The Obama administration has taken aggressive efforts to attempt to prevent foreclosures. There are numerous programs out there to try to help struggling Americans stay in their homes, the most notable of which is the $75 billion Making Home Affordable Program (HAMP). So you might think the White House would cheer when banks began announcing that they were halting foreclosures due to documentation problems. After all, this could provide more time or reason for homeowners to qualify for modifications. Yet, administration officials are not among the chorus of lawmakers calling for a national foreclosure moratorium.
In fact, on CBS's Face the Nation this week, senior White House advisor David Axelrod made clear the administration does not believe a national moratorium will help. Here's an excerpt from the show's transcript (.pdf), responding to a question about the foreclosure halt asked by Bob Schieffer:
First of all, Bob, it is a serious problem. It's thrown a lot of uncertainty into the housing market that is, you know is already fragile. And it's-- and it's bad for the housing market and it's bad for these institutions which is why they're scrambling--now to-- to go back through and-- and-- and through their documentation for all of this as they should. The President was concerned enough to veto a bill that came to him last Thursday, that would have unintentionally made it perhaps easier to make mistakes. And, so we are concerned. We're working with these institutions. I'm not sure about a national moratorium because there are, in fact, valid foreclosures that-- that-- that probably should go forward. And where the documentation and paperwork is-- is proper, but we are working closely with these institutions to make sure that they expedite the process of going back and reconstructing these and throwing out those that don't work.
Those who argue for a national moratorium say that the entire foreclosure process has been thrown into doubt as most major banks have halted foreclosures due to documentation problems. Yet, here you have Axelrod saying that there's no basis to say that all foreclosures should be temporarily stopped until banks have fixed the problems that exist. Considering the administration's earlier attempts to try to prevent foreclosures, that attitude is a little bit surprising.
But it's important to note that the White House here appears to be taking a moderate approach. As Axelrod says, President Obama vetoed a bill that would have made it easier for banks to get around documentation discrepancies. So he isn't blindly supporting the banks, but he also isn't an unyielding advocate for struggling homeowners. If he were, then he would be calling for a national foreclosure moratorium. There are a few reasons why the administration may have decided to stop short of calling for a complete halt.
Fannie and Freddie
According to a Washington Post article from yesterday, this foreclosure stoppage endangers Fannie Mae and Freddie Mac. It could cause billions of dollars in new losses. Consequently, Fannie and Freddie have warned banks that they had better fix the problem quickly or face penalties.
First, it's doubtful that Fannie and Freddie are actually threatened, as the article claims. After all, the federal government is standing behind the entities. So they could only fail if the federal government can no longer borrow to pay for the firms' losses.
Yet, the administration almost certainly doesn't want their losses to increase. That will fuel Republicans' common complaint that the summer's financial regulation bill failed to reform Fannie and Freddie and that they were the chief cause of the financial crisis. It will also make continued government involvement in the housing market even harder for the Treasury to sell next year when it unveils its plan for housing finance reform.
HAMP Isn't Working
The White House might have argued that a national foreclosure moratorium could provide more time for borrowers to obtain modifications. But at this point, if the Treasury has learned anything, it's that the HAMP program isn't working particularly effectively. The program has been winding down for almost a year, and cancellations have begun outnumbering new modifications. After being in place for more than a year, less than a half million modifications have been made -- far fewer than the 7 to 9 million struggling homeowners the administration had sought to help.
As a result, the White House might be indirectly admitting that modifications aren't the answer. Instead, the housing market must be allowed to hit its true bottom. Short of very aggressive principal reductions, most homeowners facing foreclosure won't ultimately be able to afford their underwater mortgages.
Finally, as November nears, the success of the Tea Party's influence continues to grow. One of the early complaints of Tea Party founding father Rick Santelli was the government's effort to prevent foreclosures through mortgage modifications. He and others argued that many millions of Americans were responsibly paying their bills and hadn't taken on more than they could handle -- so why should taxpayers pay $75 billion to prevent foreclosure for a few million Americans who aren't paying and couldn't afford the houses the purchased in the first place?
Even those who aren't tea partiers, but are considering voting against Democratic incumbents, probably sympathize with this notion. While foreclosures remain a problem, only a small minority of Americans are in the pool of those who might temporarily benefit from a national moratorium. Meanwhile, the homeowners who continue to pay their mortgages combined with renters are a much bigger portion of the population. The Obama administration might not want to push this issue with midterms a few weeks away.
So really, the White House here is taking a moderate approach. While it doesn't intend to make foreclosures easier in cases where banks have been negligent, it also doesn't want to prevent clearly legitimate foreclosures. This shows that the administration reluctantly recognizes that the sooner all foreclosures are accounted for, the sooner the housing market can begin to finally heal.
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