The other staggering moment from the President’s Twitter townhall came when he was actually asked a question about housing, which sets the townhall apart from practically every White House briefing over the past two years. Obama probably has a sense that the housing market is an undercovered topic, and nobody really understands the extent of the damage perpetrated by the mortgage industry. So he launched into his set remarks about how the Administration has a variety of programs to help unlucky or underwater homeowners, and that while they have been successful, they haven’t been enough. He actually specifically said that principal reductions need to be used as a means to keep people in their homes. The Administration recently started a principal reduction program called the Principal Reduction Alternative (PRA), which early in its launch has reduced principal for almost 5,000 borrowers on average by $69,000. Obviously this is miniscule compared to the problem, though it’s in its early stages. I had a sense that this feint toward principal reductions was designed to preface the imminent settlement between banks, state and federal regulators over foreclosure fraud, which now includes principal reduction again, and has a new topline number of $60 billion (I guess the $8.5 billion BofA settlement with investors made a sector-wide $20-$25 billion settlement sound puny).
But then there were two amazing comments. The President said, and I’ll have to get the transcript for an exact quote, that his foreclosure relief program was able to create “millions” of loan modifications. This is untrue. But he made a very specific point. He said that he was including both modifications through HAMP and private modifications that may otherwise not have been made.
It’s a real stretch, but not an unusual argument from the defenders of HAMP. We know the real stats; Treasury just released them. There have been 731,000 permanent modifications started, with 633,000 still active. This falls well short of “millions.” But the Administration likes to say that HAMP created a standardized system for loan modifications and allowed the industry to offer private mods in a more efficient manner. It’s difficult to get good statistics on private loan modifications. But if there were a serious jump in loan mods from before HAMP and after HAMP, it’s likely to be more attributable to the fact that there are more underwater borrowers than anything else. Given the churn of foreclosures and the way in which servicers have an incentive to foreclose rather than modify, it’s highly unlikely that “millions” of borrowers got any kind of loan modification, let alone that HAMP had something to do with those private mods. This is just bad PR spin.
Obama said one other significant, interesting thing about housing. He said that, in response to a follow-up question, “sorting through who owns what in the housing market is tough,” and that everyone knows that Wall Street sliced and diced these mortgages and did not do a good job with documentation. Actually, I don’t think everyone knows that unless they’ve paid pretty close attention. But it’s a remarkable thing for the President to be saying. He’s buttressing the core complaints of the foreclosure fraud community! Now, it was an aside, it was an example of how difficult it has been to find a solution that keeps people in their homes, but the implications of the remark are pretty serious. The President is coming very close to admitting that nobody knows who owns what in the largest market in the world, the US residential housing market. Shouldn’t this headline emblazon the top of every newspaper in America tomorrow?
Anyway, just by getting the President to actually talk about housing, the Twitter townhall provided a valuable service.
UPDATE: I’m going to put the full text of Obama’s remarks on the flip. Boldface mine.
MR. DORSEY: Mr. President, 6 percent of our questions are coming in about housing, which you can see in the graph behind me. And this one in particular has to do with personal debt and housing: “How will admin work to help underwater homeowners who aren’t behind in payments but are trapped in homes they can’t sell?” From Robin.
THE PRESIDENT: This is a great question. And remember, I mentioned one of our biggest challenges during the course of the last two and a half years has been dealing with a huge burst of the housing bubble.
What’s happened is a lot of folks are underwater, meaning their home values went down so steeply and so rapidly that now their mortgage, the amount they owe, is a lot more than the assessed worth of their home. And that obviously burdens a lot of folks. It means if they’re selling, they’ve got to sell at a massive loss that they can’t afford. It means that they don’t feel like they have any assets because the single biggest asset of most Americans is their home.
So what we’ve been trying to do is to work with the issuers of the mortgages, the banks or the service companies, to convince them to work with homeowners who are paying, trying to do the right thing, trying to stay in their homes, to see if they can modify the loans so that their payments are lower, and in some cases, maybe even modify their principal, so that they don’t feel burdened by these huge debts and feel tempted to walk away from homes that actually they love and where they’re raising their families.
We’ve made some progress. We have, through the programs that we set up here, have probably seen several million home modifications either directly because we had control of the loan process, or because the private sector followed suit. But it’s not enough. And so we’re going back to the drawing board, talking to banks, try to put some pressure on them to work with people who have mortgages to see if we can make further adjustments, modify loans more quickly, and also see if there may be circumstances where reducing principal is appropriate [...]
MR. DORSEY: So we have a follow-up question to your answer about homeowners being underwater. And this one came in under 10 minutes ago from Shnaps: “Is free-market an option? Obama on homeowners underwater: have made some progress, but plus needed looking at options.”
THE PRESIDENT: Well, when Shnaps — (laughter) — when Shnaps talks about free market options, I mean, keep in mind that most of this is going to be a function of the market slowly improving because people start having more confidence in the economy; more people decide, you know what, the housing market has kind of bottomed out, now is the time to buy. They start buying. That starts slowly lifting up prices, and you get a virtuous cycle going on.
So a lot of this is going to be determined by how well the overall economy does: Do people feel more confident about jobs? Do they feel more confident that they’re going to be able to make their mortgage? And given the size of the housing market, no federal program is going to be able to solve the housing problem. Most of this is going to be free market.
The one thing that we can do it make sure that for homeowners who have been responsible, didn’t buy more house than they could afford, had some tough luck because they happened to buy at the top of the market, can afford to continue to pay for that house, can afford their current mortgage, but need some relief, given the drop in value — that we try to match them up with bankers so that each side ends up winning. The banker says, you know, I’m going to be better off than if this house is foreclosed upon and I have to sell it at a fire sale. The mortgage owner is able to stay in their home, but still pay what’s owed.
And I think that that kind of adjustment and negotiation process is tough. It’s difficult partly because a lot of banks these days don’t hold mortgages. They were all sold to Wall Street and were sliced and diced in these complex financial transactions. So sorting through who owns what can be very complicated. And as you know, some of the banks didn’t do a very good job on filing some of their papers on these foreclosure actions, and so there’s been litigation around that.
But the bottom line is we should be able to make some progress on helping some people, understanding that some folks just bought more home than they could afford and probably they’re going to be better off renting.