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How to Spin a Failing Program As a Success: The Treasury and HAMP

Perhaps with an eye on the midterm elections, the Treasury Department is spinning hard to change public perceptions that the Obama administration's main anti-foreclosure initiative, HAMP, is a dud. Although only a handful of homeowners have managed to get mortgage relief under the program, it is a success because it helped stabilize the banking system, agency officials recently told Steve Randy Waldman and other financial bloggers:

On HAMP, officials were surprisingly candid. The program has gotten a lot of bad press in terms of its Kafka-esque qualification process and its limited success in generating mortgage modifications under which families become able and willing to pay their debt. Officials pointed out that what may have been an agonizing process for individuals was a useful palliative for the system as a whole. Even if most HAMP applicants ultimately default, the program prevented an outbreak of foreclosures exactly when the system could have handled it least....

The program was successful in the sense that it kept the patient alive until it had begun to heal. And the patient of this metaphor was not a struggling homeowner, but the financial system, a.k.a. the banks. Policymakers openly judged HAMP to be a qualified success because it helped banks muddle through what might have been a fatal shock.

Felix Salmon, echoing liberal bloggers, says a government program that falsely raises desperate people's hopes about keeping their homes is "cruel." And so it is. It's helpful -- essential, in my view -- to occasionally put such issues in stark moral terms, especially given our proclivity in the financial press to gloss over ethical considerations in favor of more "hard-headed" analysis.

But I don't think cruelty is the point here. Public policy is often harshly indifferent to the very people it's supposed to help (NAFTA, anyone?). The question is whether Treasury really did design HAMP mostly to bandage the banking sector, rather than to aid homeowners avoid foreclosure. Because, if so, those goals are at odds. And it's certainly not how President Obama presented HAMP in announcing it in February 2009.

Indeed, that's the very charge consumer advocates and other critics have leveled at HAMP since its inception -- that the program places the interests of lenders over those of borrowers. The most most glaring example of this dynamic is the enormous discretion HAMP gives lenders and loan servicers to reject, often arbitrarily, homeowners for mortgage modification.

Meanwhile, what big banks were in danger of suffering a "fatal shock" if the government had pressed them to modify more mortgages? Certainly not players like Bank of America (BAC), the nation's largest mortgage lender, or other giants such as JPMorgan Chase (JPM) and Wells Fargo (WFC). Such institutions are not only too big to fail, but today also highly profitable.

Treasury is correct in saying that it has leaned harder on servicers to work with borrowers in good faith. To little effect, however. One measure of this failure: More people have fallen out of HAMP -- some 616,000 homeowners -- than have secured permanent changes to their mortgages. That's why it's misleading to say that HAMP "prevented an outbreak of foreclosures." Really? There were a record-high 2.8 million foreclosures last year, and research firm RealtyTrac projects another 1 million in 2010. That's why TARP Special Inspector General Neil Barofsky said in July that HAMP hasn't put an "appreciable dent" in foreclosure filings.

Would more borrowers have lost their homes without HAMP? Sure. But even more foreclosures would've been prevented if Treasury had demanded more transparency and accountability on the part of lenders participating in the program and done more to punish servicers that flouted the rules. Meanwhile, how many more homeowners might've been saved if the White House, rather than caving to financial industry pressure, had gotten behind legislation proposed in 2009 to allow bankruptcy courts to "cram down" mortgages?

In other words, HAMP's failure reflects reflects a broader unwillingness by Obama and Treasury to hold bankers' feet to the fire, a timidity all too visible in the administration's softness on financial reform.

As for what Treasury intentions in designing HAMP, Waldman gives the agency rather more of a pass than I would:

I believe these policymakers conflate, in full sincerity, incumbent financial institutions with "the system," "the economy," and "ordinary Americans." Treasury officials are not cruel people. I'm sure they would have preferred if the program had worked out better for homeowners as well. But they have larger concerns, and from their perspective, HAMP has helped to address those.
That's exactly the point. Officials like Treasury chief Tim Geithner and White House economic adviser Larry Summers have a habit of treating the fortunes of large financial firms as if they were one and the same as those of ordinary Americans, not to mention of smaller banks. That reflex emanates from an economic philosophy that internalizes Wall Street's interests -- it values the "system" more than the people in it.

Cruel? That's tricky terrain. Taking Treasury's defense of HAMP at face value, however, it can't be heartening for struggling homeowners to hear the government describe as a "success" a program that has failed them so badly.

Image from Wikimedia Commons, CC 2.0

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