At the end of January 2009, less than a month in the Senate and a brand-new member of the Senate banking and housing committee, Jeff Merkley saw a problem in how the Obama administration was planning to deal with the Great Recession's mortgage crisis.
"Folks in key positions at the top of the Obama financial team," he cautioned, "are more oriented to Wall Street than families."
Despite Merkley's concerns, the administration proceeded with its Home Affordable Refinance Program and Home Affordable Modification Program, promising to adjust 4 million mortgages to keep families in their homes. Endangered homeowners would get in touch with their mortgage holders, get their payments reduced with the help of $50 billion in federal money set aside for the purpose, and both families and neighborhoods would be stabilized.
By that summer, the phones in government offices — and some at The Oregonian/OregonLive — were swamped by calls from applicants complaining about banks losing applications and documents, repeatedly asking applicants for the same information, telling homeowners not to make mortgage payments because they were applying for modification and then telling them they were in foreclosure because they hadn't made payments. By the end of 2009, Merkley warned, "There are some incredibly telling signs that this is not going well. The program is, so far, a huge disappointment."
By the end of the next year, the program that had promised to modify 4 million mortgages had totaled just over half a million. To the House financial services committee, Jack Schakett, Bank of America's executive for credit-loss-mitigation strategies, conceded "ineffective communications with customers, shortcomings in document maintenance, misunderstandings about program requirements and the inability to comply by some borrowers."
In 2011, Merkley introduced a bill to require banks to provide a single contact for applicants, to allow homeowners to refinance with different providers and to let bankruptcy judges modify the terms of mortgages, as they can with other debts. By then, Republicans had taken the House, and the issue was dead.
A report issued at the end of last month by Christy L. Romero, special inspector general of the Troubled Asset Relief Program, explained just how the program — which after six years has modified 887,000 mortgages, instead of 4 million — ended up as less profit than loss. With participation voluntary for the banks, all banks rejected the majority of applications — led by Citibank with 87 percent — and roadblocks in the process led virtually all applicants to be rejected the first time around. The report told of homeowners improperly rejected four times before finally, with legal help, getting approved.
"We are constantly seeing problems," Romero told The New York Times, "with the way servicers are treating homeowners and not following the rules. I don't understand why there hasn't been a stronger policing from Treasury on servicers."
To Merkley, his six-year-old doubts and objections about the program have all been painfully confirmed.
"The program was and is poorly defined," the senator said this month, and he holds to his diagnosis of the basic problem: Obama's economic advisers — Treasury Secretary Timothy Geithner and National Economic Council Chairman Larry Summers — "were more concerned about strengthening the banks than helping families."
Partly as a result, the ultimate decisions were all made by the mortgage holders, often distracted by their collecting fees on overdue payments.
"There were fundamental conflicts of interest and poor design," concluded Merkley. "There is an incentive to prolong the process. The only point when it's in the interest of the banks (to complete the modification) is when a family is just about to go under."
Which, not occasionally, was too late.
The bail-out programs have now been extended through 2016, but nobody expects them to make much progress toward 4 million modifications, or in fact to make much progress at all. Merkley reports his office now gets only about one call a month on modifications — most of the people who needed help having found another approach or, more likely, having left their house.
Instead, Merkley thinks about what could have been the effect of the 3 million mortgage modifications that were promised but never achieved.
"That's a lot of families not relocated, of kids staying in their schools, of marital tensions that would have been directly reduced," he says. "It would have had a strengthening effect on the economy. It would have been a real win-win."
Instead, with the design and operation of the program, and how hard it was for homeowners to get help, the recovery didn't move as much.
But a lot of American families did.
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David Sarasohn's column appears on Wednesdays and Sundays. He blogs at davidsarasohn.com.
