We all remember the fable of The Boy Who Cried Wolf. The moral of the story: Lie one too many times and nobody will believe you, even when you’re telling the truth. Now we have a case of The Government Who Cried Wolf, showing how the failure of the Obama administration’s foreclosure mitigation programs haunt them to this day.
The Federal Housing Finance Agency (FHFA), which oversees mortgage giants Fannie Mae and Freddie Mac, wants to help around 676,000 homeowners it has identified as eligible for refinancing under the government’s Home Affordable Refinancing Program (HARP).
These homeowners currently hold mortgages with interest rates that are at least 1.5 percent above the current market rate, and would save roughly $200 a month if they used HARP to refinance. They also have little or no equity in their homes, which means they could not get a refinancing deal from a mortgage lender without HARP. After a slow start, HARP has enabled 3 million refinances, and these last 676,000 must be completed before the program expires at the end of 2015.
This week, Mel Watt, the new head of the FHFA, participated in a town hall meeting in Chicago designed to encourage eligible residents to refinance. It’s one of several planned outreach efforts to save homeowners a decent amount of money, at no cost to the government.
The FHFA gets something out of it, too: HARP refinancing reduces the potential for future defaults among borrowers with low or no equity. The approximate annual benefit if everyone eligible refinanced would be about $1.6 billion, a small but significant boost. Any money homeowners save from smaller mortgage payments could be spent on other needs, providing a modest stimulus to the economy.
But these remaining homeowners appear to have no interest in the program, and Watt explained why in Chicago. “We have written to them. We have called them, and they're saying this is too good to be true,” he said.
Why would homeowners exhibit so much skepticism in a government program that they feel inclined to turn down thousands of dollars in free money? You can track it back to all the promises made over the past five years to help homeowners, and the unfortunately sorry results.
In 2009, when the foreclosure crisis was most acute, President Obama promised to save 4 million homes through the Home Affordable Modification Program (HAMP). Today, only around 900,000 hold active permanent HAMP modifications, while millions of others either re-defaulted or were rejected by the program. Mortgage servicing companies, which had a greater financial incentive to foreclose over modifying home loans, quickly figured out how to game the system, using it to pile more bad debt on borrowers for their own reward.
The process devolved into a horror show for homeowners. Servicers prolonged trial modifications well past the three-month period set out in HAMP guidelines so that they could rack up late fees. They deliberately lost borrower’s income documents to extend the default period, even shredding documents and purging records to do so. They pursued foreclosure while negotiating the modification, against HAMP rules. They granted modifications that folded servicer fees into the principal of the loan, increasing the unpaid principal balance — and thus their profit — while pushing the borrower further underwater. And they trapped borrowers after denying modifications, demanding back payments, missed interest and late fees, with the threat of foreclosure as a hammer.
This sometimes forced borrowers into “private” modifications with the servicer, usually on worse terms than the status quo. Or it led to many of the 5.6 million foreclosures we’ve seen since the collapse of the housing bubble. One set of employees at Bank of America testified that they were given bonuses like Target gift cards for pushing homeowners into foreclosure.
Subsequent government programs, like the “Hardest Hit Fund” directed at states with the most nagging foreclosure crises, similarly failed to deliver. The failure to restructure mortgages and avert foreclosures is seen as the biggest policy mistake of the Great Recession.
With this as a backdrop, it’s easy to see why homeowners who managed to avoid that carnage would cast a skeptical eye toward the government’s latest push. Ultimately, HARP goes through mortgage servicers, the same way HAMP does. And virtually all homeowners have friends and neighbors who can cite them chapter and verse about the hell they went through with their mortgage company. They think about that, and suddenly that refinancing gift being dangled in front of them doesn’t look so shiny.
The HAMP debacle has caused a breakdown of trust between mortgage servicers and their customers, and the government did this no favors by failing to police servicer behavior. The Treasury Department, which gave incentive payments to servicers for successful HAMP modifications, could have sanctioned them at any time for violating their contractual obligations, up to and including clawing back those incentive payments. Yet it never did so, despite documented evidence of fraud and abuse. One temporary withholding of incentive payments in late 2011 was quickly terminated. Treasury paid every servicer in full, regardless of the violations.
When homeowners hear from a government looking to help them, and previous efforts along similar lines led to broken promises and foreclosure nightmares, you can’t blame them for saying no. This is why, if you believe in an activist government that can help solve problems, failures of this sort become so debilitating. The housing policy disappointments reinforced the old Ronald Reagan dictum that the most dangerous words in the English language are “I’m from the government and I’m here to help.”
The FHFA wants to literally give free money to homeowners, and they simply can’t trust that it won’t send them into a downward spiral. That credibility gap really harms the ability of liberal government to function.
There’s only one way to restore credibility: through efficient, quality government programs that establish high standards among the public. But one misstep can ruin years of diligent work. The FHFA might have a perfectly sound program that will really benefit homeowners. But until they stave off the lingering mistrust, they will simply serve as representatives of a Government Who Cried Wolf.
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