N.Y. Times: Obama Should Have Bailed Out More Deadbeats

Binyamin Appelbaum can't prove it, but he's sure President Obama's troubles are a result of not spending enough taxpayer money on bad borrowers. 

Although his 2,600-word New York Times story "Cautious Moves on Foreclosures Haunting Obama" presents no evidence to support his thesis, Appelbaum insists the president could have saved the economy and ensured his re-election if only he'd been willing to spend more of the $700 billion Troubled Asset Relief Program and the $800+ billion American Recovery and Reinvestment Act to give more home equity to people who don't pay their mortgages. 

Appelbaum's narrative is a simple one: "After inheriting the worst economic downturn since the Great Depression, President Obama poured vast amounts of money [to] revive the economy." But he didn't force banks to give mortgage "cramdowns" to defaulted borrowers, and he failed to spend more of the "hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity." As a result, "the nation's painfully slow pace of growth is now the primary threat to Mr. Obama's bid for a second term" as "Congressional Democrats and liberal advocacy groups not normally focused on housing, like the National Council of La Raza," demand "action to prevent foreclosures." 

Appelbaum does not question the idea that "action" would in fact have prevented foreclosures or revived the economy. He makes a pilgrimage to the headquarters of the Depression-era Home Owner's Loan Corporation, which bought about a fifth of the country's underwater mortgages in 1933. (The Depression lasted another 13 years after the agency was created.) He also notes that Obama's opponents in 2008, Hillary Clinton and John McCain, both advocated straight-up government purchases of non-performing mortgages. That idea at least would have been a more or less clear waste of money. 

Obama avoided making this outlandish promise in 2008, but as president he did try without success to get legislation allowing mortgage debt to be discharged in bankruptcy. This might have put pressure on banks to give bad borrowers cramdowns of their outstanding principal. The theory behind cramdowns (beyond the never popular notion that of all the people who could possibly live in a house, nobody deserves to live in it more than the one person who is demonstrably unwilling to pay for it) is that reducing principal will eventually turn proven bad borrowers into reliable borrowers. At some level, the theory holds, deadbeats will have been given enough free equity that paying their mortgages will become an attractive option. 

This theory has so far failed every test of reality. While principal-reduction loan modifications result in somewhat better performance than interest-rate or term-extension modifications, the rate of redefaults on modified loans is so high – more than 50 percent in some classes – that there is no economic argument for them. A bank that provides a loan mod essentially gives free housing to a borrower, and when the borrower again stops paying – which has been the accelerating pattern for modified loans since the OCC's Mortgage Metrics Report began tracking redefaults in 2009 – the bank is left foreclosing on a property that is worth even less than it was at the time of the modification. (We're also starting to see redefaults on redefaults, as borrowers get third and fourth chances from their lenders but still go bad.) 

So if Appelbaum's economic argument doesn't work, what about the political one? Here the story is even more nebulous. His on-the-record sources tend to be former something-or-others, like erstwhile Treasury Department housing czar Michael S. Barr and Rep. Jim Marshall (D-Georgia) who mysteriously lost his job in 2010. Appelbaum refers to this event with the taciturn phrase, "In November, Democrats lost control of the House…" 

Is it possible the Democrats lost control of the House because they were perceived as doing too much to modify the economy, rather than too little? Survey says Yes

This is the hard reality that Applebaum – and the Times, which put his story in the top-right-above-the-fold spot in Monday's paper – can neither comprehend nor control. Appelbaum blames Obama advisors (mostly Treasury Secretary Tim Geithner and former National Economic Council director Larry Summers) for persuading the president that "even in the depths of an unyielding crisis, most Americans did not want their neighbors rescued at public expense." 

Most Americans are right to feel that way. They're right on the morality: Nine out of ten mortgage borrowers continue to make their monthly payments no matter how much it sucks. It is grotesquely unfair to them, to the roughly 100 million Americans who avoided buying into the still-inflated real estate market in the first place, and even to the one-third of bad borrowers who manage to "self-cure" with no special assistance, to provide free housing to people who are not paying their mortgages. 

They're also right on the economics. The real estate market has not hit bottom after more than half a decade of long-overdue deflation, and encouraging both borrowers and lenders to slow down the foreclosure process has made that problem worse. It's bad for banks, for the reasons outlined above. It's also bad for deadbeats, who have been encouraged to stay in untenable situations rather than going back to the rental market, mending their finances, and getting on with their lives. After six years, some in the mainstream media have started to figure this out. America's newspaper of record, on the other hand, is unteachable. 

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  • Auric Demonocles||

    If I didn't know better I'd think giving money to people who got houses that were too big was a bad idea and was screwing over the people who were waiting for prices to drop.

  • Tman||

    Wait, it gets better. Here's President Not My Fault from his presser on Monday-

    http://www.whitehouse.gov/the-.....ress-corps

    Number two, we have put forward an idea that I think a lot of Americans think makes sense, which is we've got historically low interest rates now, and the housing market is beginning to tick back up but it's still not at all where it needs to be. There are a lot of families out there whose homes are underwater. They owe more than the house is worth because housing values dropped so precipitously, and they're having trouble refinancing.

    We're going to be pushing Congress to see if they can pass a refinancing bill that puts $3,000 into the pockets of the average family who hasn’t yet refinanced their mortgage. That's a big deal. That $3,00 can be used to strengthen the equity in that person's home, which would raise home values. Alternatively, that's $3,000 in people's pockets that they can spend on a new computer for their kid going back to school, or new school clothes for their kids, and so that would strengthen the economy as well.

    FREE MONEY!!!! WOOOHOOOO!!!!

  • Palin's Buttplug||

    Refinancing is a proven technique to reduce interest payments, you idiot.

    It is the capital cycle we all know and love.

  • OldMexican||

    Re: Palins' Buttwipe,

    Refinancing is a proven technique to reduce interest payments, you idiot.


    Yes, and it is so proven and obvious, that begs the question as to why would the Great One give away bribe money to people to perform something that is so obviously beneficial for their financial well being, captain Missthepoint!

  • Tman||

    Don't bother OM, shriek has moments of sanity but they are fleeting.

    Can't teach a pig to sing, etc..

  • ||

    Tman was talking about the "free" 3k you idiot, not refinancing.

    Jesus tap dancing Christ.

  • OldMexican||

    We're going to be pushing Congress to see if they can pass a refinancing bill that puts $3,000 into the pockets of the average family who hasn't yet refinanced their mortgage.


    And once they get their free money, never will.

    Alternatively, that's $3,000 in people's pockets that they can spend on a new computer for their kid going back to school, or new school clothes for their kids, and so that would strengthen the economy as well.


    "And while we're at it, we'll break a few shop windows... "

  • Auric Demonocles||

    Why does it matter if you are underwater on your house or not anyway? As long as the monthly payments are a reasonable amount compared to renting, you've got a place to live (for an acceptable price).
    Which is the point of a house.

  • ||

    House values are always supposed to go up and my wife is supposed to get progressively hotter as I get fatter and balder.

    You mean the world DOESN'T work that way?

  • ||

    Well let's think about it: none of those houses were built by anyone, somebody else made it happen. So clearly the problem is that Obama has failed to be the "somebody else" to make it happen. It's so clear now!

  • SIV||

    Tim, didn't you apply for a cut of Obama's stash?

  • ||

    Appelbaum insists the president could have saved the economy and ensured his re-election if only he'd been willing to spend more of the $700 billion Troubled Asset Relief Program and the $800+ billion American Recovery and Reinvestment Act to give more home equity to people who don't pay their mortgages.

    In fairness if Obama instead just gave everyone in the US $4000 we would have been better off.

  • SIV||

    How much are those "prebate" checks GayJay wants to hand out every month?

  • Palin's Buttplug||

    Prebate is a term Atlanta redneck Neal Boortz uses to sell his bogus tax plan.

  • Brutus||

    I'm pretty sure it's the same term BU Econ professor Larry Kotlikoff used in his Cato Policy Analysis recommending the scrapping of income, FICA, inheritance, corporate and other taxes in favor of a national sales tax. He says the effects would be a large rise in the capital stock of the US over time.

    Maybe he's a redneck, too.

  • SIV||

    Larry Kotlikoff, Neil Boortz, and Gary Johnson, like all fair tax rednecks, just want their prebate checks to spend on deer estrus and Copenhagen.

  • Anacreon||

    On the radio today, on one of those "help with your finances" programs, a lady caller was saying that she had been ready to walk away from her house, but had just been approached with a loan modification which would take $400K off the principal, and then would refinance her at 2.0% in a 40-year loan. She was asking Joe Financebuddy if she should go for it.

    Jeez, any way I can get $400K knocked off my loan and 1.5% taken off my loan rate like this? What a sucker I have been for paying my bills on time.

  • Paul.||

    Wait 'til they do the same for college debt.

  • Mr Whipple||

    How many points? Closing costs?

  • Hugh Akston||

    I thought the NYT already had a Paul Krugman.

  • SugarFree||

    The NYT has decided to go FULL KRUGMAN!

  • ||

    This is one of his clones; he reproduces asexually through budding.

  • SugarFree||

  • ||

    That theory is two years old and was based on the limited information available at the time. It was a valid theory, but since then new information has come to light, and it is now believed that Krugman is in fact an alien from the planet Keyneson. What is unclear is if his budding forms slightly modified clones, or if the buds replace existing humans just like in the documentary Invasion of the Bodysnatchers. There is an investigation underway to determine this.

  • SugarFree||

    The only way to prove me wrong is for you to go get bit by a Kruman. If you don't turn into one, I'll believe you; if you do, I promise to put you down myself.

  • ||

    Don't get snippy because your pet theory has been proven wrong, Stephen Jay Gould.

  • Paul.||

    Stan Keyneson?

  • Tim Cavanaugh||

    The evidence backs up your theory, SugarFree. It pains me to say it, but we can't be afraid of the truth.

  • SugarFree||

    Thank you. Your faith in me makes up for all the know-nothing Episiarchs in all the oceans of all the worlds.

  • ||

    I note that neither of you addresses the evidence I have put forth. The xenobiologist community is in consensus about this, except for a few deniers like yourselves. Now, admittedly, I'm not a xenobiologist myself, but I've read all the literature presented to me on it by Newsweek and I know my facts.

    The science is settled.

  • SugarFree||

    Your mindless devotion to TEAM XENO sickens me.

  • ||

    Look who's talking, Mr. TEAM CONTAGION. This is like that time you were convinced that a virus caused that quarantine of Evans City, PA.

  • OldMexican||

    Re: Episiarch,

    This is one of his clones; he reproduces asexually through budding.


    After taking too much Thai food, perhaps?

  • Beefkins||

    We'll not have you making comparisons between Krugman and an intelligent human being around here, even if said human being is just a character on a television show.

  • ||

    But only if it's after midnight.

  • Fluffy||

    On the political side, a great many Democrats of my acquaintance are utterly convinced that there is a vast pool of voters out there who aren't showing up because they're "discouraged" by the fact that Democrats haven't been radical enough.

    IOW, even though election results show Dems getting punished for going half-Krugman, these folks are convinced that angry Tea Party voters would get swamped and outvoted by "discouraged" folks who would become "encouraged" if Obama set up a few guillotines and wiped out all debts Gracchi-style.

  • Paul.||

    In a way they're right. If Obama would just put up a lemonade-style booth in front of the white house with a sign that said, "Cast your vote for Obama and get $3000 instant cash back!", the Tea Party voters would be utterly swamped and outvoted. The fact that Obama's sign says, "Cast your vote for Obama and be entered into a drawing for $500,000 cash!" hasn't pulled quite as many votes.

  • Palin's Buttplug||

    yeah, I hear brain dead progressives complain that Obama is on the bankers side all the time.

  • ||

    You mean he's NOT on the bankers side?

    This will come as quite a shock to his and Timmah's friends on Wall Street.

  • Christina||

    This has tapped into my secret shame.

    In 2007 was was an accountant, specializing in job cost and budgeting, for a homebuilder. I saw, every day, the market was softening. I had expected this would happen. I'm trained in economics and knew a bubble when I saw one. Indeed, I had just left a luxury homebuilder for a larger company precisely because I knew I would be out of a job pretty soon unless I got in with a company that had weathered a few downturns.

    One advantage for working for a homebuilder is a discount on buying a house. Only $1,000 earnest money! Plus the hubs was doing well in his career. We'd been married for a few years, and were bursting out of our 2 bedroom rental townhouse. I had a husband who was bitching about needing a bigger kitchen and an office, baby fever like crazy, and a tax attorney FIL who kept telling us we were throwing money away on renting.

    So I fucking bought a house. I had a pit in my stomach from the moment we signed out contract with the builder. I FUCKING KNEW BETTER. But my husband would not shut up about buying a house, so I went along.

  • Tim Cavanaugh||

    The value proposition is that you lived in the house, with a big kitchen, for five years, Christina. Think about it that way and the decision won't seem so bad.

  • Christina||

    Five years later we are facing foreclosure. We have gone through the loan modification application process something like 5 or 6 times, and are currently on second modification. In both cases, HAMP was useless. The mods have been completely in-house, and have done nothing to write-down our principal or reduce our interest rate. We've merely been given the opportunity to tack our missing payments to the principal and extend the terms of the loan to 50 years. If we don't make our payment on September 1 we will once again be in default and the foreclosure process will begin again. Since my husband doesn't have a job and I make $10,000 less than I did 5 years ago, chances are great that we will be out of this house by the end of the year and living in Mom's basement. Frankly, it'll probably be a relief. And then a whole new type of hell.

    Lessons Learned: FUCK tax attorneys. FUCK whiny husbands. FUCK peer pressure. FUCK the government for trying to drag this pain out instead of just letting the market correct. And most importantly FUCK ME! I deserve all the shit that is raining down on me. I fucking knew better!

  • Paul.||

    Oh, sorry, I banged out my response before you had finished the punchline. Well, never mind.

    I wish you the best of luck. And hopefully you don't live in a community property state.

  • OldMexican||

    Re: Christina,

    I deserve all the shit that is raining down on me.


    Oh, will you look at the time? We'll continue on next week's session, if you don't mind. Just pay the receptionist before you ask her to schedule your next appointment.

  • Tim Cavanaugh||

    This is my GENERIC response to people in your GENERAL situation, Christina. I am neither a licensed financial planner nor any other kind of financial planner, and my own finances prove it. Consult an expert. The following is for editorial purposes only. By reading the following you waive all claims against me, my heirs and assigns &c., forever and in perpetuity &c. More information about personal finance can be found on the internet. That having been said:

    You can make the shit stop raining in one tough week. Find a rental you and yours can afford and tolerate. Call movers or rent a truck. Hold a yard sale, then dispose of unsold property at your choice of local charity. Put your keys and a brief, friendly note explaining that you have vacated the property in a soft padded envelope addressed to your lender. Affix adequate postage. Mail the keys from a U.S. Post Office you pass along the way to your new residence. In your mind, redefine the mortgage payments you made over the past five years as rent you paid to live in a nice house with a big kitchen. Have your husband commit to doing the same and also to getting a job.

    It will be a very painful week, but after that you will be past the worst part.

  • Paul.||

    It's only a loss, Christina (oh, and what Tim said... but...) if the house you bought has lost a huge amount of its value and you intend to sell.

    If you live there, then you think of it like a car. It depreciated when you drove it off the lot, but if you intend to drive the thing for 20 years, then there's very little harm done.

    Or unless... UNLESS you got an exotic loan to pay for it. Then I really can't help you. Only lots of free taxpayer dollars can help you.

  • OldMexican||

    At some level, the theory holds, deadbeats will have been given enough free equity that paying their mortgages will become an attractive option.


    Or change their cost of opportunity schedules. Why bother paying now if the government just gave you free money to play with for a few more months?

  • OldMexican||

    Appelbaum insists the president could have saved the economy and ensured his re-election if only he'd been willing to spend more of the $700 billion Troubled Asset Relief Program and the $800+ billion American Recovery and Reinvestment Act to give more home equity to people who don't pay their mortgages.


    "I can still win if you let me have more! I have a hunch this one horse will pay off big, Mable! Trust me!"

  • Enjoy Every Sandwich||

    That's always the answer with these statist fucks, isn't it? If a government program, law, etc. fails, it's never because the basic premise of the program was flawed; it's always because it wasn't done hard enough. Shovel more money in! Close teh loopholes! More draconian punishments! Clap harder!

  • Sevo||

    Palin's Buttplug| 8.22.12 @ 7:12PM |#
    "Refinancing is a proven technique to reduce interest payments, you idiot."

    Yeah, dipshit, it's proven to do so under the conditions of 'if and only if'...
    You claim to have knowledge of finance and you continue to post crap like that? What a ignoramus.

  • Invisible Finger||

    Not only is he stupid, he doesn't even know history.

    Until the bubble popped, people refi'd to pay less interest PER MONTH but re-started the term so they would pay interest LONGER which means they actually INCREASED their total interest paid.

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