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Why the Banks are Thrilled That the Media and the Obama Administration Have Failed on the Foreclosure Crisis

Stressed homeowners twist in the wind as home values, and the economy, continue to stagnate.
 
 
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On the one hand, the dismal failure of the Administration’s cosmetic responses to the foreclosure mess is so evident that the New York Times is willing to acknowledge it, via a first page article titled, “ Cautious Moves on Foreclosures Haunting Obama.” On the other, what the story offers is a whitewash, not an analysis.

The Times puts forward a long form apology for the Administration’s failure to face the housing crisis head on. It admittedly does start off as if it might be a hard-hitting piece:

After inheriting the worst economic downturn since the Great Depression, President Obama poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy.

But he tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.

During his first two years in office, Mr. Obama and his advisers repeatedly affirmed this carefully calibrated strategy, leaving unspent hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity.

But even here, you can see the deck being stacked in Obama’s favor. He “inherited” the housing mess, so how much can we blame him. Bold measures were “unpopular”. Really? “Controversial” is a better word. Helping millions and boosting the housing market would have been more “popular” than letting stressed homeowners twist in the wind and the home values, and the economy, continue to stagnate.

The excuse for the inaction? The servicers were even more screwed up than the Administration thought, so even if they had pushed really hard, it’s unlikely things would have been different. That’s a convenient cover for what was really at work: a belief by Geithner, who was driving this train, that the banks needed to be coddled, which aligned with Obama’s disinclination to ruffle powerful industry incumbents.

Yes, it’s true the big servicers are incompetent. But that didn’t mean there weren’t alternatives. First, there are specialized servicers (known as “combat servicers”) who are set up to do “high touch” servicing. Distressed debt investors have been buying mortgages and using combat servicers (who typically have five times the staffing for the same number of loans as a traditional servicer) to restructure them (and no, I don’t mean Ocwen, it’s already too big and running too many standardized operations to do this job). There was and is a lot of capacity in combat servicing precisely because they believed the big servicers would have to offload some of their delinquent loans to them to see if they could be modified. Bank of America is required as part of its pending $8.5 billion settlement to offload all of its servicing of delinquent loans, which is proof that this was an option all along.

In addition, there are other approaches that would have taken pressure off the servicers’ lousy operations. One was developed by NACA, which was to have borrowers bring income documentation and provide their household expenses, and a NACA staffer would upload images of the documents to a server (no more “Honey, I lost your W-2″) and input the data into a spreadsheet so that someone at the servicer could see the borrower’s income, expenses, and other debt charges. Admittedly, NACA itself did not obtain all that many mortgage modifications. I’ve never gotten a good answer as to why; my sense is servicer lack of motivation was a big contributor, and NACA was also pushing for deep mods (which we and others have advocated) which also reportedly annoyed servicer personnel.