Few things are as grating as the polite jargon used to describe politicians caving in to corporate interests. “The politics of the possible,” for instance, has suddenly replaced “yes, we can” as Barack Obama has walked back a central plank of his presidential campaign—that he’d create a public insurance plan. If only the problems we face were as flexible as our elected officials. Case in point: Obama’s compromised response to the still-worsening foreclosure crisis.
Early this month, the Obama administration released the first batch of data on its foreclosure prevention initiative—in which taxpayers will give mortgage servicers $75 billion to fix failing loans rather than shovel them into foreclosure. The results are better than those of the Bush administration’s meager effort, but they fall far, far short of resolving the problem. Which is pretty much what everyone predicted back when “pragmatic” Obama was backing down from a meaningful solution this spring.
In the program’s first three months, servicers reworked 235, 247 failed mortgages. (Servicers are paid to manage loans owned by investors and banks.) The Obama initiative wisely demands that every one of these loan modifications actually lower the borrower’s monthly bill. That doesn’t sound like much of a victory, but in 2008 more than half of the deals offered to struggling borrowers either did nothing to change the monthly payment or increased it. To qualify for Obama’s $75 billion, servicers have to lower payments to roughly a third of a borrower’s monthly income. That’s the good news.
The bad news is that we logged 360,000 foreclosure filings in July alone. Got that? It means the gains Obama’s program generated over three months were subsumed by a single month’s foreclosures. The problem today is the same as it was under Bush: The servicing industry can’t and won’t fix itself voluntarily.
I describe at length why that’s the case in this Nation magazine investigation. Here’s the short version: Alongside the subprime lending boom, big banks bought up and consolidated the mortgage servicing industry, too. Today, just three servicers—arms of Bank of America, Wells Fargo and Chase—control about half the market. These new mega-servicers generated good money for banks—until more than 10 percent of the market started defaulting. Now they must slog though millions of complex, poorly written mortgages to make them into smart, sustainable ones. But the high-volume, low-cost business model of today’s industry makes that a losing proposition—and even if it wasn’t, the mega-servicers literally don’t have the expertise to do it. Which is why Bank of America and Wells Fargo have modified a lousy 4 percent and 6 percent, respectively, of their eligible loans.
When Obama began talking about fixing foreclosures, he included measures that would force banks to prioritize long-term stability over short-term profit. But much like with health care, he slowly walked that argument back. In the end, he caved to conservative Democrats in the Senate. He handed industry some marginal new rules, but he shrunk from the core fight. Then he cut servicers a $75 billion check and moved on. Sound familiar?
It’s a developing pattern for this White House. Private health insurers are now poised to get a lucrative new market by way of a mandate that we all be insured; in return they’ll accept some marginal new rules and Washington will leave the core problem of their profiteering unchecked. But as we’ve seen with foreclosures, calling the status quo change don’t make it so.
UPDATE: It's only getting worse. The share of home loans that are in trouble broke yet another record in the second quarter of 2009. According to industry data released today, more than 13 percent of all home loans were past due or in foreclosure at the quarter's end. And among foreclosures, *prime* loans with fixed interest rates acconted for 1 in 3 filings. So much for the turnaround.