Stress Test

  If there had been a game-changing housing plan that could have provided much more relief, we would have embraced it. We had some of the nation’s best progressive talent working on housing. We also had powerful incentives to throw everything we had at the problem; the press was killing us and so were our political allies. The head of the National Council of La Raza once warned me that if we didn’t start doing more to prevent foreclosures, Hispanic groups wouldn’t work for the President’s reelection.

  We tried to do what we could within the constraints we faced. It wasn’t enough. But it was more than most people realized.

  WE HAD three basic housing objectives. We achieved the first two without much drama or media attention. The third would be a struggle.

  Our first goal was to arrest the dizzying drop in home prices. The most important thing we did to stop the slide, other than our efforts to arrest the broader economic and financial free fall, was to stabilize Fannie and Freddie so that mortgage credit could keep flowing at a time when private capital was fleeing the sector. Even with unemployment rising and defaults increasing, home prices stabilized in mid-2009, and gradually began to rise in the following years. The end of the real estate slump helped avoid further damage to the typical family’s largest source of wealth and savings, and was critical to restoring the economy to growth. It wouldn’t have happened without our $400 billion lifeline for Fannie and Freddie.

  Our second objective, related to the first, was to keep mortgage rates as low as possible. Our rescue of Fannie and Freddie was vital here as well, since they were now the dominant drivers of mortgage credit. The government backstop maintained their access to cheap money, which held down rates for ordinary families. The Fed’s purchases of mortgage-backed securities through QE1, along with more modest purchases by the Treasury, also helped keep rates historically low, putting extra money in the pockets of millions of Americans. And our HARP program, along with a streamlined refinancing program for Fannie and Freddie, helped borrowers refinance their mortgages at those low rates even if the decline in home values left them underwater. Despite its slow start, HARP would help three million homeowners refinance. That was short of the program’s initial target, but by 2014, another twenty-three million U.S. homeowners would refinance their mortgages outside of HARP, a huge though unheralded stimulus.

  Our final goal, helping vulnerable families stay in their homes, was more complicated.

  By the fall of 2009, two million U.S. mortgages were in foreclosure and another seven million were at serious risk of foreclosure. About eleven million homeowners were underwater—one in every five mortgages—with a total of about $700 billion in negative equity. Our resources could make an important difference in the lives of some vulnerable families, but they were far too limited to fix America’s housing problems, much less its larger economic problems.

  It was also going to be extremely difficult to decide whom to help and how to help them. Even after the horrific recession, roughly nine out of ten homeowners were still paying their mortgages on time, often at significant hardship and sacrifice. We didn’t want to spend tax dollars helping borrowers who could afford to stay current without our help, but there were also real fairness issues, as well as political issues, around using tax dollars to help their neighbors who got in over their heads. And politics aside, as we studied potential housing programs, we were troubled by their limited bang for the buck. The logistics were daunting. The incentive problems were complex. If our ultimate goal was to improve the lives of families in need, rather than claim we had “fixed housing,” there were much more efficient ways to help.

  We did not believe, though we looked at this question over and over, that a much larger program focused directly on housing could have a material impact on the broader economy. Jan Eberly, the assistant secretary of economic policy, took a fresh look at these alternatives later, and her analysis concluded that even if the federal government had borrowed and spent $700 billion to wipe out every dollar of negative equity in the U.S. housing market—a “principal reduction” program of utopian proportions—it would have increased annual personal consumption by just 0.1 to 0.2 percent. The projected impact on employment was relatively modest, too, amounting to a cost of about $1.5 million of federal spending per job created. By contrast, our auto rescue cost about $14,000 for each of the one million jobs it saved. In other words, even if Congress had authorized the mother of all principal reduction programs, as expensive as TARP and almost as expensive as the Recovery Act, it wouldn’t have changed the trajectory of the recovery.

  Our main foreclosure prevention program, HAMP, was much more narrowly targeted. It was designed to help homeowners who seemed likely to default in their current situation but likely to stay current if their mortgage payments could be reduced for several years. Borrowers with expensive homes or second homes or rental properties weren’t eligible. We didn’t want to spend our limited resources helping speculators hang on to investment properties they had hoped to flip in the boom. We knew HAMP would help borrowers, who would avoid the trauma of foreclosure, as well as mortgage servicers, who would receive generous incentives to track down eligible homeowners and modify their mortgages. Many creditors howled in protest, but they would ultimately benefit, too, receiving more income from HAMP borrowers paying reduced mortgage payments than they would have gotten from foreclosure sales during a foreclosure epidemic when banks were already awash in inventory.

  We knew it would be tough to identify the universe of eligible homeowners and get them into the program quickly. HAMP borrowers could get relief for up to three months through a “trial modification” with minimal documentation, but then they would have to provide proof of eligibility to receive a permanent modification. We ended up requiring a mountain of paperwork for permanent relief, in part to appease critics such as Barofsky, who warned that the limited safeguards in our initial proposal were an invitation to fraud; we decided that in this case he had a point. But Larry warned that we were so worried about “false positives,” providing aid to the undeserving, that we would allow too many “false negatives,” denying aid to the deserving. He had a point as well.

  By the fall, it was clear that HAMP’s reliance on the broken infrastructure of the mortgage servicing industry was a serious problem. This was probably unavoidable; we didn’t have the authority to start up a new government agency or hire thousands of loan specialists ourselves, and even if we’d been able to get the authority from Congress, it would have been a long and messy process. But the servicers, many of them owned by banks, had little experience modifying loans, and nowhere near the capacity or the resources they would need to modify millions of loans. They had been completely unprepared for the housing crisis, and had laid off staff in droves after the bubble popped. Now we were asking them to conduct a challenging and time-consuming form of triage, and they were terrible at it—slow to hire, slow to figure out how to provide relief, just slow. In fairness, many of the borrowers they were supposed to track down were hard to find and harder to engage; homeowners also struggled to find every required document. But many incompetent servicers found ways to lose those documents multiple times.

  As the disappointing numbers rolled in that fall, and it became clear that many homeowners in the trial period wouldn’t or couldn’t produce the documents they needed for permanent relief, we discussed whether we should just grant a permanent loan modification to everyone with a trial modification, to help as many homeowners as possible. But we decided that could produce too much opportunity for scandal and abuse that would threaten support for the entire program; we had seen the dangers of “no-doc loans” and “liar loans” during the boom. We were spending the public’s money, and we had an obligation to protect the integrity of the program.

  The President kept urging us to think big, to think bold, to consider anything that would help homeowners in distress. We even revisited our debates about broad-based principal reduction. But as I testified before Warren’s panel in Dece
mber, the biggest driver of the foreclosure crisis wasn’t underwater mortgages. It was the weak economy. Too many unemployed and underemployed workers were having trouble making their mortgage payments. We could spend hundreds of billions of dollars paying down negative equity without changing that reality. It wouldn’t matter how many mortgages we modified if the borrowers didn’t have income. We couldn’t fix the economy by fixing housing, but we could do the reverse.

  “Our judgment is the best thing we can do is to help get the economy growing again, bringing unemployment down as quickly as we can, and to continue to make sure we’re providing overall stability to the housing market,” I told Warren.

  The most important thing we could do to fix our housing problems—other than stabilize the real estate market, keep mortgage rates low, and provide targeted foreclosure relief, which we were already doing—was to help promote an economic recovery that could create more jobs and income for average Americans. I had once told the President—and he often quoted this back to me—that if he had another $100 billion to spend on the economy, we wouldn’t recommend he spend it on housing. It would make much more economic, moral, and practical sense to provide relief to families through tax cuts, unemployment insurance, or safety net spending, or to save the jobs of teachers and first responders via aid to states, or to finance infrastructure projects that would put people to work building schools and fixing roads and creating a smart electric grid. Housing programs are pretty weak job creation and income support programs, while the opposite is not the case; job creation and income support programs are excellent ways to help families afford their mortgages or rent.

  STILL, OVER the rest of my time at Treasury, we would make an extensive set of changes and additions to our initial housing initiatives to try to expand their reach.

  We added programs to provide relief to the unemployed and to help overstretched homeowners move into affordable rentals. We made HAMP’s financial incentives much more generous in order to accelerate the modifications. We set up a program to evaluate mortgage servicers and withheld incentive payments from the worst performers. We provided new incentives to reduce burdensome home equity lines of credit and other second mortgages, which had been obstacles to modifications of first mortgages. We provided billions of dollars to the states hardest hit by the housing bust to help fund their own programs, and billions more to state housing finance agencies across the country. We even added a narrowly targeted principal reduction program for some HAMP recipients.

  We also tried to push the Federal Housing Finance Agency to pursue a similarly targeted program for loans backed by Fannie and Freddie. But acting FHFA director Edward DeMarco, a competent but cautious civil servant who did not want to inflame our Republican critics, refused to allow any principal reductions, even though FHFA’s own analysis showed they would save the government money in about half a million cases. It was amazing how little actual authority we had over Fannie and Freddie, considering they were entirely dependent on Treasury’s cash to stay alive. Some liberals later blamed the President for their failure to provide relief, since he could have fired DeMarco at any time. But we couldn’t just appoint a new director on our own. The President did nominate well-respected North Carolina Banking Commissioner Joe Smith to replace DeMarco, but Senator Shelby blocked him, claiming he would be an administration “lapdog,” even after North Carolina Senator Richard Burr, a Republican who actually knew Smith, endorsed him as “the best nominee” and “a perfect choice.” After that experience, we had a hard time finding any willing candidates.

  This was frustrating, but I don’t think a more compliant FHFA would have produced a dramatically different result. And while our numerous expansions of housing programs helped many Americans, they were still modest relative to the size of the problem. They certainly didn’t change the widespread perception that after embracing a strategy of dramatic force and creativity to save greedy financiers, we left innocent victims of the crisis adrift, vulnerable to the predations of the very banks and investors who had benefited most from our largesse. I once played a prank on Gene Sperling, pretending I had told a reporter he was the secret architect of HAMP—not just the substance, but the communications and messaging strategy. My press secretary got so worried that Gene would have a heart attack that she called to spill the beans; that’s how universally reviled HAMP was.

  HAMP would end up permanently modifying about 1.3 million mortgages through 2013, saving the median homeowner more than $500 a month. That’s a lot less than the 3 to 4 million we unwisely suggested HAMP would aim to help at the rollout in February 2009, a number that would be thrown back in our faces from that day forward. But the industry permanently modified another 3.9 million mortgages without government assistance, so the number of homeowners with more sustainable loans was about what we had hoped. Another quarter million homeowners have avoided foreclosure through alternative programs we implemented, and the Federal Housing Administration has mitigated the losses of 2 million more. If we had somehow managed to triple the HAMP modifications, we wouldn’t have substantially increased the overall number of modifications, just the share supported by the government, and we wouldn’t have made a serious difference in the post-crisis economy. The foreclosure crisis was caused by big macro forces—a frenetic credit boom, a brutal recession, a dizzying drop in home prices—and big macro forces would be required to end it.

  That said, our housing efforts got off to a rough start, and I set too high a bar for expanding them later on. I was also an ineffective advocate for what we were trying to do. I often met with social service agencies from the low-income housing world, and I frequently made the kind of empathy mistakes that frustrated Carole, pushing them for solutions and inundating them with the constraints we faced instead of listening patiently to their stories and feeling their pain. I wanted to hear about what was working and what wasn’t and how we could realistically help. I once interrupted an advocate early in her passionate description of the human costs of the crisis, saying I knew things were terrible out there. “Let’s stipulate that,” I said. “Let’s talk about what we can do.” Afterward, Sara Aviel walked me back to my office and told me: Don’t ever ask them to stipulate the pain and suffering.

  “Let them have their moment to explain,” she said.

  I made similar mistakes when we arranged a series of dinners to reach out to disgruntled progressive leaders. Instead of listening sympathetically to their complaints and promising to do better, I would defend our strategy, provide lists of all the constraints we faced, and explain why their alternatives wouldn’t work any better. All I managed to do was persuade them that I wasn’t on their side. John Podesta, the former White House chief of staff who ran the Center for American Progress, told Patterson after one dinner that I needed to stop trying to explain all the barriers that made it harder to do more on housing.

  “He said you’re only making it worse,” Patterson told me.

  IN MANY ways, 2009 was an extraordinary year for the new administration. We helped end the financial crisis and the Great Recession faster than we had ever thought possible. The U.S. economy was growing again, and by March 2010, it would be adding jobs again. In April 2009, the IMF predicted we would spend up to $2 trillion bailing out the U.S. banking system; by the end of the year, it already looked like taxpayers might turn a profit on our financial rescues. A paper by the economists Alan Blinder and Mark Zandi estimated that without our fiscal, monetary, and financial interventions, GDP would have been about 11.5 percent lower, and we would have lost an additional 8.5 million jobs. Meanwhile, GM and Chrysler were out of bankruptcy and poised to return to profitability. The Recovery Act was pouring transformative resources into the President’s long-term priorities, including clean energy, education reform, electronic medical records, and scientific research. And both houses of Congress had passed a version of health reform, bringing a long-standing progressive dream to the brink of reality.

  Politically, though, it was a brutal ye
ar. The right hated us, and the left wasn’t interested in defending us. Republicans won gubernatorial races in New Jersey and Virginia, states the President had won a year earlier. And in January, Republican Scott Brown stunned the world by claiming the late Ted Kennedy’s seat in deep-blue Massachusetts, ending the filibuster-proof Democratic majority in the Senate.

  That same day, I went to see the usually dour Senate Minority Leader Mitch McConnell, and he was in a pretty good mood. At that point it looked like Obamacare might be dead, although congressional Democrats would later find a way to push it across the finish line. The President’s disapproval ratings were getting much closer to his approval ratings. McConnell bluntly told me Republicans intended to stick with their strategy of obstructionism, blocking whatever the President wanted, because it was working for them electorally.

  “The one exception,” he said, “might be financial reform.”

  That was why I had come to talk to him. The financial regulatory system was broken, and we needed legislation from Congress to fix it. I didn’t want a future Fed chairman or New York Fed president to feel as helpless to confront a gathering storm as Ben and I had felt. I didn’t want a future Treasury secretary to face the constraints Hank and I had faced after the storm hit. But if the forty-one Senate Republicans stuck together, they could prevent us from reforming the system, and I wanted to know if McConnell planned to do that.