The Foreclosure Crisis

Look, on this it depends how you measure it. As many as 2 million people got substantial reductions in their monthly payments, and that's probably by a factor of 1,000 more than participated in any government housing program. And the launching of that program helped to get a lot of people private modifications.

Second, if the government had not stepped in outside just that narrow mortgage program, if the government had not stepped in through Fannie [Mae] and Freddie [Mac], through other parts of their credit market to sustain the mortgage market, I believe that you would have seen for housing finance the same thing you saw for consumer finance all over the map. Auto loans totally dry up. Credit card loans dry up, lines of credit for small business getting pulled, yanked, people going bankrupt. I believe that you would have had 50, 75 percent of this country unable to get any mortgage whatsoever. We would have potentially had much more devastating impacts on the housing market.

Now, that said, we still have a huge negative equity problem in the country. We still have a $20 trillion market that lost $5 trillion of its value. We have a lot of households whose balance sheets got wrecked because their number one asset went down so far in value, and what do you do about that? It's really not easy to answer that question of what can the government do to solve that. And that is a problem that we continue to struggle with, and we probably will for sometime.

Yeah, I think housing is a really tough issue. And at the time, we did -- again, the administration did careful work, sort of looked at the academic literature and said the main thing, if what you want to prevent are foreclosures, the main thing is to lower people's payments; that what puts people into foreclosure is often they lose their job or they get sick or they get a divorce, something that makes them unable to afford their payments. So we had designed a program that basically tried to lower payments for people that got into trouble.

But I think what the new research is showing us is that maybe there's a problem from homeowners just being what we call underwater, which means that their mortgage is bigger than what their house is now worth, because house prices have come down.

And what that research seems to say is that heavy debt loads that come with things like being underwater on your mortgage does tend to just hold back consumer spending. So one of the things that I've been thinking about is maybe we did need to be more aggressive in dealing with so-called negative equity. What do you do with these homeowners?

And the problem there, I could never support the government just doing it, to say: "Well, we're going to write down your mortgage. Here, we're going to make the bank whole so they don't lose any money, and the only people that lose money will be the taxpayer." That just didn't seem right. But I think something that forces financial institutions to write down underwater mortgages, I think, would be a sensible thing to do.

Well, the housing market is and was a terrible morass, where we've got 5, 6 million vacant homes, construction completely dormant because we had a huge bubble and we got way overbuilt and we got way excess debt and people in over their head. It was a $25 trillion market that fell down to a $20 trillion market. Once you start thinking of numbers that big, you realize the government is not in control of this market. The government can't set a price floor on this market. ...

So the Congress in, I think, '07 passes the HOPE for Homeowners Act. And it's supposed to help maybe 500,000 people, and it helps less than 500 people. And a series of government policies, before the Obama administration come in and very few people use them -- we then come up with a policy that, if you had told me at the time you'll get close to 2 million people helped, I would have thought that was pretty good.

If we made a mistake, it was in saying that it might help up to 6 million people, because then when you look back you say, "Well, it's only 2 million" -- and the one thing that we just didn't -- it didn't cross our minds was the -- we came up with a plan to modify people's mortgages, people who were paying, and if you could get it affordable, would allow them to have lower payments.

The banks got onboard with that idea. It never crossed our mind that the same bank that was agreeing to modify the person's payment -- let's say cut their monthly payment by a third -- that a different side of the same bank was going to turn and say: "Well, you only paid two-thirds of your monthly payment. Therefore we are going to launch a foreclosure against you." That is a so-called dual-tracking problem. And I don't know if it was because of lack of oversight and controls within these banks or what was going on, but that proved to be extremely detrimental. And we are still trying to figure out why did that happen. I think the banks are still trying to figure out why did that happen.