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Administration Housing Policy in a Second Term

Of all the thumbsuckers about the second-term Obama agenda I’ve read, the ones that reflect the least contact with reality concern Administration housing policy. It’s beyond clear that the first-term policy framework sought to protect banks and allocate losses from the collapse of the housing bubble elsewhere. That was the point behind HAMP, designed to “foam the runway” for the banks, allowing them to squeeze out a few extra payments from borrowers and absorb foreclosures more slowly. That was the point behind the foreclosure fraud settlement, reacting to the largest consumer fraud in the history of the world by immunizing the conduct in exchange for a pittance of a fine. That was the point behind a financial fraud task force that turned up precious little financial fraud and sought criminal prosecutions of no individual.

So the second-term agenda described by these reports elide this reality, and focus on things like Fannie Mae and Freddie Mac’s prominence in the marketplace.

In the third quarter, various government entities backstopped 92 percent of all new residential mortgages, according to Inside Mortgage Finance, a publication that focuses on the home loan industry.

Mr. Obama’s economic team has consistently said it wants the housing market to work without significant government support. But it has taken few actual steps to advance that idea […]

Most immediately, the housing market has to be strong enough to deal with a government pullback. Some analysts think it’s ready. “I think the housing recovery is far enough along that they can start winding down Fannie and Freddie,” said Phillip L. Swagel at the University of Maryland’s School of Public Policy, who served as assistant secretary for economic policy under Treasury Secretary Henry M. Paulson Jr.

The administration can take smaller steps first. Mr. Lawler, the housing economist, thinks the government could start to reduce the maximum amount that it will guarantee for Fannie and Freddie loans. In some areas, like parts of the Northeast and California, it is as high as $625,000. Before the financial crisis, it was essentially capped at $417,000.

This all focuses on the future of housing finance when there is still a fire burning among homeowners. Delinquencies actually shot back up in September. The Center for Responsible Lending and other analysts think we’re only halfway through the foreclosure crisis. Yet the focus for a housing market on the road to alleged recovery is all about housing finance.

First off, there won’t be a single change on that front as long as the private securitization markets remain unformed. Unless banks change their recent historical practice and hold mortgages on their own portfolios, only the GSEs will buy them on the secondary market. The idea that new rules on qualified mortgages will break this logjam is ludicrous. Private investors are wary of the entire unreformed system. They’ve been burned by fraud and nothing has fundamentally changed. Consider that the exact same enablers of fraud run the show at the big banks:

An executive who the Justice Department says facilitated a scheme to defraud Fannie Mae and Freddie Mac is now spearheading JPMorgan Chase’s role in the government’s program to compensate victims of the big banks’ abusive foreclosure practices.

The executive, Rebecca Mairone, worked at Countrywide and Bank of America from 2006 until earlier this year, when she left for JPMorgan Chase, according to her LinkedIn profile […]

Mairone was chief operating officer of the Countrywide lending division that allegedly carried out the “Hustle.” She took the helm of JPMorgan Chase’s involvement in the Independent Foreclosure Review this summer, according to a former Chase employee.

And that’s really only one piece of the puzzle. The point is that there’s been no reform of the system because there’s been no accountability in the system. Even the weak efforts at accountability we’ve seen lately are being undermined. The US Attorney in New York filed suit against JPMorgan Chase over how Bear Stearns, now a subsidiary, packaged loans to investors. But the Securities and Exchange Commission, which should be the lead watchdog for investors, just settled a case over the same allegations.

There are plenty of avenues just using mail and wire fraud to prosecute those who committed fraud. These roads will never be taken, and the rest of the policy just springs from that. It’s nice to use the False Claims Act in a few lawsuits, but those are inherently civil charges, and not very expensive ones at that.

The Administration talks about “more aggressive” mortgage relief programs, but every single one they have offered to date has underperformed, and banks feel no sanction for failing to meet their obligations under these programs. There have been many promises to fire Ed DeMarco, but not a real sense of what a successor would offer, and whether they would continue the more salutary programs DeMarco has carried out. Anyway, DeMarco is a convenient scapegoat, deflecting the ultimate responsibility for housing failure. And needless to say, actions like a foreclosure moratorium are off the table unless your area experienced a devastating hurricane. And if the Administration really wanted to move to a debt forgiveness posture, they have $40 billion in unspent TARP funds for housing just sitting idle.

What I see most from the Administration on housing policy is happy talk. The market is in recovery, and everyone will benefit. That may even be true. But it’s of little comfort to the millions still struggling to make their payments, or those who want to see the system reformed and the fraudsters held to account.

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David Dayen

David Dayen