BAILOUT: PLACING BANKS BEFORE HOMEOWNERS
BY STAS MARGARONIS
While supporting the Bush administration’s $700 billion bailout of the banking industry, the Obama administration is still struggling to help millions of homeowners devastated by the 2008 financial crisis.
The administration decided to help homeowners save their homes by relying on mortgage companies to modify unaffordable loans. The effort largely failed, according to Neil Barofsky, former special inspector general in charge of the Troubled Asset Relief Program (TARP).
Barofsky writes in his book BAILOUT that the Home Affordable Modification Plan (HAMP) was so flawed that its effect was to help banks and mortgages companies make money at the expense of distressed homeowners: “the program potentially rewarded servicers who “lost” documents: it could be more profitable for a servicer to drag out trial modifications and eventually foreclose than to award the borrowers quick permanent modifications.”[1]
Barofsky says that US Treasury officials including Secretary Timothy Geithner refused to insist on tough anti-fraud provisions that would guard against abuses with the result that some “servicers would direct borrowers who were current on their mortgages to start skipping payments, telling them that that would allow them to qualify for a HAMP modification….” In some cases, this resulted in homeowners accruing late payments that eventually lost them their homes.[2]
Elizabeth Warren, then the head of the Consumer Financial Protection Bureau was critical of Treasury’s handling of HAMP and grilled Secretary Geithner about how the program would help homeowners.
Geithner’s response, according to Barofsky, was that HAMP was designed to reduce the foreclosure pressure on the banks: “We estimate that they (the banks) can handle ten million foreclosures, over time…This program will help foam the runway for them.” [3]
The New York Times concluded that the plan to help homeowners failed to meet even its own modest goals: “Mr. Obama said in Arizona a few weeks after taking office that the government would help ‘as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.’ As of May, 4.3 million people had applied for aid, but only one million had received government-sponsored modifications, according to the most recent data. About a third of those turned away lost their homes, were facing foreclosure or filed for bankruptcy.”[4]
The Obama administration rejected politically unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — betting that “a recovering economy would take care of the rest.”[5]
However, the newspaper said, the Obama administration has since enriched incentives for companies and found new ways to press them to take action and as a result more people are getting help:
“If the program they have now had been used at the beginning, it would have had a tremendous impact,” said John Taylor, chief executive of the National Community Reinvestment Coalition, an umbrella group for housing advocates.[6]
Gretchen Morgenson, a business columnist for the New York Times, asked Barofsky, now senior fellow at the New York University School of Law, what could be done to improve the regulation of financial institutions to minimize abuse in the future:
“We need to re-educate our regulators that it’s O.K. to be adversarial, that it’s not going to hurt your career advancement to be more skeptical and more challenging…It’s implicit in so much of the regulatory structure that if you don’t make too many waves there will be a job for you elsewhere. So we have to limit those job opportunities and develop a more professional path for regulators as a career. That way, they won’t always have that siren call of Wall Street….
Only with this appropriate and justified rage can we sow the seeds for the types of reform that will one day break our system free from the corrupting grasp of the megabanks.”[7]
[1] Neil Barofsky BAILOUT: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street ( Free Press 2012) p.152