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Feds to Homeowners: It's Your Own Damn Fault Our Foreclosure Program Failed

The NYT buried the lede in its front-page story yesterday about the U.S. government's failure to confront the foreclosure crisis, tucking away this gem near the bottom of the more than 2,100-word piece:

In private conversations, senior Treasury officials offer an often-heard critique: Homeowners failed the program. That is, Americans were in far worse shape -- jobless, underwater on mortgages and with terrible credit -- than anyone realized in 2009.
I was wondering why the federal Home Affordable Modification Program was such a wreck, and it turns out the answer was really quite simple -- it was homeowners' fault all along. Of course! It's so obvious I just whacked myself in the head with a sneaker for not spotting it before.

Clearly, no one in government could possibly have foreseen in 2009, as the economy burned, the lines of jobless, equityless, creditless borrowers snaking around the block in hopes of getting banks to reduce their mortgages. Nor could someone like Treasury Secretary Tim Geithner, with his superb education, years of financial industry experience and something resembling a brainpan, conceivably have predicted that loan servicers might resist playing ball.

Why HAMP really bombed
Obviously, it's inconceivable that HAMP could have flopped because the feds:

  • Allowed loan servicers, the party with the strongest incentive to foreclose, to decide whether to reduce people's mortgage payment
  • Failed to monitor the program, even when modifications actually increased how much people owed
  • Rejected calls to adopt meaningful goals and benchmarks for evaluating HAMP's performance
  • Permitted servicers to foreclose on homeowners who were supposedly under review for modification
  • Let banks and servicers turn modifications into a profit-center by gouging homeowners with high fees, often pushing them into default
  • Ignored evidence of gross negligence and misconduct by servicers
  • Refused to sanction servicers that flagrantly broke the government's own modification rules
Nor could the government have understood that in siding with banks in 2009 to oppose "cramdown" legislation, which would've let bankruptcy courts cut people's mortgage principal, it was relinquishing a proven remedy for preventing foreclosures. Or that opposing even a brief slowdown in foreclosures despite the banks' admission of having systematically committed fraud amounted to a green light to continue the abuse.

Should HAMP live or die?
Complicity has a cost, of course, even in Washington. Lawmakers, mostly Republican, are now cynically exploiting the government's feeble anti-foreclosure efforts to push for HAMP's termination. But disgust with the program is bipartisan. Some Democrats also want to end the program, while even progressive groups like La Raza, the country's largest Hispanic advocacy group, have come out in favor of killing it.

That leaves the White House in the unenviable political position of defending a colossal bust of a program that also happens to remain critically necessary.

As tempting as it is to pull the plug, the reality is that only the government can organize a response to the foreclosure epidemic on a large enough scale to make a difference. Legal aid for homeowners is woefully short, leaving most borrowers to fight their banks alone. And private-sector approaches run into the same fundamental problem as the government, which is that it is in loan servicers' financial interest to foreclose.

HAMP up the program
The only answer: Fix HAMP. Federal officials claim (yet again) that they're committed to repairing the program. Assistant Treasury Secretary Timothy Massad said yesterday that the agency in April will start grading servicers on their performance. He also vowed to hold firms accountable by withholding payments to servicers that don't pass muster.

Of course, Treasury has made similar noises before. That's why the government can prove it means business this time by also requiring banks to reduce borrowers' mortgage principal, as many state and federal officials are urging under a proposed loan-servicing settlement with financial firms. Research shows that this is the most effective way of preventing foreclosures.

Besides, what's the alternative? Killing HAMP in the absence of another workable solution would only compound Treasury's failure. And it would leave the government with no one to blame but itself.

Images from Wikimedia Common
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