The Huffington Post described a scene in a forthcoming book by Neil Barofsky, the former Special Inspector General of TARP, where Treasury Secretary Timothy Geithner delivered a string of F-bombs during a discussion about transparency. I’ve read the book, and while that’s an amusing diversion, it’s nowhere near the headline story.
The important moment in the book for me comes conveniently after Barofsky recounts this FDL News item, one of my HAMP horror stories. Barofsky shows how HAMP’s faulty design led to all sorts of problems like this, with trapped borrowers, extended trial payments, no-doc modifications, and eventually unnecessary foreclosures. Barofsky mused that Treasury didn’t care about the suffering of borrowers under HAMP, and the issue came up in a meeting with the Treasury Secretary, which was also attended by Elizabeth Warren, then the head of the Congressional Oversight Panel, another TARP watchdog.
Warren asked Geithner repeatedly about HAMP. After several evasions, Geithner said about the banks, “We estimate that they can handle ten million foreclosures, over time… this program will help foam the runway for them.”
This is a revelatory moment for Barofsky in the book, and should be for everyone reading. Geithner’s concern, first of all, was with how the banks would respond to the program, not how homeowners would respond to it. In fact, homeowners are quite besides the point. Regardless of their situation, they will be one of the 10 million foreclosures, in Geithner’s construction. His goal was merely to space out the foreclosures and give the banks time to earn their way back to health, mostly through the other parts of the bailout, that enabled them to earn profits.
This is a classic “extend and pretend” scheme; banks can extend the time frame for their losses, and pretend they were financially strong in the meantime. We previously had evidence that Geithner and the Treasury Department thought this way. In August 2010, a Treasury official (which Barofsky outs in the book as Geithner) made basically the same defense of HAMP, that it would give time for the banks to absorb foreclosures rather than have them come on the market all at once. But that came as a defense of the program after the fact. This scene with Warren and Barofsky came in mid-2009, when the program was in its infancy. And it’s prospective, not retrospective. It’s not that Treasury came up with a justification after the performance of HAMP faltered. It’s that it was designed this way.
As Barofsky says, HAMP was not separate from the bailouts, it was part of them. It squeezed a few extra payments out of borrowers and then allowed banks to do with them whatever they wanted. It stretched out the foreclosure crisis, by design. In fact, by the end of this, HAMP may not help even the borrowers secure in permanent modifications. Not only are the modifications of inferior quality, and not only have they led to high re-default rates already, but most of the permanent modifications are not permanent at all. Barofsky notes in the book that they have five-year time limits, with interest rates rising and payments returning to their original size at that time. So in 2014 and 2015, we’re going to see hundreds of thousands of recasts, like on an adjustable-rate mortgage. Maybe the borrowers will have righted their financial ships by then, or saved up enough to move on. But the more logical scenario is for more defaults at that time. But by then, the banks will have built their fortress balance sheets (with lots of government help) and won’t mind another half a million foreclosures.
This confirmation of the design of HAMP is just one of the many revelatory moments in a book from a man thrust into the position of a Washington insider, willing to tell the tale. It’s well worth your time when it goes on sale next week.
I have attempted to contact Elizabeth Warren to corroborate this meeting, and will let you know if I hear back.
UPDATE: Yves Smith has a preview of the book as well.