Marcy hit on something last night that I wanted to pick up on. I think most political observers agree that the struggling economy is driving the difficult election cycle for Democrats, but where this opinion veers off is whether you think the President has examined every option to reverse the slide. “He stopped a Depression,” supporters say. “The stimulus was too small,” detractors say. “He did the best he could with Congress,” supporters say. “He could have negotiated better,” detractors say.

All of this sidesteps the impact of millions of Americans losing their homes and going into foreclosure, which was not a predetermined scenario. As I’ve laid out pretty thoroughly, going all the way back to TARP, then-candidate Obama promised to use the necessary tools, like cramdown and a large loan modification program, to reset the housing market and keep borrowers in their homes. Not only did cramdown, one of the only ways to fix the mess, die, but the loan modification program put in its place has been abused by lenders and made the financial situation of many borrowers worse.

Now we’re learning that a healthy chunk of these foreclosures moving through the system are fraudulent, because in the go-go days of securitization, lenders would go to any lengths to create mortgages and push paper, leading to incomplete loan processing. Nobody really knows who owns a substantial number of properties in the US, and states have begun to step up for their residents and demand answers. There’s no question that this will move beyond Ally Financial/GMAC and become an industry-wide investigation.

This uncertainty has at its root a failure to fix the housing market. The Obama Administration had $50 billion in TARP money and every opportunity to bypass Congress and devise programs that would have kept people out of foreclosures, and thus not victims to foreclosure fraud. Even today, the Administration could follow the wishes of many lawmakers and devise strategies to allow Fannie Mae and Freddie Mac to refinance all the mortgages they own, and use more of the HAMP fund as incentive payments.

At President Obama’s backyard meeting in New Mexico yesterday, somebody asks him about foreclosures, and as you’ll see he doesn’t even try to hide the scope of the problem, to his credit (with the exception of one paragraph, see if you can spot it):

Q: I work for the New Mexico VA health care system.  My question is that, I think as an integral part of being Hispanic, being from here, home is very integral to that, and not only for Hispanics, for all New Mexicans, for all Americans.  And yet I hear stories of my family members’ friends, veterans that I treat, of losing their homes due to this economy that we’ve been through or are going through.  And I guess my question is, what are we doing to prevent people from losing their homes?
    
I know education is truly incredible — it moves people beyond what we can ever expect — but if we don’t have homes to go to, what good is the education?
    
THE PRESIDENT:  Well, the housing crisis helped to trigger the financial crisis.  And it’s a complicated story, but essentially what happened was, banks started seeing money in peddling what looked like these very low-interest-rate mortgages, no money down.  Started peddling these things to folks.  A lot of people didn’t read the fine print, where they had adjustable-rate mortgages or balloon payments, and they ended up being in situations where they were in homes that they couldn’t necessarily afford. 
    
The banks made a whole bunch of money on all these mortgages that were being generated.  But what happened was — is that when the housing market started going down, then all these financial instruments that were built on a steady stream of payments for mortgages, they all went bust, and that helped to trigger the entire crisis [...]
     
Now, this is a multitrillion-dollar market, so there’s no government program where we can just make sure that whoever is losing their home that we can just pick up the tab and make sure that they can pay.  And frankly there are some people who really bought more home than they could afford, and they’d be better off renting, or they’re going to have to make adjustments in terms of their house.

What we have tried to do, though, is to make sure that people who had been making their payments regularly, who are meeting their responsibilities, if they could have a little bit of an adjustment with the banks, if some of the principal was reduced, if some of the interest was reduced on their mortgage payment, they could keep on making payments.  The bank would be better off than if the home was foreclosed on, obviously they’d be better off, and as the housing market starts picking back up again — which it will do over time, although not in the same trajectory as it used to, right; it’s going to be more much gradual — then potentially the bank could recoup some of the money that it had lost by making the adjustments on the mortgages.

So we’ve set up a number of these mortgage modification programs that are out there.  But I don’t want to lie to you — we’ve probably had hundreds of thousands of people who’ve been helped by it.  I think there have been a couple of million who’ve applied.  But that doesn’t meet the entire need because this is such a huge housing market. 
    
And what really is probably the most important thing I can do right now to keep people in their homes is to make sure the economy is growing so that they don’t feel job insecurity.  That’s probably the thing that’s going to strengthen the housing market the most over the next couple of years.  If we’ve got a growing economy, unemployment is gradually being reduced, then people are going to feel more confident; they’re going to be able to make their mortgage payments; new — homeowners, people who are potentially buyers of homes, are going to say, you know what, I don’t mind entering the market because I think things have sort of bottomed out — that starts lifting prices and that gets us on a virtuous cycle instead of a negative cycle.
    
But it’s going to take some time.  We’re working our way out of overbuilding in the housing market, a lot of not very sensible financial arrangements in the housing market.  And we’ve got to get back to sort of a traditional, more commonsense way of thinking about housing which is, if you want a house you got to save for a while.  You got to wait until you have 20 percent down.  You should go for a mortgage that you know you can afford.  You’ve got to — there shouldn’t be any surprises out there, right?  That kind of traditional thinking about saving and thinking about the house not as something that is always going up 20 percent every year and you’re going to flip and take out home equity loans and all that — we’ve got to have a different attitude, which reflects what you talked about, more of an attitude that this is your home.  This is not just a way to make quick money.

The President admits that HAMP didn’t work, in fact that it came in helping a fraction – about 10% – of the borrowers promised. He also claims that in a multi-trillion dollar market, you can’t help everyone who needs help. This is untrue. Banks and borrowers actually both have an interest in keeping the home occupied, and under circumstances where the government actually facilitated solutions instead of hoping that the banks would come to them on their own, this could get fixed. Since unemployment will likely remain high at least for the next year, we’re in the negative cycle, and foreclosures – as well as people locked into their homes because they can’t move to find work – plays a role in that.

But the President and his economic team chose not to force those solutions. They chose not to do what’s necessary. And as a result, we still have a broken housing market, which will drag on recovery as long as it remains broken.

The millions of people trapped in this negative cycle may have other concerns on their mind than voting. They may place the blame on the President and the party in power for their troubles. They hold the fate of the election in their hands far more than a couple liberal bloggers.