Another critic is Harvard University Professor Elizabeth Warren who thinks the Home Affordable Modification Program (HAMP) is just kicking the can the road. This exchange is classic and speaks to Geithner's inabilities.
The biggest source of concern remains the growing numbers of underwater borrowers — now about one-third of all American homeowners with mortgages, according to Economy.com. The Obama administration clearly grasped the threat as it created its program, yet opted not to focus on writing down loan balances.
"This is a conscious choice we made, not to start with principal reduction," Mr. Geithner told the Congressional Oversight Panel.
"We thought it would be dramatically more expensive for the American taxpayer, harder to justify, create much greater risk of unfairness.”
Mr. Geithner's explanation did not satisfy the panel's chairwoman, Elizabeth Warren.
"Are we creating a program in which we're talking about potentially spending $75 billion to try to modify people into mortgages that will reduce the number of foreclosures in the short term, but just kick the can down the road?" she asked, raising the prospect "that we'll be looking at an economy with elevated mortgage foreclosures not just for a year or two, but for many years. How do you deal with that problem, Mr. Secretary?"
A good question, Mr. Geithner conceded.
"What to do about it,” he said. "That's a hard thing."
Back in July economist Dean Baker offered this assessment on solving the housing crisis in the UK Guardian:
The folks in Washington have developed a series of complex mortgage modification schemes designed to keep people in their homes. George Bush put forward the first plan in the summer of 2007. It was entirely voluntary for lenders and came with no government money.
Last summer, Congress developed a package that committed up to $300bn in loan guarantees to support modification efforts. Eight months after the plan went into effect, there were fewer than 1,000 applications and only 52 completed modifications.
The most recent set of proposals came from President Barack Obama in February. This plan focused more on giving incentives to servicers,offering them $1,000 to carry out a modification and an additional $1,000 for each year that the homeowner stays in their home. This programme also appears to be having a limited effect, as foreclosure rates hit a new high in the second quarter of this year.
There is an easier route. In recognition of the extraordinary situation created by the housing bubble and its collapse, Congress could approve a temporary change to the rules governing the foreclosure process. This change would give homeowners facing foreclosure the right to stay in their homes, paying the market rent for a substantial period of time (eg seven to 10 years).
This change would have two effects. First, it would immediately give housing security to the millions of families facing foreclosure. If they like the house, the neighbourhood, the schools for their kids, they would have the option to remain there for a substantial period of time.
Also by keeping homes occupied, this rule change can help prevent the blight of foreclosures that has depressed property values in many areas. Vacant homes are often not maintained and can become havens for drug use and crime.
The other effect of a right-to-rent rule would be that it would give lenders substantially more incentive to modify a mortgage. Under the rule, the lender could still carry through with the foreclosure process and take possession of the house. The lender would also be free to resell the property, but the former homeowner would still have the option to remain as a tenant, paying the market rent for the period specified in the law.
Since a house that comes with a renter attached is much less valuable to the bank, foreclosure would be a much less attractive option. Therefore lenders would have more incentive to try to work out a modification plan that allowed the homeowner to remain in their house as an owner.
The main argument that has been raised against a right-to-rent law is that it would interfere with the sanctity of contracts by changing the terms of enforcement after the fact. While it is important to have clear law on such issues, there is precedent for such changes. During the Great Depression the government imposed a complete moratorium on foreclosures, a move that was upheld by the courts.
Another option is to encourage loan servicers to write down principal. This is the proposal of Mark Zandi, the chief economist at Moody's. Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. The problem is that bailouts are unpopular and perhaps now politically infeasible. Still, the Administration's tack does seem to be as Elizabeth Warren noted "to kick the can the down the road." Translation we are allowing the foreclosures to continue because we are not tackling the underlying problem of negative equity that perhaps a third of all US mortgages confront thus putting a drag on the economy over a longer term.
The Obama Administration wasn't responsible for the housing crisis but it's increasingly clear it will be held responsible if its programs do not meet with the requisite success. And part of the problem is a Treasury Secretary who seems to be afraid to make hard choices.