The anger that grew on how the banks were dealt with, along with the amount of money being spent and everything else, came back to haunt the Obama administration. The midterms came about, and, I mean, what was the reality that they found themselves in?
Well, I think by 2010, of course, what people had seen was massive assistance to the financial sector. Yet at the same time, homeowners, people without jobs were left in many respects to fend for themselves. So, you know, there was anger that had built up, and that always accrues to the detriment of those that are in power. But I do think there was a golden opportunity lost in the wake of this crisis to bring in fresh ideas, a fresh team essentially, to examine what we had done over the last two decades and to talk about how we could reverse the damage and remake the economy so that we had a financial system that could support real growth in this country.
And, you know, it really is striking. Take a look, for just a minute, about what we did for banks and what we did for homeowners. Trillions of dollars going to the banks -- 24 separate programs of financial assistance, TARP obviously being the crown jewel or the centerpiece of that program, $700 billion.
For homeowners, we had a series of anemic efforts to try to help people stay in their homes. Less than a million people have been helped by HAMP [Home Affordable Modification Program], which is the main program to help people modify their mortgages. So we are now in a place today where 11 million households owe more on their mortgages than their homes. The first wave of foreclosures in this country were in the people that got all those loans that probably never should have been made. The second wave happened when millions of people lost their job. And now the third wave that is happening are millions of people who are underwater so badly that they just know that there is no hope that they will ever have equity in their homes, and they are beginning to walk away. Those homeowners, those underwater homeowners, are underwater by about $700 billion, and not enough has been done to help them.
It's striking that we did so much for the banks. Yet what we haven't done is lowered the principal amount for homeowners so they could stay in their homes so we could restart the housing market. And it really is kind of a striking dichotomy between what the most powerful banks got and what tens of millions of homeowners got.
... As you describe it yourself, you're a guy who likes to run into burning buildings. Why do you do this? You're past normal retirement age. You've got resources. You've got money.
There are several things. It's one of the few activities where you can do well and do good at the same time. Take steel. We made a lot of money in the steel industry.
And you own some 20 percent of the U.S. steel industry.
More at one point. But if you ask Leo Gerard, the head of the steelworkers union, he's not the slightest bit upset that we made money. Why? Because he knows we saved 100,000 jobs, because the steel industry was going to go down the drain, except that steel workers and we developed a whole new frame of reference for labor and management relations. I feel really good about that. ...
This is where it's tricky for people, because there is pain when you come in and turn a company around. Some people lose jobs. In the case of banks, some people are proposed off. ... Some people lose their businesses.
First of all, our institutions percentage-wise have been far more active and more successful in doing loan modifications than other banks and other melded services comparable. Because we think that's the right thing to do, both from the lender point of view and from the homeowner.
In other words, you go in and you write down the value of the loan and get the person paying and get them out from underneath.
... Sometimes it just needs interest rate reduction. Sometimes it just needs extending the mortgage duration. Sometimes it needs to roll in this payment.
But there are cases where these badly packaged mortgages, the guy never should have been in. The home is probably three times more expensive than the person could ever afford. There's no point in modifying those loans. It never should have come, and especially if the guy is also out of work. ...
Why not bail him out rather than the banks?
The government is trying its best to bail him out, but if you don't have healthy banks, nobody will have loans. You have to have a banking system to have an economy function. So I don't think the two are inconsistent.
Remember the shareholders of the old banks, the ones that FDIC took over, some of which we turned around? They all got wiped out, and in many cases, the subordinated debt holders got wiped out.
So it isn't that there was no penalty to the owners of the bank. They suffered mightily. Mostly lost all of their investments. The individual bankers, many of them lost their jobs too. So it isn't that nobody in the banking world suffered.
But it's certainly an area that was not a success.
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.
And did we take our eye off the prize of housing? You've written about that recently, about how important it was, and perhaps we didn't push hard enough there, because it's at the center of the crisis really. Tell us a little bit about where your thoughts are on that.
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.
The housing market and how to deal with it was always key at the center of this. What are your thoughts now, looking back, at the problems in dealing with that?
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.
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