On July 28, Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan will meet with representatives from the top 25 mortgage servicers to question why these servicers have not done more to facilitate loan modifications.
Our nation needs a stable housing market to pull itself out of the economic crisis. However, demanding that these servicers do now what they should have been doing all along — remaking loans suitable for each individual borrower — is not the answer. Instead, the Obama administration needs to recognize that those who created this mess are not going to clean it up.
The home mortgage has long been the great machine of wealth creation for our nation's economy. For decades, this machine was operated in a sensible and conservative manner — community banks gathered deposits and used those funds to make responsible loans to borrowers who were thus able to make their payments. In this model, all parties benefited: the borrower became a homeowner with a mortgage suited to his or her qualifications and began to build equity in his or her home; the bank had a prudently underwritten, performing mortgage on its books and, in most cases, a loyal customer; and the community was strengthened by the stability homeownership brings to neighborhoods. The mortgage machine hummed along at a steady pace. In recent years, however, the mortgage machine was cranked up to an unsafe speed as mortgages were funded not with deposits, but with financing from Wall Street. As securitization became big business, more and more fly-by-night brokers took the place of the hometown bank in the model, creating mortgages that were not properly underwritten and did not protect the consumer.
Mark Zandi, Moody's Economy.com's chief economist, recently stated in The New York Times that as of March there were some 15 million homes under water. The mortgage machine has broken and has taken our nation's economy with it.
The administration has done its part to try to keep the mortgage machine dry from the floodwaters of foreclosure. The Making Home Affordable program, which provided mortgage servicers with incentives to make modifications, was one of the first programs the administration initiated, but it remains undermined by servicers that are either unwilling to participate or unable to do so because of the volume of loans in need of modification. As a result, the program has successfully modified loans in the thousands while the nation faces foreclosures in the millions.
Instead of attempting to chide these servicers into doing what's needed, the administration should revisit one of the Great Depression's most successful solutions.
At that time, the nation's housing market was racked with the same rash of foreclosures that exists today. In 1933, President Roosevelt signed into law the Home Owners' Loan Act, authorizing $200 million to set up the Home Owners' Loan Corp. with authority to issue $2 billion in tax-exempt bonds. These funds enabled the HOLC to buy delinquent loans from lenders and refinance them directly with consumers on flexible terms. Each loan situation was handled individually, including personal visits to prevent default. In just two years, the HOLC refinanced 20% of all qualifying mortgages.
The benefits of the HOLC were far-reaching. Approximately 800,000 homeowners were spared from foreclosure, and by taking these loans off the books of lenders, the HOLC shored up the balance sheets of thousands of lending institutions. The taxpayer was also a beneficiary, as when the HOLC liquidated itself in 1951, it did so at a slight profit.
In 1933, the government's initial investment into the program was $200 million; in today's dollars, that's roughly $3.3 billion, or less than 1% of the $700 billion authorized by the government for the Troubled Asset Relief Program. While we do not know how effective the Tarp will ultimately be in restoring our economy, the HOLC is a proven cure.
A year and a half ago, in the pages of American Banker, I advocated the renewal of the HOLC. Today, our need is even more pressing. The mortgage machine may be broken, but we have the tools to fix it. The revival of the HOLC can return it to a place where it can press on steadily, making quality loans to responsible homeowners, laying down the economic foundation of America.