This morning the Obama administration fessed up to what out side critics have been saying for some time: its efforts to date to stem the mortgage foreclosure crisis hasn’t worked. “Making Home Affordable” was a seventy-five billion dollar incentive to the financial industry to deal with the fact the a quarter or more of Americans are now upside down in their homes and millions are facing potential foreclosure in no small part because of actions by the financial industry.
The Great Double-Ought Bubble was the product of many blowing lips: the irrational monetary exuberance of the Greenspan Fed cutting interest rates to give-away rates; foolishly greedy homeowners and buyers looking to turn hearth and home into equity ATMs; rapacious realtors looking for the next commission come what may. But the biggest lips blowing up the bubble were those of the financial industry which, from financing ridiculous rates for subprime mortgages complete with their own bubble clauses to the slicing, dicing and splicing of mortgage-backed securities spread the risks of their reckless realty practices far and wide.
So who’d a thunk that the same Wall Street suits sitting in Board Rooms and Fed meeting rooms who came up with the Foreclosure Fiasco would chose to not sit on their hands—and the throats of homeowners—when it comes to cleaning up the festering mess? The Obama Administration, of course. Talk about the audacity of hope. The “Making Home Affordable” plan relied on financial institutions to take up front risks and forego “lucrative fees” to help out underwater homeowners based on an appeal to do the right thing by the government. So they didn’t, simple as that. Who’d a thunk that? Oh, right.
Today the Administration now promises to get tough with financial firms by not paying them the cash incentives promised in exchange for modifying distressed mortgages until those mortgages be permanently de-distressed. That would be the cash incentives that were not big enough to tempt financial institutions to modify a significant number of mortgages in the first place.
Six or twelve months and three or four million more home foreclosures from now, what will the Administration do? Get really, really tough on the financial industry by halting all deliveries of cappuccinos to their walnut-paneled offices until more mortgages are modified? That threat might actually work better. Unfortunately, by then, the country might well find itself deep in the second dip of the Great Recession and the Obama administration may find itself facing its own potential pink slip in 2012.
The real scary fact of this great meltdown has been that, step by step, everyone involved in it, from consumers to businessmen to government officials, essentially took rational, intelligent actions in pursuing their own self interest under the system of the time. The real scary fact of this great meltdown is that there is no one bad guy—no Enron or AIG or Michael Milken or even a good old Gordon Gecko to blame this all on. The great meltdown has been the product of systemic failure which has resulted, amongst other things, in the tying of the mortgage industry into a Gordian knot of conflicting interests.
Only the terrible swift sword of government action can cut through that not.
Relying on the private sector to sort out a housing crisis that it a) made; b) doesn’t fully understand; and c) has no short-term interests in fixing is taking audacious hope to the point of simple blind foolishness. Government must use the power of law to modify the very mortgages the financial industry refuses to do. Without such bold, truly audacious action the foreclosure crisis threatens to spike again, dragging the housing and financial sectors back down and dropping the entire economy back into the swirling porcelain bowl.
Last year I suggested the government pursue an aggressive National Fair Mortgage Act to, by the power of law, reset mortgage principals back to pre-bubble assessed home values and structure these mortgages on a 30 year fixed, 4%-5% rate, with mortgage holders being compensated through tax breaks and direct government compensation for any losses. (See the plan here.) As foreclosures continue to soar, the economy continues to falter and the latest efforts by the Obama administration to get the banks to fix bad mortgages fail, the powers that be might want to chew on this idea a bit.
Continuing to try and get banks to fix loans they have no interest in fixing, however, remains throwing worse money after bad.