Cautious Moves on Foreclosures Haunting Obama
The administration made just one mistake, he said in a recent interview: it failed to rewrite the bankruptcy code.
Congressional Democrats wanted to change the law to permit “cramdown” — a term that meant letting bankruptcy courts cut mortgage debts — to put pressure on mortgage companies to modify loans and to provide a backup plan for borrowers who could not get the help they needed.
“There was another way to deal with this, and that is what I supported: forcing the banks to deal with this,” Mr. Marshall said. “It would have been better for the economy and lots of different neighborhoods and people owning houses in those neighborhoods.”
Mr. Obama sponsored cramdown legislation as a senator, endorsed it as a presidential candidate and called on Congress to pass it in the Arizona speech.
But he also repeatedly pressed the pause button. When proponents sought to add a cramdown to the Emergency Economic Stabilization Act in September 2008, Mr. Obama, who had flown back to Washington from the campaign trail, persuaded them to postpone the “partisan” effort as an example to Republicans, who said the measure would violate existing contracts.
In February 2009, after Mr. Obama became president, the White House asked Democrats not to attach the measure to the American Recovery and Reinvestment Act, fearing it would cost votes. In March, a watered-down version finally passed the House, but the mortgage industry rallied opposition to block it in the Senate.
Some officials said the White House had tried and failed. But other officials and participants, including Mr. Marshall, said it simply was not a priority.
“There wasn’t enough political capital, time or energy,” said Mr. Barr, the former Treasury deputy.
Mortgage companies, mostly owned by large banks, had ample resources to improve their treatment of troubled borrowers. But in the absence of any significant threat of punitive government action, they made little progress.
“Here we are in 2011, looking at high levels of foreclosures on the horizon, looking at significant failures in process, and nothing much has changed,” Sarah Bloom Raskin, a Federal Reserve governor, said at a housing finance conference in February 2011.
“It seems to me we have reached the point where this sign of failure is hindering our economy’s ability to rebound.”
How Far a Trillion Goes
A stone-faced building just north of the Capitol testifies to the federal response to the last national housing crash in the 1930s. The block-long office building housed the Home Owners’ Loan Corporation, which bought and refinanced roughly 20 percent of outstanding mortgages, most within two years of its creation in 1933, to help a million families avoid foreclosure. It even turned a modest profit before closing in 1951.
Mr. McCain surprised Mr. Obama during their second debate in October 2008 when he proposed investing $300 billion in such a program, echoing prominent Democrats. Some economists argued that debt reduction would hasten recovery not just by preventing foreclosures, but by spurring consumer spending, the nation’s primary economic activity.
Mr. Obama, leading in the polls, dismissed the idea as a “risky” giveaway to mortgage companies. “Taxpayers shouldn’t be asked to pick up the tab for the very folks who helped to create this crisis,” he said at a rally two days later in Dayton, Ohio.
After the election, top economic advisers led by Mr. Summers told the president-elect that debt reduction was not the best policy. Mr. Obama hoped to secure about $1.1 trillion from Congress to arrest the recession — a stimulus package of about $750 billion and the second half of the $700 billion Troubled Asset Relief Program bailout fund Congress had created in September. In a blueprint delivered at a mid-December meeting in Chicago, the advisers recommended that nearly all of the money be used to stabilize the financial system and for a package of tax cuts and government spending programs. That, they said, would stimulate growth more than paying down mortgage debts and hoping homeowners spent their savings.
Mr. Geithner told Mr. Obama that if even if an additional $100 billion were available, he still would not spend it on housing.
As for foreclosures, the advisers said more modest forms of aid would work just as well in most cases. Indeed, some economists argued that debt reduction would counterproductively persuade other borrowers to stop making payments in pursuit of a better deal.
But the decision ultimately was political. Mr. Obama and his advisers were convinced that even in the depths of an unyielding crisis, most Americans did not want their neighbors rescued at public expense. Several cited the response to the Arizona speech — including the televised diatribe by a CNBC personality, Rick Santelli, that helped give rise to the Tea Party — as proof that they were wise not to do more.
“There’s a lot of risk aversion in Washington,” said James B. Lockhart III, who participated in some discussions as director of the Federal Housing Finance Agency, administrator of Fannie Mae and Freddie Mac, “and I don’t think anybody knew how bad it was going to get.”
End of the Beginning
Eighteen months later, the administration’s hopes for a rapid economic recovery had faded. By summer 2010, it knew that the recession had been deeper than initially understood and that the effects of the financial crisis were lingering longer than expected. The housing market still showed no signs of life.
Frustrated allies — including Congressional Democrats and liberal advocacy groups not normally focused on housing, like the National Council of La Raza — were shouting for new action to prevent foreclosures.
Still the White House held firm to its strategy. “The most important thing I can do right now to keep people in their homes is to make sure the economy is growing,” the president said in Albuquerque in September 2010. “That’s probably the thing that’s going to strengthen the housing market the most over the next couple of years.”
Two days later, an important deadline passed quietly. The $700 billion bailout fund Congress had created in 2008 expired. The administration could no longer use the money to finance new programs even if it wanted to. It had left more than $300 billion unspent.
In November, Democrats lost control of the House, further constraining the administration’s ability to address the housing crisis.
And right about then, in the fall of 2010, Mr. Obama began to reconsider. The frustrated president told his advisers that what they were doing was not good enough. He told them to revisit old ideas and to find new ones.
Mr. Obama was particularly incensed by mounting evidence that mortgage companies were breaking the law in some foreclosure cases. There was also new research underscoring the costs of foreclosures and the benefits of measures like debt reduction.
But perhaps most important was the simple reality that housing, left to fester, had become Mr. Obama’s biggest economic problem.
At a virtual town hall in April 2011, Mark Zuckerberg of Facebookread a question that began, “The housing crisis will not go away.”
The president, perched on a stool, listened gravely and nodded. “Well, it’s a good question,” he said, “and I’ll be honest with you — this is probably the biggest drag on the economy right now.”