell said.
Silvers questioned her again.
"Let me suggest to you that the 'it is still early' is a perfectly acceptable position. ... Is it your position that Bank of America honoring five of these things would not present a systemic risk? ... Is Bank of America not systemically significant?"
Caldwell responded that she and Treasury "didn't say there was no risk. We said there didn't appear to be evidence of a major systemic risk."
"I hope that ... if the Treasury comes back to us and is discussing whether or not we need to deploy further public funds to rescue Bank of America, or such other institutions as might be affected by these events, that we get a similar kind of indifference to their fate after it's too late," Silvers shot back. "Because it strikes me that in light of the mathematics I've gone through with you, it is not a plausible position that there is no systemic risk here."
Silvers is a Democrat, but the panel's concerns were bipartisan. Republican panelist J. Mark McWatters, a high-powered corporate tax lawyer and CPA, similarly peppered Caldwell with questions.
After asking whether "Treasury [was] concerned that any of the large, too-big-to-fail financial institutions may experience a solvency or liquidity or capital crisis over the next few years" due to investor demands that it buy back faulty mortgages, and being told that Treasury had yet to find evidence of "systemic risk," McWatters continued to press Caldwell.
Citing the roughly $2.3 trillion of non-government-backed mortgage securities held by investors at the height of the housing bubble, McWatters said that "even if a relatively small percentage of those are put back and the banks have to buy them back at face [value], this could be a substantial problem.
"Also, considering that this is not just a one-shot deal. I mean, when a mortgage is originated and put in a [mortgage-backed security], it may be multiplied through synthetic CDOs. So you may have the synthetic CDO problems also going back to the banks," he added.
CDOs, or collateralized debt obligations, are securities based on the value of other securities, like home mortgage bonds. Synthetic CDOs are essentially side bets on those securities.
"So, I mean, it sounds like Treasury as of today has not done even a back-of-the-envelope sketch as to what the potential put-back rights could be to the TARP financial institutions," McWatters said, referring to the risk big banks face from investors forcing them to buy back dicey mortgages.
Caldwell repeated that Treasury is "monitoring this situation daily." She declined to offer specifics, though at one point she did say that the administration was "monitoring litigation risk."
Despite the many questions, and various hypothetical scenarios, Caldwell declined to give any more details on the foreclosure paperwork crisis than had already been disclosed by other members of the administration. The panel was forced to make do with open questions and a lack of details on what, exactly, the administration was looking at, how hard it was looking, and whether they are considering or planning for worst-case scenarios.
McWatters likely summed up the feelings of the entire panel when he said, "It's a little bit frightening."