Why Obama’s plan failed to fix America’s housing crisis (and Obama’s letter to me)

Confounded Interest ^ | 06/12/2012 | Anthony B. Sanders

[whitedog57]

There was an interesting article on Bloomberg and the Washington Post with the tantalizing title, “Why Obama’s plan failed to fix America’s housing crisis.”

The article features Steven Nesmith (who wanted a bolder effort) and me (who said we shouldn’t have intervened at all).

“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.”

“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.”

That’s it? I said a lot more at a conference on the future of the housing finance system at the Woodrow Wilson Center recently. The Wall Street Journal’s Nick Timiraos asked me “You seem to be saying that maybe we shouldn’t have done TARP at all?”

Bingo. But why?

As I have said before, we went through a horrendous period in the American economy where housing prices collapsed followed by a massive spike in unemployment. It was a hard road for the Administration to salvage the housing and mortgage market when faced with this tsunami in housing and unemployment. The original program, HAMP, was a first attempt at loan modification on a mass scale and (or Nesmith sad) it wasn’t bold enough.

Without finger pointing, look at the U6 unemployment index as it skyrocketed in 2008 and 2009. And remains just under 15% today. Now, how easy do you think it is to figure out if a borrower will be helped by a loan modification and not enter into re-default? It was a very, very challenging market environment.

Unfortunately, HAMP was self-sabotaged by massive amounts of paper work and changing rules. And a lack of understanding as to why servicers/investors would be skeptical about the value of loan modifications while house prices continue to decline and unemployment remains so high.

But as Ian Malcolm said in the film Jurassic Park: “Your scientists policy makers were so preoccupied with whether or not they could, they didn’t stop to think if they should.”

1. Policy makers had no idea how it would work since we have never been in this place before. When in doubt, don’t do it! 2. Policy makers wanted to make loan modifications “fair” meaning that they wanted to “means test” borrowers. That is, you had to show you were going to default to be a loan mod. The Administration moved from “stabilizing the housing market” to wealth redistribution. 3. The best way to come back from a market crash is to let prices adjust downwards. HAMP and Fed policies were aimed at trying to maintain a status-quo rather than allowing the market to function.

So here we sit in 2012 with housing prices still weak and unemployment is not improving (or improving at a painfully slow rate). But the Administration now has 14 loan modification programs in place.

Then I received an email from the Obama Administration today.

We will see tomorrow whether HARP 2.0 is hitting on all cylinders. But until we see how this is working, don’t remove the remaining safeguards on mortgage refinancing on a whim.

[Texas resident]

Because it was never intended to fix anything.