Foreclosure Avoidance Efforts Keep Failing
Hardly a month has gone by in Washington since late 2007 without another government effort to avert the tidal wave of millions of home foreclosures. President Bush established HopeNow in December, 2007. He signed the Hope for Homeowners Act in July, 2008, and created the Troubled Asset Relief Program to purchase mortgage securities on October 3, 2008. President-elect Obama backed the second $350 b. tranche of TARP, which was released by a Senate vote on January 15, 2009, with a new requirement that at least $40 b. set aside for averting foreclosures. Mr. Obama established the Making Home Affordable Program on February 18, 2009 and signed the Helping Families Save Their Homes Act making modifications to the Hope for Homeowners Program to make it more effective on May 20, 2009. Early this week, Larry Summers and senior administration officials called mortgage servicers to the White House to berate them for not doing more to avoid foreclosures.
None have worked.
On July 6, 2009, Boston Fed economists, Manuel Adelino, Kristopher Gerardi, and Paul S. Willen, found that mortgage servicers had made "payment-reducing modifications on only 3 percent of seriously delinquent loans." They found that securitization, originally touted as the main impediment to mortgage renegotiation by the mortgage industry, was not the problem. Instead they showed "that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors."
Tuesday, the Joint Economic Committee held a hearing on the dismal state of foreclosures, focusing on a new Government Accountability Office report detailing foreclosures by state and congressional district.
This morning, The New York Times alleged in a front page article that large bank profits from fees on delinquent mortgages trumped all the government incentives to modify mortgages and avoid foreclosures.
In my experience, one of the main pitfalls facing Washington policy economists is getting to the heart of very complicated economic problems like mortgage foreclosures. We're so used to making simplifying assumptions that, when we're confronted with really complicated problems, we attack what we think are the main causes and miss.
One thing about Washington, it keeps trying. I'll bet the next foreclosure prevention plan is just around the corner. House Financial Services Chair Barney Frank (D-MA) flashed the nuclear option yesterday - allowing bankruptcy judges to dispose of first mortgages in bankruptcy. We may see if Congress can overcome the mortgage industry to pass that later this year.
