Obama’s top advisers faced difficult questions about how to spend the money. None favored using taxpayer money simply to wipe out all the bad debt. That would have required one of two things: handing out up to $700 billion to more than 10 million Americans so they could pay off part of their loans, or asking Congress to force banks, which had just narrowly escaped collapse, to tell borrowers they did not have to pay back their whole debt, which would lead to more financial losses for the firms.
Still, Shaun Donovan, secretary of housing and urban development, argued that debt reduction had an important role to play in healing the economy given the depth of the crisis. “It was of a scale that we had not seen before, and that clearly required extraordinary response,” Donovan said in a recent interview.
Donovan pressed for large payments to banks to cover part of the cost of reducing the debts of underwater borrowers. Owing less, homeowners would be able to afford their mortgages, the best outcome for borrower and bank alike.
But the president’s inner circle of economic counselors — Geithner and White House economic advisers Lawrence H. Summers and Austan Goolsbee — did not favor a big program of debt reduction.
“We made that choice because we thought [reducing debt] would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness,” Geithner said later before a congressional panel.
The advisers also worried about the problem of “moral hazard,” when forgiving debts could encourage borrowers not to pay back loans.
Rather than targeting debt, the administration focused its efforts on making monthly mortgage payments more affordable — for example, paying banks to lower the interest rates on loans. At the end of the day, homeowners would still have as much debt.
Even with this less-dramatic approach, Obama’s economic advisers worried about spending too much taxpayer money to help borrowers who still might not pay back their loans. So they excluded large categories of borrowers, including those who could not provide extensive documentation of a steady income.
They allocated $50 billion — at the low end of what they had pledged to use — to the plan, called the Home Affordable Modification Program, or HAMP.
Donovan argued it was crucial to require banks that had received bailouts to take part in HAMP, to ensure aid was offered to eligible homeowners. Others argued they could get banks to participate only if it were a voluntary program — and that view prevailed.
Days before the program’s unveiling, David Moffett, the chief executive of housing finance giant Freddie Mac, arrived at the White House with a last-minute warning: Freddie’s analysts had concluded that the proposals were unlikely to help the millions Obama hoped. But, he recalled, the White House didn’t want to hear it.
“They were a little outraged,” Moffett said, adding that he was told, “We need a strong set of numbers.”
On Feb. 18, a day after Obama signed the stimulus bill, he flew to Arizona and rolled out his housing strategy, pledging to “give millions of families resigned to financial ruin a chance to rebuild.”
With the housing crisis so intertwined with the financial crisis and recession, Geithner came to play one of the administration’s most prominent roles in overseeing and formulating its housing policies. But the secretary did not seem to embrace all aspects of this role.
Geithner met periodically with housing groups at the Treasury Department, but when his communications advisers raised the idea of him holding more public homeowner events at housing counseling centers or similar locations, Geithner said he did not want to spend his time on purely symbolic gestures.
Generally, the Treasury secretary did not regard direct homeowner aid as the best use of taxpayer dollars. He favored expanding the economy by spending money on construction projects or programs to keep teachers and other workers employed, which would help the housing market. In meetings, Geithner would tell the president that if he suddenly had $100 billion more to spend, he would never advise spending it on housing.
Geithner, who was also the point man for stabilizing the financial markets, worried that some steps to help homeowners could pose risks to the financial system, causing more harm than good.
In 2009, for example, Obama officially supported a bill in Congress that would have made it easier for homeowners to obtain mortgage relief in court — a “stick” that would pressure banks to generously reduce homeowner payments.
Behind the scenes, Geithner had grave concerns that if courts could change the terms of mortgage loans after the fact, banks would be less likely to lend, reducing the availability of credit in the financial system.