N.Y. Times: Obama’s 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
story 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. 

You should pay more taxes so this house can be finished.

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.” 

Another way to make housing go higher. 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. 

He just needs another loan. 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

We need to help keep the borrower in this home. 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.