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.
