I hope the whole day doesn’t consist of me rehashing the President’s meetings with progressive bloggers and The Daily Show, but there is a lot to break down. There were interesting responses on the filibuster (he’s against it), Social Security (he doesn’t think raising the retirement age is the right move) and the cost of TARP (he’s full of it). Others can take a whack at that. I’m going to stick with my core competency: HAMP. Here was the exchange:
Q: I was wondering if you’re happy with the federal response to the foreclosure crisis or if you think there’s more that either should have been or could be in the future done either through HAMP or Fannie and Freddie or various mechanisms?
THE PRESIDENT: I don’t think I’m happy with millions of foreclosures or millions of houses being underwater. This is — this was both a powerful symptom as well as a cause of the economic crisis that we’re in. So we’ve got to do as much as we can to stabilize the housing market.
I do think that the steps that we’ve taken helped stabilize the housing market. The HAMP program has gotten a lot of criticism, but the fact of the matter is, is that you’ve got half a million people who have gone through permanent loan modifications that are saving 500 bucks a month. And I get letters every day from people whose homes were saved as a consequence of it.
It is important to acknowledge this. I’ve gotten a few letters about people who successfully navigated HAMP, and I even have written about them on occasion. On net, I’d rather have 500,000 people with a permanent modification than not. Keep in mind, however, that the re-default rate of 11% needs to be taken out of those numbers: $500 a month wasn’t enough for them to not slip back into delinquency.
That said, this is far less than the expectation of the program of 3-4 million modifications. And if you look at it in raw data terms, 500,000 people at $500 a month is $250 million a month. It would take well over sixteen years per loan to get to the $50 billion dollar allotment (I know that’s not actually how the HAMP program works, but bear with me). The program was supposed to lever UP money to incentivize the banks to make workouts and turn their loans into performing products. That’s not happening at all. [cont’d.]
And of course, this neglects the greater number of people who walked into HAMP, the 700,000 who were denied a modification and came out in abjectly worse financial shape than when they entered the program.
So let’s see what else Obama said:
I think that the broader steps we took to stabilize the economy mean that housing prices are not plummeting the way they were.
But this is a multitrillion-dollar market and a multitrillion-dollar problem. And the challenge that we’ve had is we’ve got only so much gravel and we’ve got a really big pothole. We can’t magically sort of fix a decline in home values that’s so severe in some markets that people are $100,000 to $150,000 underwater.
What we can do is to try to create sort of essentially bridge programs that help people stabilize, refinance where they can, and in some cases not just get pummeled if they decide that they want to move.
Well, I would argue that you have more gravel, in the form of the outright fraud knowingly committed by the banks in the origination, securitization and now foreclosure process. This is the path to actually stabilizing the economy, simply as a matter of bringing the legal system into the process. Banks do not have secure claims on the homes they’re repossessing. This is not isolated cases, it’s industry-wide. Wells Fargo finally copped to it yesterday.
What you can envision is a way to get a whole lot of gravel by using the threat of prosecution or mass give-backs of homes to people to force real modifications with principal reductions down to the real value of the property. There are actually many worse options for the banks, including having to write down all their second liens to zero. And actually, principal reductions can be made to be the least worst option for them, from a financial standpoint.
I think that we have tinkered with the HAMP program as we get more information to figure out can we do this better, can we do this smarter with the resources that we have.
The biggest challenge is how do you make sure that you are helping those who really deserve help and if they get some temporary help can get back on their feet, make their payments and move forward and stay in their home, versus either people who are speculators, own second homes that they really couldn’t afford because they’d gotten a subprime loan, and people who through no fault of their own just can’t afford their house anymore because of the change in housing values or their incomes don’t support it.
And we’re always trying to find that sweet spot to use as much of the money that we have available to us to help those who can be helped, without wasting that money on folks who don’t deserve help. And that’s a tough balance to strike.
OK, here’s the truth: 53% of all Americans are worried about paying their next rent or mortgage payment. You can take that stat to mean that, since lots of people own their homes, “among people who actually have a rent or mortgage commitment in the first place, something like three-quarters are worried about having enough money to pay it.”
This is an ENORMOUS problem, not one that requires picking through the pile making sure everyone “deserves” the help. It needs an overwhelming response, and HAMP simply has not been that mechanism. In fact, it has hurt a lot of good people who just needed another chance. The President seems far more concerned with helping “bad” people than hurting good ones. And furthermore, when you add in all the fraud and predatory lending in the subprime market, it’s not clear you can put this on the victim of that fraud, that they got too much home or whatever.
OK, wrapping up:
I had a meeting with Warren Buffett in my office and his basic point was there was a lot of over-building for a long period of time. Now there’s under-building because all that backlog of inventory is being absorbed. Some of that is just going to take time. And we can do as much as we can to help ease that transition, but we’re not going to be able to eliminate all the pain because we just don’t have the resources to do it. The market is just too big.
The other aspect of the housing market that is worth bearing in mind is that whereas initially a lot of the problems on the foreclosure front had to do with balloon payments people didn’t see coming, adjustable rate mortgages that people didn’t clearly understand, predatory lending scams that were taking place — now the biggest driver of foreclosure is unemployment. And so the single most important thing I can do for the housing market is actually improve economic growth as a whole. If we can get the economy moving stronger, if we can drive the unemployment rate down, that will have probably the biggest impact on foreclosures, as well as housing prices, as just about anything.
I don’t think the recasting of loans has ended, with exploding interest rates. That won’t end for a couple years yet. Is the problem major? Yes. Is unemployment triggering a second wave of home losses? Yes. Can everyone be helped? I think that’s the wrong way to look at this. It is impossible for the economy to succeed without the housing crisis being fixed. You can say that fixing unemployment will fix foreclosures, but I think that looks at things the wrong way. The housing market is part of the economy, in fact quite a large part. And it bleeds into the financial sector, another very large part, where zombie banks have unrealized losses on their balance sheets affecting the way they allocate capital. It’s impossible to resolve this problem and get back to economic growth without actually resolving the problem, and there are ways to do that, ways which may cause pain for the banks, but which they have little choice but to accept at this juncture.
We’ve gone from “Yes we can” to “We can’t do it.” But there is a way.