This tweet from Richard Yeselson, the labor organizer and old-school lefty, I think accurately reflects the official left-of-center history of the Obama Administration:
In this official history, the $40 billion HAMP, along with various creative executive actions, should have been expeditiously used for foreclosure relief to keep people in their homes; the failure to get the money out the door prolonged the crisis and slowed the overall economic recovery.
But this is wrong. Obama’s policies failed, but they probably would have done more harm than good if they had succeeded. More importantly, their failure was the result of conceptual error and ideological blinders, not implementation mishaps or a failure of executive will.
Obama’s people thought that they would solicit individual homeowners who had fallen behind on loans and who just needed a little help to get back on track, give them that help, and keep them in their house.
Then, when that didn’t work, they turned it over to individual state agencies to do the same thing, who also didn’t get the money out the door.
The biggest problem with any kind of “foreclosure relief” is the name: why are the people being foreclosed upon being relieved? The United States has employed more types of subsidy for homeownership than any country in history, ending with the jerry-rigged system of implicit subsidies and deals with private lenders that led to the sub-prime crisis. The marginal people buying homes at the height of the bubble were people, often, who had no business buying homes at all, let alone borrowing the several hundred thousand dollars the banks were gifting them. No matter how many bridge loans and temporary grants they were given, they weren’t going to be able to pay even a portion of the money they owed. And, as Atif Mian has regularly been discovering, in many neighborhoods, the loan was based on straightforward fraud and misrepresentation of income, not just lax underwriting or poor standards.
If there is one thing anyone can figure out when they take out a home loan, no matter how lacking in numeracy skills they are, it’s that if you don’t pay your mortgage, you lose your house. This wasn’t some secret in 2005 or 2006 or 2007, that low-income people were deprived of hearing about.
Are there sad stories attached to foreclosure, people who would have been better off if they never were offered a loan, along with tenants who end up thrown out unfairly when their landlord gets foreclosed? Of course.
But there are sad stories whenever and wherever people make mistakes, which is everywhere and every time.
This doesn’t mean that there isn’t any market failure happening when half of Phoenix or Cleveland suddenly decides to walk away from their loan.
There are three”victims” when someone gets foreclosed upon: one is the person’s neighbor who is still dutifully paying their mortgage, whose house is about to be worth a lot less and who may have to deal with the day-to-day consequences of increasing abandonment and transient occupancy in the neighborhood. The second is the other banks which have lent to the neighborhood, who may have done more due diligence but are still getting hit with the spillover effects of their competitors’ malfeasance. The third is the next person trying to get a loan to buy a house, who has to deal with the banks’ terror of the toxic assets lurking in their and their competitors’ books, making them unwilling to lend out a penny.
Note, that the second and third cases, keeping the foreclosed person in their home worsens the problem rather than alleviates it. Even in the first case, a quick foreclosure with a chance to move new people in right away may stabilize the neighborhood more effectively than a drawn out process. (For example, by 2012, New Jersey had a worse foreclosure rate than Nevada, thanks to a particularly impossible foreclosure process in New Jersey, despite the housing bubble being almost incomparably more pronounced in Vegas and the rest of the Southwest.)
The appropriate policy course in any case is not to keep writing checks to the person being foreclosed on but the one that Obama and the Fed and the Congressional Republicans eventually hit upon. Keep interest rates ultra-low, cut payroll taxes, and prop up the banks long enough for the economy to get back on its feet, which it more or less has. Insofar as direct action on foreclosures is called for, give people money to get out of their house and get a rental they can afford, and bonus cash to people who buy a foreclosed home, since the spillover effects (see graph above) worsen almost linearly with the days the bank have a property on their hands.
Paul Krugman is fond of saying that economics isn’t a morality play, that addressing issues like foreclosure or macroeconomic instability effectively requires recognizing, as Keynes said, that sometimes vice is virtue and virtue vice.
But “morality” isn’t just a matter for church sermons, climate change op-eds, and microaggression prevention at freshman orientation. It’s the rules by which the society operates, fairly or unfairly, day after day, and that assures the social trust that allows for prosperity or the dissension that ensures prosperity’s absence. It’s what happens when no one is paying much attention, for better or for worse.
In this case, the reluctance of ordinary bureaucrats and state policymakers openly to reward fraud and throw good money after bad, that stymied the efforts at “foreclosure relief,” did in no way stop the recovery from going forward as well as could reasonably be hoped, and helped keep our limited commitment to fair play from being chiseled away still more. Obama’s biggest failure should be counted as a success.