We now know that government programs aren't doing much. Why not just give the private sector a nudge to move faster?
Dear Treasury Secretary Geithner,
First, kudos on your decision to stay on for the rest of your boss's term. I know Goldman is aching to get you on board, but you'll have plenty of time to make money when you're in your 50s. Now that you've committed to another year, let's talk for a minute about one of the most important problems you face: how to fix the housing market.
I'm glad to see that the Treasury has recognized two key facts about the housing market. For starters, the economic recovery won't take off until housing has hit bottom and begun to rebound. And as far as what Washington has done to try to fix the market up to now, none of it's working.
What Isn't Helping
Let's learn from those lessons, shall we?
Lesson #1: Be Aggressive -- Little Carrots Don't Work
Your Home Affordable Modification Program ("HAMP") had so much promise. It sought to prevent between 7 and 9 million foreclosures! That was ambitious, and well, it won't even come close. You guys will struggle to break a million permanent modifications.
Honestly, I was a little surprised at just how poorly the program performed. When the details came out, I thought that servicers would jump at the opportunity to get free money from the government to modify mortgages that would just have ended in foreclosure anyway. But it turns out that the carrots you offered weren't big enough. So whatever action you take, it must be aggressive.
Lesson #2: Stop Trying to Prevent Foreclosures -- Mortgage Modifications Aren't Working
In fact, let's take this a step further: mortgage modifications are turning out to be a huge headache. Banks and servicers are barely cooperating. And once you manage to find a handful of borrowers who even qualify, one in four is re-defaulting.
I know what you're thinking: but what about principal reduction? That's the key to sustainable mortgage modifications, right? In theory, yes. But in practice banks and servicers hate them. They don't want to incur a big, immediate loss by writing down a mortgage. They also worry about the slippery slope effect, where Joe and Jane want a principal write-down because their neighbors Bob and Barbara got one.
If servicers are determined to foreclose, then it isn't easy to change their minds. But you can work with that.
Lesson #3: Ignore Consumers -- They Can't Fix This Problem
Remember that home buying credit? Yeah, it didn't work out so well. Home sales rose for about a year, then they plummeted and prices began to fall again. The problem is that consumers aren't in any position to fix the problem, so you just pulled forward a little bit of future demand. Most people who can qualify for and afford to own a home already have one at this point. To clear out housing inventory, you'll need to rely on people who have cash to spend. Most Americans don't.
Lesson #4: Stop Pretending You Control Fannie and Freddie -- You Don't
What about the idea that maybe Fannie and Freddie could take these foreclosures and rent them out? First of all, Fannie and Freddie's very job -- what they developed decades of "expertise" doing -- was to manage mortgage risk. We all know how that turned out. Do we really want them to take on something as foreign as the role of landlord?
And you've got another problem: you can't tell those guys what to do. I mean, you can try, since you kind of own them. But your coercive powers aren't working out so well. After all, they refuse to participate in your principal reduction program. If you had any real control over them, then you would have forced them do so. So even if they go along with this whole foreclosure rental idea, do you really trust them to look out for their new tenants without your oversight?