Why few homeowners have been rescued
By Neel Kashkari,
Neel Kashkari, head of global equities at the investment management firm Pimco, served as an assistant Treasury secretary during the George W. Bush administration. He led the Office of Financial Stability and ran the Troubled Assets Relief Program until May 2009.
Since the housing downturn that began in 2007, policymakers in both parties have implemented numerous programs to modify loans and help homeowners avoid foreclosures. Sadly, none of these programs has lived up to its goals. With each missed expectation, advocates identified the next impediment and offered the next silver bullet. But there is a reason all these programs have fallen short — and why in-kind successors will, too.
When I worked in the Treasury Department, my colleagues and I evaluated hundreds of mortgage modification proposals and started several. At the same time, Congress and several states put in place their own plans. Hope Now. The rate-freeze plan. Hope for Homeowners. The basic thesis behind such programs is that foreclosures are very costly to everyone involved: Tens of thousands of dollars are needlessly poured down the drain when a house goes through foreclosure. A bank’s recovery on its loan is severely impaired. Homeowners are out on the street. Neighborhoods are blighted. If, however, a compromise is reached, everyone wins: Banks recover more, families stay in their homes and neighborhoods are strengthened. With so many different modification programs, why haven’t more struggling homeowners been helped?
Most people agree that some foreclosures are unavoidable: If someone bought a home he or she could not possibly afford — having counted on refinancing at ever-increasing home price levels — foreclosure is likely the only outcome. But it’s commonly accepted that loan modifications should work for homeowners who need only a modest amount of assistance. We used to say our policies were designed to target people who “are in the right home, but in the wrong mortgage.” Some government efforts, such as President Obama’s Home Affordable Modification Program, have also used limited taxpayer resources to tip the scales so that more homeowners would fall into the sweet spot of loan modifications.
Unfortunately, the past four years have shown that relatively few people losing their homes need only a moderate amount of assistance. Many either bought homes they could never hope to afford or, because of the financial crisis and serious recession, lost their jobs. The latter may have been responsible and bought homes that were once within their means, but now these homeowners don’t need a loan modification — they need work. With unemployment stuck at 8.2 percent, millions of Americans are in this terrible position. Recent data from the Mortgage Bankers Association indicate that almost 4 million mortgages in the United States are at least 90 days delinquent or in the foreclosure process. A loan modification can’t help someone who doesn’t have a job.
Political constraints have forced government housing programs to target homeowners who need limited assistance. Even this use of taxpayer money has angered many Americans who sacrificed to live within their means: Why should their tax dollars support those less prudent? This political constraint is the fundamental reason more homeowners have not been saved. Unless as a nation we are willing to spend substantial taxpayer dollars to help those who need a lot of housing assistance, any new foreclosure program, even the latest silver bullet of principal write-downs, is likely to have only limited reach.
It is important to note that we did not constrain ourselves this way when we used the Troubled Assets Relief Program to stabilize the financial system. If the federal government had limited TARP funds to banks that needed moderate assistance, several large banks would have failed, bringing down the financial system. Those bailouts were also politically unpopular, but we overrode political concerns for the sake of preventing another Great Depression — and sparked tremendous political backlash as a result. In effect, because of both political constraints and limited resources, bailout recipients had to be deemed systemically important or not that troubled. Those deemed not critical to the system and deeply troubled have not been helped by government programs. Unfortunately, many individual homeowners have fallen into this category.
Given this political reality, we need either to agree, as a nation, to spend substantial taxpayer dollars to reach more homeowners, or the federal government should focus on programs to quickly move troubled homeowners to affordable rentals and, most important, focus on pro-growth economic policy to create jobs. The urgent need for decisive action was highlighted by Friday’s disappointing economic data. The economy grew at only a 2.2 percent rate in the first quarter, down from 3 percent the previous quarter and below expectations. Most alarming, however, is that this growth was achieved largely by consumers saving less to spend more: The personal savings rate fell from 4.5 percent to 3.9 percent.
To put this in context, consider that from the 1960s through the mid-1980s, Americans saved more than 8 percent of their income each year. After 1986, savings began to fall — and were close to an annual rate of zero just before the financial crisis. The crisis scared many people into saving more, but after the rate hit 6 percent at the end of 2008, it declined again.
Notwithstanding some investment-related outlays, most government stimulus policies since 2008 have been designed essentially to boost consumption, to keep Americans spending, so the economic adjustment was less severe. But our long-term economic growth cannot come from more of the same.
There are no quick fixes. A competitive economy and a vibrant jobs market are the most powerful solutions to help families and communities get back on track. Foreclosures will continue to be costly for everyone involved. Moving homes out of bank inventory and into the rental market can help. But however well-intentioned, Washington programs that target only a fraction of struggling homeowners will not revive the housing market.