The White House’s Housing Fumbles

Timothy Geithner sat still, subdued, as civil-rights and housing advocates took turns presenting a brutal reality check to President Obama’s Treasury secretary. The administration’s housing programs, they said, were ill-conceived, had failed woefully, and would be indefensible in an election year. From her seat around the long oval table at the center of Treasury’s ornate Diplomatic Reception Room, Janet Murguia, president of the nation’s largest Latino-rights organization, delivered a blunt ultimatum: Make dramatic changes to your housing program, or the National Council of La Raza will be unable to carry Obama’s message to Hispanic voters in 2012.

It was clear that Geithner had lost the room—and, beyond that, the meeting served as proof positive that the administration had failed in the larger struggle to help homeowners who had been under siege for years. The White House’s failure to appease La Raza on such a critical issue underscored how an economic sore spot could metastasize into a crippling, even devastating, political vulnerability as the election year approached.

But that day at Treasury, Jan. 13, 2011, was part of a slow but significant shift in Obama’s approach to the housing crisis. And, critically, it would include a change in policy management, as Gene Sperling would move from Treasury into the West Wing and advance a campaign to heal political wounds and to rewrite a story of undeniable failure.

The turnabout followed three years of tepid, halfhearted, and conflicted policies driven by a desire among Obama’s most senior advisers to avoid political risks and insulate the financial sector from further losses. It was a disastrous approach that did little for a market in free fall or for the millions of Americans still underwater and facing foreclosure.

National Journal spoke with more than two dozen sources involved in creating and implementing the Obama administration’s many housing initiatives, from Election Day 2008 to the present. The result is a story of missed opportunities, competing priorities, out-of-whack expectations, and a few subtle, yet noteworthy, successes—all impelled at least as often by political, rather than economic, calculations.

The approach remains haunted by a primal decision made almost immediately after Obama’s economic team took office. Although the federal government would spend reams of cash to stanch, to some degree, the losses suffered by the financial sector, the auto industry, and state and local governments, suffering homeowners would see no such relief, at least not on a widespread basis. Their bailout never arrived. It appears that the administration simply didn’t have the stomach for it.

A FAILURE OF WILL

The housing market was in its second full year of deterioration when Barack Obama won the 2008 presidential election. But that was far from the only crisis on the block. The financial sector was imploding, and preventing a full collapse on Wall Street commanded the attention of President Bush in his final stretch. At the same time, as credit dried up, employers began to shed workers, sloughing off 700,000 jobs a month in late 2008.

Some of the early members of Obama’s transition team began as quickly as Nov. 5 to grapple with these crises, starting to work on everything from the first-time homebuyer credit to the American Recovery and Reinvestment Act, better known as the economic-stimulus package. They also decided which of Bush’s initiatives would live on, and in doing so brought holdovers from Secretary Henry Paulson’s Treasury Department into the discussion—including people central to the housing effort who would stay into the first years of the Geithner reign.

Housing clearly was an area where Obama’s team thought it needed to take quick action simply to stop the bleeding. “Housing was 30 months in the hole when Obama was elected,” said Peter Swire, a member of the transition team who, after the inauguration, became one of the economic officials leading the effort. “The first goal was to stabilize.”

To its credit, Obama’s policy group recognized just how unprecedented the crisis was, and that realization helped to elevate the discussion about solutions to the highest levels, placing decision-making authority in the hands of Lawrence Summers, who would be director of the National Economic Council, and Geithner. Others, such as Housing and Urban Development Secretary Shaun Donovan and bank regulators, were called to the table inconsistently. Treasury was the department running the nation’s housing policy.

But the task was enormous—and enormously complicated. The economic team was committed to some form of government intervention, but it could find little consensus on the scope and scale necessary for that effort to succeed. Compounding the problem, the deterioration of housing markets throughout the country, and of the U.S. economy overall, accelerated between the election and Inauguration Day.

What’s more, housing had so quickly turned from tremendous boom to disastrous bust that the mortgage industry was unable to cope. Lenders and loan servicers had never operated in that kind of environment and had no mechanism to respond to the dramatic surge in delinquencies and foreclosures. One senior administration official called the servicing system “dysfunctional” in 2008 and 2009, and an industry representative agreed. “The system was not designed to deal with massive foreclosures,” he said. “It simply was not clear what was the response to take.”

From the start, two principles would drive the housing-policy team’s debate about the form that government intervention would take. First, Geithner and Summers sought to preserve the sanctity of contracts, and that commitment determined the structure of the president’s core housing programs. The government would not force banks to modify loans, and any changes made to mortgage terms would have to work for investors as well as homeowners. Those requirements led to hours of discussion and proposal drafting around the idea of “net present value,” or NPV—a formula used to determine whether modifying or foreclosing on a mortgage would result in higher profitability for investors.

Moral hazard was the other debate driver. Having witnessed Main Street’s reaction to the Wall Street bailout under the Troubled Asset Relief Program, Obama’s team went to great lengths, time and again, to promise Americans that taxpayer money would not be used to help people who had simply purchased too much house. This was assistance built for “responsible” and “deserving” homeowners, the story went. So your neighbor got in over his head? Or a friend bought a house to flip and then couldn’t sell it? Their fault, the White House was saying. “That narrative is one we had to be careful with,” a senior administration official said.

Taken together, contract sanctity and moral hazard set the parameters for the president’s housing policy. And within four weeks of Obama’s swearing-in, his team proclaimed itself ready to unveil the sharply tailored strategy.

ALL CARROT, NO STICK

On Feb. 18, 2009, the administration unrolled its Homeowner Affordability and Stability Plan, an overarching effort that would soon generate programs with similar sounding names, grouped under yet another umbrella initiative called Making Home Affordable. At the core were two efforts, detailed weeks later in March—the Home Affordable Modification Program and the Home Affordable Refinance Program. Under the former, the government would use TARP money to pay mortgage servicers to modify loans held by borrowers who were delinquent or likely to default. Under the latter, homeowners who were “underwater”—meaning that they owed more than their house was worth—but current on their mortgage payments, could refinance into a lower interest rate, but only if their loans were held by Fannie Mae or Freddie Mac. Today, HAMP and HARP remain the main components of Obama’s web of programs meant to repair the housing market.

Other ideas, including a direct government purchase of mortgage loans, had been brought to the table for discussion, and many more would come in the months ahead from Treasury staffers, housing and banking regulators, and outside experts. But when those options forced a fresh look at contract sanctity or moral hazard—in other words, when they raised potential political risks for the White House—the team set them aside.

Two of those sidelined options—a policy known as cramdown and a broad-based reduction of the principal owed on loans—could have been game-changers, according to economists inside and outside the administration. Even high-level policy officials and advisers today readily concede that those options were missed opportunities. That’s especially true of cramdown, a proposal that would allow federal bankruptcy judges to reduce mortgage balances, cut interest rates, and lengthen the terms of loans to help borrowers get out of trouble. “It was a missed opportunity,” Donovan said. “It would have been the right thing to do and it could have helped.” (See “The Fix Was Out.”)

In early 2009, supporters saw cramdown as the stick that would make the industry bite the Home Affordable Modification Program’s carrot. If lenders were uninterested in participating voluntarily in the government’s modification and refinancing initiatives, then federal bankruptcy judges would have the option of modifying and refinancing for them. “HAMP would have worked better with cramdown,” one House Democratic aide said. “But [the administration] didn’t try.” Specifically, Summers and Geithner didn’t try, according to numerous sources who were involved in the discussions. Instead, they sided and with the financial sector, and the administration went quiet as Wall Street pulled out all the stops to kill cramdown in the Senate.

Principal reduction remains a more controversial route, but one that many experts on both sides of the political spectrum have argued is necessary to truly reset the housing market and hasten stability. Martin Feldstein, a conservative economist at Harvard University who served on Obama’s Economic Recovery Advisory Board, was one of the first to call for broad-scale principal reduction as a way to help underwater borrowers and arrest the deterioration of home prices. His plan called for the government and lenders to share the cost of writing down mortgage principal, and he assigned a price tag between $156 billion and $400 billion, based on the size of the underwater loan pool. “It was too big to do,” Swire said, especially in light of the $787 billion stimulus package that the Obama administration had just gotten from Congress.

For Obama’s team, the possibly negative optics involved took precedence over the potential, and frankly unknown, economic benefits. “There was not a lot of extra political capital that was available to be spent on the cramdown provision,” said Michael Barr, who was Treasury’s assistant secretary for financial institutions and one of the main architects of the housing programs. “Getting the stimulus package done was much more important to the economy.”

Moreover, Geithner and Summers were motivated time and again by a heartfelt need to support banks still struggling to emerge from the financial crisis, and to contain the losses faced by lenders and bond investors—groups with palpable influence inside the debt-selling Treasury Department. “Many of the private mortgage-backed investors are the same people who buy government debt,” said Sheila Bair, former chairman of the Federal Deposit Insurance Corp. “So they are very important constituents for Treasury.”

A FAILURE OF EXECUTION

Once the scale of the administration’s response to the housing crisis was established, Treasury and HUD pushed ahead to get loan servicers on board with the voluntary modification and refinancing programs. And it was, in fact, an all-out push.

The administration had ambitious goals to reach. Treasury pledged that the programs would aid 7 million to 9 million borrowers, with HAMP reaching 3 million to 4 million and HARP helping 4 million to 5 million. In addition to those hard numbers, insiders had softer goals. Among them, Obama’s housing-policy team wanted to see 500,000 trial loan modifications by November.

To hit that target for trial modifications, the administration needed mortgage servicers to ramp up quickly. So officials began inviting industry representatives to Washington to talk about HAMP, address obvious challenges, and put the pressure on. The first of these “fly-ins” was on July 28, 2009, in an unfinished office space at 1801 L St. NW.

A handful of core officials—at least one each from the White House, Treasury, and HUD—bought coffee and doughnuts and then wheeled chairs into an empty conference room. They listened to the loan servicers’ concerns and questions, discussed the complexity of their operations, and hammered home what servicers needed to do.

One of the main questions centered on up-front documentation: Did Treasury want the process to happen so rapidly that servicers should put mortgagees into trial loan modifications based on verbal statements alone? Yes, the officials said. Don’t worry about the documents. Just put loans into the “trial mods” and then get the documents in order before the time comes to make the changes to the loan permanent, they said. “Just do it,” was the message.

“They insisted to us they could not do this program, they were not ready to do this program, and we told them they had to,” said Treasury’s Tim Massad, then chief counsel in the department’s financial stability office.

The intention—to get help to as many people as quickly as possible—was laudable. But the decision led to significant problems when mortgage servicers were unable to collect the necessary documents or when those documents revealed that the borrower didn’t qualify for the modification in the first place. A wave of cancellations followed over the remainder of 2009, as servicers could not make trial mods into permanent ones, sealing negative perceptions of the program. By the time the administration backtracked and required up-front documentation for any loan modification, a year had gone by. The pace of trial mods fell off, and, by the end of 2010, half of all trial modifications had been canceled, according to TARP’s special inspector general.

The failures betrayed the administration’s difficulty in unraveling the mortgage-securitization business—the consolidating and selling of the loans as debt instruments. Administration officials frequently cite “frictions” in the mortgage market, noting that their initial housing efforts were hamstrung by opaque connections among different pieces of the mortgage market on every single loan, and by the conflicts between mortgages and second liens—the piggyback debt that many borrowers took on when they didn’t have enough money for a down payment. The administration also simply misread the industry’s capacity to handle demand for modifications, officials said.

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People in the administration “don’t understand how securitization works,” said one mortgage market participant in the sessions. “Ten million ideas were floated, but I think the complexity of the mortgage system was underestimated.” Members of the housing and borrower advocacy community—a group tied closely to Democrats and often at odds with lenders and banks—echoed that sentiment.

MISSING THE TARGET

Obama’s policy team spent the next two years tweaking the mortgage modification and refinance programs. The housing crisis was accelerating, the sputtering economy was presenting unexpected hurdles, and the political dynamics were shifting quickly away from the administration. All of this forced the housing-policy group to constantly rework initiatives on the fly, reexamining its programs at least every three to four months to judge their effect and discuss what additional steps were needed. More-frequent examination went on at the staff level and at the housing agencies.

Even then, though, the programs’ creators never viewed HAMP and HARP as the silver bullet. “Our basic view was to try and get as much on the ground as fast as possible, given the extent of the harm, and then to revise the programs as we went,” Barr said.

But it soon became apparent that the programs were not reaching, and would not reach, the number of people intended. By the third quarter of 2009, members of Congress were pressing the administration for concrete results, seeking to know how much money the administration had spent and how many homeowners it had helped. At a hearing on Sept. 24, Sen. Jeff Merkley, D-Ore., drove witness Herb Allison, then Treasury’s assistant secretary for financial stability, into a corner, forcing him to abandon the talking points and admit how little the program had accomplished.

“Are you familiar with how much TARP funds have been spent?” Merkley asked Allison from the dais in the Senate Banking Committee’s hearing room.

“Well, we have planned to devote $50 billion to the Making Home Affordable Program … ”

Merkley cut him off. “I’m not asking about the future. How much has been spent?”

“So far, we have committed over $22 billion … ”

“Not committed, but spent to date,” the senator demanded.

“Very little.”

Merkley pounced. “It is zero. It is zero dollars.”

Allison then coughed up another number that raised eyebrows among housing advocates and market lobbyists: Just 1,800 people had been moved into permanent loan modifications. By the end of that hearing, and certainly by the close of 2009, economists, housing experts, and the media had reached a consensus that Obama’s programs would not meet their goals. By 2011, both HAMP and HARP would be widely branded as failures.

The raw numbers support that assessment. The Obama administration in February 2009 vowed that its effort would help as many as 7 million to 9 million borrowers. Officials at all levels would come to downplay, even dismiss, these figures, but the government was crystal clear about them at the time. The president reiterated those targets in a speech in Mesa, Ariz. But neither program has come close.

Today, HAMP has yielded 951,000 permanent loan modifications, according to Treasury’s latest housing report. HARP has led to the refinancing of about 1 million mortgages over its almost three-year life span—just a quarter of the way to the low end of Treasury’s projections. “There was a PR disaster on HAMP,” Swire would say three years, almost to the day, after the programs’ inception. “Those numbers haunted the whole housing program.”

The administration—in both public and private—is now engaged in a campaign to minimize the targets and even sweep them under the rug, pretending that the projections never existed or at least never mattered. Massad, Treasury’s current assistant secretary for financial stability, told National Journal that the media put too much weight on the effect that Obama promised. “There has been often too much focus on, well, gee, what did the president say or what exactly did he mean,” Massad argued.

The core problem: Estimates for both programs were based on faulty, incomplete data. “There was always a huge degree of uncertainty around those forecasts, which reflected the limitations of the data available at that time,” said John Worth, who helped design the two initiatives as director of Treasury’s Office of Microeconomic Analysis. “We were sort of building the airplane as it was trucking down the runway, because there was a real sense of urgency to deliver help to homeowners.”

What’s clear now is that people throughout the administration knew within the first few months of the programs’ launch that the goals were no more than aspirational. And what about the target of 500,000 trial loan modifications by the end of 2009? When asked recently how that number was chosen, one of the officials who was at the center of the housing programs raised his hand and pretended to snatch something out of the air.

LOST OPPORTUNITIES

Amid the administration’s persistent struggles to help homeowners, as 2009 drew to a close, the housing market, along with the rest of the economy was looking up. A string of improved data in the first quarter of 2010 generated some cautious optimism within markets and among economists. The stock market exhibited a similar pattern. At the White House, officials quietly began to feel that success might be within reach. Sales of existing homes had tracked higher through 2009 and into 2010.

It wouldn’t last. At the end of April, American markets dove—the Dow Jones industrial average and Standard & Poor’s 500 index dropped more than a tenth of their value between April and June—as a debt crisis erupted in Europe. The bottom dropped out from under the U.S. housing market and the economy began an ugly, aggressive spiral downward that would not show signs of bottoming out until the end of 2011.

Although the sinking economy might have been viewed as a call for the housing-policy group to redouble its efforts, the opposite occurred. Housing slid precipitously down the administration’s priority list. Fresh worries about a double-dip recession led the White House economic team to place a greater focus on strengthening the job market. Fix unemployment, and housing will follow became the sentiment prevalent among economic officials in those months. What’s more, the administration was using its political muscle to push the Dodd-Frank financial regulatory-reform bill through Congress. Officials had little time, or will, to do much more than muddle along with the existing, though underperforming, housing programs.

The administration advanced some important housing measures, to be sure. But the mortgage industry, housing experts, and borrower advocates largely count 2010 as a year of lost opportunity. And squandered money.

Obama’s team fumbled badly with the funds appropriated for a variety of housing programs that year under Dodd-Frank. The law, for example, made $1 billion available for an emergency program meant to keep unemployed people in their homes. The money had to be out the door by a date certain, about a year after Obama signed Dodd-Frank. But HUD delayed issuing the application requirements, giving would-be beneficiaries only weeks to assess qualifications, apply, and submit the necessary paperwork. In the end, half of the allotted amount for that program went back to the Treasury, unused. It was not the first nor the last time that the government failed to use all the money at its disposal for housing. In fact, by the end of 2011, the Obama administration had spent just $3 billion of the $45.6 billion allowed for housing under TARP. Another $8.7 billion has been set aside to cover incentive payments to lenders and investors for loans now in the program.

“Having said the financial crisis was the priority, after Dodd-Frank, there was no excuse,” said Judith Kennedy, president of the National Association of Affordable Housing Lenders. “2010 could have been a pivotal year.”

Administration officials have a hard time explaining why funds went unspent, both from Dodd-Frank and TARP—or why they never came close to a written commitment that Summers made on Jan. 15, 2009, to spend $50 billion to $100 billion on “a sweeping effort to address the foreclosure crisis.” The voluntary mortgage-modification program paid lenders based on performance, and the estimated funding for that major initiative was based on an assumption that several million more borrowers would see permanent relief under HAMP than ultimately did. Had that program hit its goal, those officials say, Washington would have paid out a much bigger chunk of the available billions.

A COURSE CORRECTION

By early 2011, labor unions, civil-rights groups, and housing advocates—Obama’s political base—had seen enough. They were frustrated, and in some cases, enraged, by the administration’s failure to find a way to ease homeowners’ financial suffering. With anger mounting, Geithner held the Jan. 13 meeting at Treasury.

After the participants voiced their complaints, Wade Henderson, president of the Leadership Conference on Civil and Human Rights, urged Geithner to make some commitments, saying that the session could not be just a “meet-and-greet.” According to numerous attendees, the Treasury secretary promised that he would support a six-month mortgage-forbearance period for the unemployed and that he would in good faith consider extending it to 12 months. He took care of the six months, but it was Gene Sperling who now gets credit for the 12.

Obama grabbed Sperling from Treasury, where he was Geithner’s adviser, and brought him to the White House to succeed Summers as director of the National Economic Council in early 2011. With that shift, the center of influence on housing policy moved up Pennsylvania Avenue. It was Sperling, according to numerous government and advocacy sources, who recognized the political risk created by earlier, troubled policies and Geithner’s reluctance to embrace some of the more-aggressive options available. And it was Sperling who understood the importance of what the advocacy groups were saying and the potential election threat to the president.

The plummeting housing market and the recession that followed had slammed blacks and Hispanics much harder than it had whites. The Pew Research Center has released data showing that Hispanic households lost 66 percent of their net worth during the recession compared with a 16 percent loss by white households. “With Gene over at NEC, he made this a big priority, and he has since he’s been there,” said Janis Bowdler, the director of wealth-building policy at La Raza.

A significant shift in the administration’s messaging on housing and Obama’s engagement on the problem followed Sperling’s move. As the months ticked toward election season, the White House began to see housing not only as a dire problem still in need of attention but also as an issue on which they could draw a beneficial contrast with Republican presidential hopefuls, all of whom contended that the government should stay out of the housing market. Indeed, only a few months later, Mitt Romney would tell a Nevada newspaper, “Don’t try and stop the foreclosure process. Let it run its course and hit the bottom.”

The president himself publicly launched what would become a freshly aggressive campaign on housing on July 6. Responding to a question posed at a Twitter town hall, Obama admitted his team’s efforts to help struggling homeowners were “not enough … so we’re going back to the drawing board.”

The White House will not say when Obama instructed his advisers to reconsider what had been done to address the nation’s housing woes and come up with more far-reaching approaches—and it rejects the notion that politics played a role in the president’s July remarks. “The headwinds facing the economy from the housing market were stronger than estimated and showed their particular force last year as the recovery slowed,” said spokeswoman Amy Brundage, “which is why the president directed his team to redouble its efforts in this area.”

But what has followed appears to be an effort to activate several measures that had been percolating among housing-policy experts for months and, in some cases, years.

Among them are tweaks to the Home Affordable Refinance Program; a $25 billion settlement between states and the five biggest lenders; increased incentives for lenders to reduce principal under the Home Affordable Modification Program; and a large refinancing push that requires congressional action. The president also promised this year to spend the full $45.6 billion allocated for housing, but the administration anticipates that it will take until 2019 to dole it all out.

None of these ideas is new, nor is the availability of those billions of dollars in relief funds. Every initiative that Obama’s team has announced since his confession in July was debated by senior advisers and their aides in the earliest days of his administration—a time when the White House and Treasury stood a chance of getting in front of a crisis that would yield 2.9 million foreclosures over the course of Obama’s presidency.

Lost in the hand-wringing and hesitation, the management failures and the missed opportunities, have been some small success stories. The administration was able to restructure and standardize the loan-modification process. Through HAMP, almost 1 million homeowners have seen their mortgages modified. Another 2.7 million mortgages have been modified outside of HAMP, based on the model that lenders learned through the government program. (Even here, the Obama team can claim only partial credit because the Federal Deposit Insurance Corp. first developed the model in 2008.) And with the settlement between lenders and state attorneys general, the federal government has brokered the start of a process that will create uniform mortgage-servicing standards.

But the intense pain wrought by the housing crisis continues, and Obama’s policy efforts have not brought relief to a great number of people who needed it and expected it, based on the administration’s own projections. It was not for want of effort, or sincerity in purpose. If anything, the work carried out over three years by scores of policy advisers, sector experts, and economists within the White House, Treasury Department, and housing agencies attest to the intense focus paid to halting the nation’s housing meltdown. But that intensity was not matched by an equal commitment at senior levels to prioritize housing, propose dramatic efforts that might have gotten the administration ahead of the problem, or engage in the political battles to advance the initiatives that economists viewed as the most necessary.

The policy makers knew this all along. They knew there was more that might have been done sooner—more aggressive steps such as whole-loan purchases or broad-based principal reduction. The decision to go with the lighter options was, by most accounts, a conscious one. “I think the president really wanted to do something aggressive and meaningful here, and I just think Larry and Tim were not as committed to it,” the FDIC’s Bair said. “It was not a priority for them. They were focused on the big financial institutions. I think they just wanted to get a program and a press release out to make the president happy.”