Three years ago, when President Barack Obama unveiled his plan for solving the U.S. housing crisis, one in five borrowers owed more on mortgages than their homes were worth, banks were repossessing 74,000 homes per month and sale prices had plunged 30 percent from their 2006 peak.
“All of us will pay an even steeper price if we allow this crisis to deepen -- a crisis which is unraveling homeownership, the middle class, and the American Dream itself,” Obama told the audience gathered at a high school in Mesa, Arizona, an area with one of the highest foreclosure rates in the country.
The crisis did deepen. Home prices continued to fall in most states during the Obama administration. Nearly 23 percent of borrowers are underwater on their loans, virtually unchanged from 2009, according to real estate data firm CoreLogic.
Obama didn’t deliver on his vow that day to avert as many as 9 million foreclosures. While his plan was undermined in part by the weak U.S. economic recovery, it also lacked broad and aggressive measures. Relief programs have tinkered around the edges of the housing finance system because Obama’s advisers chose early on not to expend political capital forcing banks to forgive mortgage debt. Instead, they created homeowner aid programs with voluntary participation by lenders and strict rules to avoid rewarding speculators or irresponsible borrowers.
“They were well-intended, but they were not bold enough,” said Steven Nesmith, a former vice president at loan servicer Ocwen Financial Corp. who served as an assistant secretary in the Department of Housing and Urban Development during the administration of President George W. Bush. “They should have gone bigger and bolder with a robust plan to deal with housing, not just trying to stabilize the broader financial-services system and the banks.”
The administration’s strategy of providing incentives to lenders to help troubled homeowners has been hobbled by complexity, according to mortgage bond investors, advocates for borrowers and those in the business of managing home loans.
Some critics say the administration’s mistake was intervening to stop foreclosures in the first place and that home prices should have been left to hit bottom on their own.
“We would have been better off letting the market heal itself,” said Anthony B. Sanders, professor at George Mason University. “The recovery would have been quicker.”
At the same time, expecting that the market would have improved by now, the administration didn’t push to eliminate uncertainty that hinders long-term planning by private players in the business. Lenders have tightened credit while they await details of new housing finance rules and a plan for winding down government-owned mortgage companies Fannie Mae and Freddie Mac. While interest rates are at historic lows, would-be buyers of troubled properties are finding it difficult to get loans.
“We’re three years into the administration and six years into the decline in housing,” said Jonathan Lieberman, head of residential mortgage securities business at the Angelo, Gordon & Co. investment firm. “It’s important to have some rules.”
To be sure, Obama’s housing officials can point to some successes. While falling short of the goal of reaching 9 million people, the two main federal programs for refinancing or modifying mortgages have reached 2.2 million borrowers. The free fall in home prices has slowed. There are bidding wars on properties again in some markets.
“To be fair, you’d say there are mixed reviews on any individual program, but the multitude of programs clearly had an impact on stemming the crash,” said David Stevens, president of the Mortgage Bankers Association, who served as commissioner of the Federal Housing Administration during the first two years of Obama’s term.
White House officials in recent weeks have been speaking out about their housing record, saying that any assessment must take into account the impact their programs have had as a model for private industry. Under that standard, there have been 5 million loan modifications, government and private, since 2009.
“One of the most important things government can do in its efforts to heal the housing crisis is to set a template that the private industry can use and follow,” Gene Sperling, director of the president’s National Economic Council, told a real estate industry audience last month. “Setting an industry standard like that is a meaningful accomplishment.”
What the officials don’t emphasize is that one in five borrowers helped by the government’s mortgage modification program since 2009 has slipped back into default. A recent revamp of the separate refinancing program helped 180,000 homeowners in the first quarter of this year, but only 4,400 of them were the most deeply troubled borrowers -- those whose loans exceed the value of their homes by at least 25 percent.
Obama pledged to use $50 billion from the $700 billion bank bailout approved by Congress in 2008 to help homeowners. Only about $3.7 billion of that has been spent.
Brian Deese, deputy director of the National Economic Council, said the administration should be measured by the ripple effect of its policies, and by the broad set of steps now being taken to encourage everything from refinancing to principal reductions on underwater loans.
“I think those steps are all making a difference,” Deese said. “Most importantly, every place we can responsibly do something to help homeowners and help heal the market, we’re going to take those steps. It reflects the president’s commitment that this is a tough and intractable problem, but we’re going to stay on it.”
The week before the 2008 election, soon-to-be Vice President Joseph Biden Jr. told a campaign crowd in Ocala, Florida, that he sympathized with the hundreds of thousands of Floridians who were upside down on their mortgages.
“If we can help Wall Street, folks, we sure can help Silver Springs Boulevard right here in Ocala,” Biden said. “That’s why we believe we should reform our bankruptcy laws, giving bankruptcy judges the authority to reduce the amount of principal owed, give them the authority to go out and reset the terms of the mortgage so people can stay in their homes.”
Obama also said in 2008 that he backed the change in bankruptcy law, popularly known as “cram-down.” While the change in law could have given people in dire straits an avenue to rebuild their finances, it was vigorously opposed by lenders.
The campaign promise wasn’t kept. The White House never publicly changed its stance but didn’t push for passage when a cram-down bill came to a vote in the Senate in April 2009. The measure failed, with 12 Democrats voting against it.
Peter Swire, who coordinated housing finance policy at the National Economic Council from 2009 to 2010, said the White House and the Treasury Department were so focused on getting banks to raise capital in the wake of the 2008 financial crisis that they had no ability to also push for cram-down. In addition, cram-down would be a complicated process that they believed would not work for every troubled borrower.
“Getting the financial system to work was a huge priority,” said Swire, an Ohio State University law professor. “The vote on cram-down happened in that context.”
Another former White House official, speaking on condition of anonymity because the internal discussions were private, said the White House thought it couldn’t win the cram-down fight and stayed out to preserve political capital.
The White House focused on developing the voluntary Home Affordable Modification Program and the Home Affordable Refinance Program, known by the easily confused names of HAMP and HARP, which paid lenders an incentive fee for each loan they modified if borrowers could meet a long list of criteria.
“Instead of using sticks, they tried to use carrots,” said Jeff Gentes, managing attorney at the Connecticut Fair Housing Center, who often tries to stop foreclosures by taking banks and other firms that service mortgages to court. “Obama abandoned the campaign promise to pursue cram-downs, which would have given us a stick. Servicers are incorrigible. They only respond to sticks.”
At the same time, there was a debate within the administration about just who should benefit from its aid programs. Shaun Donovan, secretary of the Department of Housing and Urban Development, pushed for the government to bear some of the cost of reducing mortgage principal for underwater borrowers. Others, including Treasury Secretary Timothy J. Geithner, argued against it, saying they feared it could reward people who tapped home equity to support lavish lifestyles.
The administration chose to focus on reducing monthly payments for troubled borrowers, not their overall debt, and set barriers to entry to help only homeowners who had ended up in trouble through no fault of their own.
“We made that choice because we thought it would be dramatically more expensive for the American taxpayer, harder to justify,” Geithner said at a congressional hearing in December 2009, adding that paying banks to reduce principal would “create much greater risk of unfairness.”
That choice ultimately limited the program’s reach. The often difficult process of getting a HAMP modification was an “unfortunate outcome” of designing a program that would “protect against providing free bailouts to people who weren’t deserving,” said Stevens, the former FHA commissioner, who is to become president of SunTrust Mortgage later this month.
By the end of 2009, banks and other servicers had completed fewer than 70,000 permanent mortgage modifications under HAMP.
The lenders were unprepared to make the switch from collecting mortgage payments to walking borrowers through the complexities of a mortgage restructuring. In addition, the administration didn’t anticipate that squabbles between lenders who held primary mortgages and those who held second liens on properties would prevent homeowners from getting modifications.
Executives for the largest servicers, including Wells Fargo & Co. and Bank of America Corp., were summoned to White House meetings to discuss why progress was so slow. Servicers complained borrowers were hard to reach and failed to fill out paperwork correctly. Meanwhile, outside Washington, borrowers told housing counselors that servicers were hard to reach and weren’t acting in good faith to keep them in their homes.
When the administration changed its programs in response to the complaints, not everyone viewed it as an improvement. Having a set of overlapping initiatives, each with its own regulations, was difficult enough. Modifying those rules added to “the lack of clarity,” said Nesmith, now chief operating officer of Ticor Title, a title-insurance company.
“Any time you do something too many times, you keep rolling it out and rolling it out, it creates confusion,” he said.
In retrospect, said Swire, the former NEC official, it would have made sense for the administration to push for cram-down early on. If bankruptcy judges had been given the power to decide disputes between multiple lenders with claims on the same property, more foreclosures would have been averted.
“Cram-down, on balance, today, would have been a good idea,” he said.
Besides temporary relief to troubled borrowers, Obama vowed during the 2008 campaign to overhaul the broader set of rules for mortgage finance to protect buyers and prevent future housing bubbles. He made good on the promise by signing the Dodd-Frank regulatory overhaul in July 2010.
Still, regulators didn’t meet the July 2011 deadline set by Congress to settle on the language in most of the rules. The Consumer Financial Protection Bureau, for example, hasn’t yet defined which mortgages are considered consumer-friendly and which are considered abusive. Banking regulators including the Federal Reserve and the Federal Deposit Insurance Corp. are still working on a rule requiring lenders to retain an interest in risky loans that they securitize.
In addition, Geithner hasn’t released a long-promised plan for winding down Fannie Mae and Freddie Mac, the taxpayer-owned mortgage financiers that own or guarantee $5 trillion in loans. The two companies have been operating under U.S. conservatorship since bad bets on risky loans drove them to the brink of insolvency in 2008.
That leaves the government as the primary source of funds for new mortgages.
“Investors cannot come back into the mortgage market because we cannot price the unknown,” said Chris Katopis, executive director of the Association of Mortgage Investors.
Lenders are also facing the fallout from the poor underwriting standards of the past. Fannie Mae and Freddie Mac are reviewing billions of dollars in loans issued during the bubble years and are requiring lenders to buy many of them back if there’s evidence of inadequate documentation.
Uncertain about their liability for vetting borrowers, lenders have raised credit standards to new highs, shutting out some would-be buyers of distressed properties. To qualify for a loan, average buyers need a 20 percent down payment and a 745 credit score, which would rank them in the top 40 percent of borrowers, according to data from Ellie Mae, a Pleasanton, California, software company.
As a result, the number of new loans is shrinking. While the government share of the mortgage market has ballooned to 90 percent, the overall number of new purchase loans backed by Fannie Mae, Freddie Mac and the FHA dropped to 1.7 million in 2011, down from 2.1 million in 2009, according to data compiled by Brian Chappelle, a partner at bank consulting firm Potomac Partners.
“The typical first-time and move-up buyers who have been the backbone of the housing market are really the ones being hurt,” Chappelle said.
The Obama administration faced another obstacle to housing momentum in the fall of 2010. Lawyers representing borrowers in many states and cities discovered that banks were seizing homes on the basis of faulty legal documents. Major servicers including JPMorgan Chase & Co. and Bank of America suspended foreclosures amid state and federal investigations.
In February, Donovan helped broker a $25 billion settlement between the five largest servicers and 49 state attorneys general. The banks agreed to spend $17 billion of that on troubled borrowers, including writing down principal on delinquent loans.
“One of the most important ways this settlement helps homeowners is that it forces the banks to clean up their acts and fix the problems uncovered during our investigations,” the HUD secretary said at a press conference where the settlement was announced.
Out in the field, housing counselors and troubled borrowers say they’re seeing little evidence that servicers are more willing to modify loans rather than foreclose.
Since the settlement, “I have seen virtually no improvement whatsoever,” said Melissa Huelsman, a Seattle attorney who specializes in aiding homeowners with mortgage problems.
Huelsman said she filed an emergency injunction in King County Court to stop HomeStreet Bank, a servicer for Fannie Mae, from seizing a client’s home using what she alleges are the same kind of faulty documents at issue in the national investigation.
The administration also is hamstrung when it comes to forcing states to use the proceeds of the settlement to help homeowners. California Governor Jerry Brown is pushing to use $400 million of his state’s share to help plug a $15.7 billion hole in the budget instead of its intended purpose: monitoring how banks comply with the agreement.
H.D. Palmer, a spokesman for Brown, said the governor is proposing to use the funds for other housing-related expenses “in a way that provides relief to the state’s general fund.”
With five months before the Nov. 6 presidential vote, Obama expanded the HARP refinancing program, which can stave off foreclosure and put extra spending money into the pockets of homeowners able to get a lower interest rate.
On a visit last month to Nevada, a key swing state among the hardest-hit by the popped housing bubble, Obama asked voters to give his plans more time. He chose to deliver the message while standing in front of a Reno home with a couple whose refinance under HARP saved them $240 on their monthly payment.
The president’s speech all but acknowledged that the recent changes were more tweaks than sweeping reforms. He urged his audience to pressure lawmakers to allow underwater borrowers with privately backed mortgages to switch into cheaper government loans.
“Nag them until they actually get it done,” Obama said. “It’s one small step that will help us create the kind of economy that all Americans deserve.”
The Reno couple who hosted Obama, Paul and Valerie Keller, also have modest goals after being crushed in the credit crisis.
Their troubles started when customers of Paul Keller’s home-remodeling business stopped paying bills as the economy soured, Keller said in a phone interview. In a 2007 refinance, the couple took $51,000 out of their home’s equity to cover his business debts. Then their home’s value plunged from about $250,000 to $100,000, with $168,000 still left on the loan.
Lowering the monthly payment “is nice, and the HARP program did work for us,” Keller said.
He said he and his wife aren’t looking to do more than escape without any more financial disasters.
“Breaking even -- at this point that’s the goal,” Keller said.