Barofsky on Principal Reduction

We wrote in July,

"TARP and HAMP, programs of the Obama White House and its Treasury Department, were abject failures which threw billions at policies that benefited precious few homeowners. First and foremost, these programs were hare-brained in their design and therefore doomed to fail from the start. We've written before about the unregulated mortgage servicing industry and it being a stone wall to any rational, large scale mortgage resolution effort. Commentators like Joe Stiglitz described the public-private partnership idea for purchasing troubled mortgage assets as "ersatz capitalism." To let TARP and HAMP go forward without a legal plan and funding to bring the mortgage servicers into line with the government's objective was simply dim witted or cynical."

Today, Reuters reports these quotes from Neil Barofsky.

By late 2009, it was becoming apparent that HAMP would never come close to its stated goals. The program was designed poorly, and Treasury refused to hold the banks accountable for the abuses to which they subjected homeowners in the program. In one meeting I attended, after Secretary Geithner was pressed about the flaws in the HAMP program, he justified Treasury’s actions by explaining that the program would “foam the runway” for the banks by extending out the foreclosure crisis over time. In other words, Treasury was far more concerned with using HAMP to soften the blow of the housing crisis for the banks – just as the FAA once recommended spreading protective foam over a landing strip to prevent a disastrous crash of a malfunctioning airplane – than with helping millions of struggling homeowners. Now, three years later, with a tightening presidential election and a Democratic base disillusioned by the government’s abandonment of its promise to help homeowners (less than 8 percent of the funds originally allocated in TARP for foreclosure relief has actually been spent), Geithner and the administration would like to present themselves as having undergone a conversion.

Let’s be very clear about what is going on here. This is not a conversion – it is a political convenience. Geithner may well be correct when he wrote in a letter to DeMarco that an effective principal reduction program would “help repair the nation’s housing market” and that the refusal to do so is not “in the best interest of the nation,” but it is his own policies that are primarily to blame for where we are today."

Come crunch time in election season, look for a politically convenient, economically bad deal to be done for mortgagee votes in another late innings bailout with more taxpayer money.