The Treasury Department has a favorite explanation for why its anti-foreclosure programs didn’t keep more people in their homes: the mortgage banks were too messed up to put the plans into effect.
Officials made that claim again in The New York Times’ assessment on Monday of the Treasury Department’s efforts to assist homeowners after the financial crisis.
But how accurate is this version of history? Could the Treasury Department be overstating the dysfunction in the banks to distract from its own failures or lack of will?
It’s important to understand that when introducing its programs, the government simply had to have the cooperation of the banks. They possess all the details of the loans, they collect mortgage payments, and their employees interact with borrowers when they fall on hard times. To hear the Treasury Department tell it, the banks were woefully ill equipped for the nettlesome task of assisting borrowers who had defaulted, or were close to falling behind.
From Binyamin Appelbaum’s article:
“They were bad at their jobs to start with, and they had just gone through this process where they fired lots of people,” said Michael S. Barr, a former assistant Treasury secretary who served as Mr. Geithner’s chief housing aide in 2009 and 2010. “The only surprise was that they were even more screwed up than the high level of screwiness that we expected.”
No doubt, there were substantial shortcomings in the banks’ mortgage servicing departments. But relying too heavily on this excuse can oversimplify the issue.
First, mortgage servicing after 2008 was concentrated in the hands of three large banks. That significantly reduced the number of institutions the Treasury Department had to deal with when getting its plans implemented. Moreover, one of those dominant banks, Wells Fargo, has long had a reputation in the market for being very efficient at mortgage servicing. At the least, this undermines the portrayal of an industry as uniformly hapless.
Second, from 2009 to 2011, despite the weak housing market, the major banks were taking in enormous amounts of mortgage revenue. In theory, the banks had more than enough money to invest in the systems and people needed to modify far more mortgages. The banks earn revenue when they sell mortgages to the government for a gain and they also earn money from regular servicing payments. Wells Fargo, Bank of America and JPMorgan Chase together earned $88 billion from those two sources from 2009 to 2011, according to an analysis of their financial statements.
Third, helping stressed mortgage borrowers was not an activity that was somehow foreign to the financial industry. Certain lenders in earlier subprime booms had learned how to get borrowers current on their loans. While the housing crisis presented problems on a scale that was exponentially larger, there were effective blueprints in the system for dealing with borrowers who had missed payments. Indeed, Countrywide, a top mortgage originator during the housing boom, said it had a special “home retention” unit in the early days of the crisis. In its 2007 annual report, its last before being assumed by Bank of America, Countrywide said:
Our Home Retention unit works with delinquent borrowers to bring their mortgages back to current status and avoid foreclosure if possible. Our objective in the loss mitigation process is to develop foreclosure prevention options that have the highest probability of successful resolution for the borrower and ultimately the investor. Countrywide uses multiple tools to evaluate borrower needs and reconcile them with investor guidelines in order to offer the borrower the most advantageous workout possible. These options include, but are not limited to: payment plans, payment forbearance, loan modification, acceptance of deed to the collateral property in lieu of foreclosure and acceptance of the net proceeds from the borrower’s sale of the property (also referred to as a short sale).
This is not to say that Countrywide was somehow ready to start slashing mortgage principals for thousands of troubled borrowers. But it does show that people knew what tools could be used. And these tools were well understood going into the crisis.