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Harry and the Homeowners

The Obama administration has made several false starts at serious mortgage relief. But every single shift in the program has been hobbled by the same basic problem -- it is voluntary to the bankers.
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To David Axelrod

From Bob Kuttner

Re: Saving Harry Reid

Unless the administration picks up its game and delivers more and better jobs, and more help to the housing sector, the Democrats face a blowout in November. That would leave the President heavily reliant on Republican votes for his program, and even less able to deliver a strong recovery in time for his own re-election in 2012. It would make Clinton's unfortunate era of bipartisan triangulation look positively resolute by comparison.

But you knew that. What baffles me is why you are not acting more vigorously to change the dynamics.

Geithner and Summers I get. Geithner thinks you fix housing by rescuing Wall Street. Summers considers persistent unemployment a "lagging indicator." But I think you are enough of a political strategist to understand unemployment and the collapse in housing values as a human tragedy and a dagger pointed at the heart of this administration.

If you want the longer version of this memo, it's in my newly published book, A Presidency in Peril, an advance copy of which is moldering somewhere on your desk.

For now, I'd like you to consider the precarious situation of Harry Reid, your faithful Majority Leader in the senate, among the most vulnerable of Democrats up for re-election this fall. Senator Reid happens to be from Nevada, the state hardest hit by the foreclosure crisis.

Nationally, one in four homeowners owes more on its mortgage than the current value of the house. In Nevada, the nation's most extreme case, the figure is 70 percent--nearly three homes in four homes under water, according to the Congressional Oversight Panel. The are entire swaths of Nevada, in places like North Las Vegas, where empty homes stretch as far as the eye can see, and even homeowners who are current on their payments are finding their home equity vanishing into the desert wind.

In this context, voters are rightly depressed and disgusted with the incumbent party. Your administration has made several false starts at serious mortgage relief. But every single shift in the program has been hobbled by the same basic problem--it is voluntary to the bankers.

As a consequence, while some 2.8 million homeowners received a foreclosure notice in 2009 and 6 million more are currently 60 days or more delinquent on the mortgages, just 168,000 had received loan modifications under the Administration's main program, the Home Affordable Modification Program (that's not a typo; it's just bad syntax in the original), as of the most recent tally in February. And at least half of these modified loans are expected to go back into delinquency because the relief is not enough. Of those newly in delinquency, only 30 percent are even eligible for help under the government's guidelines.

So the foreclosure catastrophe is still increasing far faster than your program of help. You can read all about it in the Congressional Oversight Panel's April 10 report, which is the definitive critique of the failure of the Treasury mortgage program. The panel writes:

"The typical post-modification borrower still pays about 59 percent of his total income on debt service, including payments on first and second mortgages, credit cards, car loans, student loans, and other obligations. Furthermore, HAMP typically does not reduce the total principal balance of a mortgage, meaning that a borrower who was underwater before receiving a HAMP modification will likely remain underwater afterward."

Wow, 59 percent of total income going for debt payments after government aid! You can just imagine the gratitude of these citizens for the Administration's help.

Here's how the Oversight Panel evaluates your HAMP program:

"Most borrowers who proceed through HAMP will face a precarious future, but their resources will be severely constrained. With a majority of their income still tied up in debt payments, a small disruption in income or increase in expenses could make repayment almost impossible. Many will have no equity in their homes and are likely to question whether it makes sense to struggle so hard and for so long to make payments on homes that could remain below water for years. Many borrowers will eventually redefault and face foreclosure. Others may make payments for five years under a so-called "permanent modification," only to see their payments rise again when the modification period ends. The redefaults signal the worst form of failure of the HAMP program: billions of taxpayer dollars will have been spent to delay rather than prevent foreclosures."

To read the report is enough to make you want to join the Tea Party. The past 15 months have been a story of one bureaucratic tweak after another, piling new embellishments onto a failed approach. Just listing the acronyms alone of all the programs and their variants would consume all the words in this column. But the innumerable programs have two things in common--they are not getting the job done, and they are all basically voluntary to the lenders.

This continuing failure, in turn, is the consequence of two fateful decisions by your economic team. First was the decision by Summers, Geithner and company to prop the big banks up rather than clean them out. As a result, the Treasury and the Fed have as their main objective rebuilding bank balance sheets rather than requiring banks to reduce mortgage payments and take losses so that homeowners can get relief. Second, the administration has consistently rejected a bolder approach to helping homeowners -- namely mandating a reduction in the debt owed so that homeowners can have some hope of getting back in positive territory.

As long as homeowners owe significantly more than the value of the house, it makes no sense for them to faithfully pay down the mortgage, because they can never hope to accumulate positive equity. In these circumstances, millions of homeowners are quite rationally walking away, and finding rentals.

That's a solution of a sort, but one that wipes out the home equity of the middle class.

Which brings me back to Harry Reid. In Las Vegas, the average house declined 20 percent in value last year, and the foreclosure crisis keeps feeding on itself.

What's needed is a bold program reducing principal and interest, to make it possible for people to stay in their homes, and to re-employ workers securing and fixing up abandoned properties so that they become attractive rentals or affordable homes for new buyers. But except for a few pilot programs, that's not on offer.

In February, the White House announced a new $2.1 billion Hardest Hit Fund, targeted to five states that suffer both from high rates of unemployment and from very high mortgage defaults. Nevada is one of the five, along with Arizona, California, Florida and Michigan. The money is to be spent by state housing agencies, to encourage innovative approaches. But the pace of approvals is glacial.

One such approach is being pioneered in California by the coalition One Los Angeles, working with Los Angeles Legal Services and the Industrial Areas Foundation. In LA, 98,000 homeowners are in some stage of foreclosure. The idea is to give homeowners a publicly financed low-interest second mortgage, whose proceeds would go to the lender in exchange for a commitment to reduce the outstanding loan balance to its current market value, thus dramatically cutting monthly payments.

I recently interviewed several of the organizers and experts who came up with the idea. They have approval to do a small pilot program, but were told by HUD Secretary Shaun Donovan to let him know whether the bankers supported it before the program could be taken to scale.

So despite the disgrace of Goldman Sachs, and the Senate's belated progress on financial reform, when it comes to mortgage relief we still have government-by-banker. In Nevada, efforts for bolder relief keep bumping up against similar HUD and Treasury red tape.

Meanwhile, foreclosed or abandoned houses are becoming the object of speculation by hedge funds--making quick money from the housing disaster a second time. What we need instead is aid for community groups to help people stay in their homes and renovate abandoned properties, working from the neighborhood up rather than the bank and hedge fund down, as well as a direct federal presence.

In similar circumstances, Franklin Roosevelt's Home Owners Loan Corporation used direct government loans to refinance one mortgage in five, sparing millions of Americans from being dispossessed. In that era, government worked and citizens valued it.

A variant proposed by Howell Jackson, a law professor who is expert in eminent domain, would have the government buy up bundles of securitized mortgages at their current depressed market value, around 40-60 cents on the dollar, and then turn them back into whole loans, using the savings to reduce the principal and interest to homeowners.

David, the Obama administration is going to be damned by the right as socialist whether you use government well or badly. So if you are going to deploy government help to people devastated by this economic collapse, you might as well do it effectively. HAMP, its alliance with bankers, its paltry relief and endless red tape, epitomizes everything that causes people to turn against government.

If the Obama administration fails, it will not be for trying too much but for achieving too little. And your key legislative allies like Harry Reid will pay the price this November.

Oh--and a happy May Day to you. May Day, you will recall, is both the international worker day of solidarity and the international signal of distress. Mayday, Mayday!

Robert Kuttner's new book is "A Presidency in Peril."

He is co-editor of The American Prospect and a senior fellow at Demos

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