Ultimately, political advisers decided the bill was unlikely to overcome the opposition of banks, Obama did not fight for it, and the bill died. There would be no stick.
In the summer of 2009, Obama’s team started to get warnings from community groups that banks were foreclosing even when people were eligible for aid.
The president heard alarm bells in the often-emotional letters people wrote him. His top economic advisers would remind him that even if the programs were working perfectly, some homeowners would not get relief.
But it eventually became clear the administration’s housing rescue was falling woefully short. While HAMP had aided fewer than 70,000 people in 2009, for instance, 2.5 million received foreclosure notices.
Nine months after the first warnings, the administration adopted a more aggressive stance, taking new steps to stop banks from foreclosing on borrowers while they were in the process of seeking help. It also announced a new program to give money to states to help homeowners.
A debate unfolded at the White House about whether to try to reduce the debts of underwater borrowers, which could increase their confidence and free them to spend more, or to sell their homes and seek jobs elsewhere.
Obama sought to strike a difficult balance, as he often did.
“A lot of his concerns and questions were about trying to figure out how we could do more on housing,” said Michael Barr, a former assistant Treasury secretary, “while also being mindful of the costs and risks, and making sure our approach was fair to taxpayers and homeowners who were not going to directly be getting helped.”
But in reality, the programs were off-balance. Although advisers intended to address the debt problem, they set up programs in ways that were likely to limit their success — for example, asking banks to reduce debts without offering much taxpayer money to help cover the cost.
To date, administration programs have permanently reduced the debt of just one tenth of 1 percent of underwater borrowers.
Fannie and Freddie
One of Obama’s crucial levers for helping homeowners was the taxpayer-backed mortgage giants Fannie Mae and Freddie Mac, which own or insure half of all home loans. But his administration largely squandered the chance to use them.
Since the financial crisis in 2008, the firms have received more than $130 billion in taxpayer dollars to offset losses, becoming poster boys for bailouts. When Obama came to office, the Federal Housing Finance Agency, the regulator that controls Fannie and Freddie, was open to doing virtually anything to help homeowners, including reducing debts.
“My argument at the time was, with Fannie and Freddie sitting on 30 million mortgages, anything you did to right the mortgage market would actually save money,” said former FHFA director James Lockhart, a George W. Bush-era appointee.
But the administration was not willing to go that far. And when it finally decided to try some limited debt reduction, it was too late.
Lockhart stepped down for a job in the private sector. His deputy, Edward DeMarco, who took over as acting director, had spent much of his career at the Government Accountability Office and the Treasury Department, trying to rein in Fannie and Freddie. Now he had the chance to do it.
In a confidential letter to Donovan this year, DeMarco wrote that he would not allow the companies to reduce debts, because the firms would incur “immediate losses . . . on otherwise performing loans.” But he added that he would reconsider “should the Administration identify a source of funds to cover some portion of the costs.”
With the problem of underwater borrowers holding back the economic recovery so significantly, senior officials sought to use the unspent housing funds to do just that. But it was, again, too late. By now, a bailout-weary Congress had banned new uses of the funds.
Last fall, state investigations revealed widespread foreclosure abuses by banks and their lawyers. A federal audit confirmed that banks were not offering required relief to some eligible homeowners, potentially causing unnecessary foreclosures. The administration’s efforts to get banks to comply had not succeeded.
In December at the White House, Obama gathered top aides and expressed his frustration.
“He pushed the whole group to go further and be more aggressive,” Donovan said.
Over the following months, the administration began working with state officials on a $25 billion settlement with banks over foreclosure abuses that would be paid in part through debt reduction — a process that’s nearing completion.
Other programs have shown unexpected success in reducing monthly payments, though not reducing debt. The Federal Housing Administration, an agency that helps first-time home buyers, has aided about 1 million borrowers, while the private sector has assisted about 2 million borrowers.
All told, estimates indicate that when all current programs have run their course, the administration will have spent a total of about $13 billion on housing programs.
Still, at least 5 million more foreclosures are estimated in coming years — and perhaps many more. This summer at the White House, Obama offered a rare acknowledgment that his response to the housing crisis had fallen short.
Asked what mistakes he had made in handling the recession and what he would do differently, he said: “We had to revamp housing several times to try and help people stay in their homes and try to start lifting home values up. Of all the things we’ve done, that’s probably been the area that’s been most stubborn in us trying to solve the problem.”