A Needless DefaultMost of this comes from loans that are a part of the bond market which maintains our credit rating.
The 700bn were loans that were paid back.
The Obama administration "viewed foreclosures as an instrument of housing markets clearing," Damon Silvers says. "And they thought foreclosures were unavoidable, in order to maintain the fiction that these loans were worth what banks said on the balance sheet."
Silvers explains that only minimal taxpayer funds, far less than the total needed, were devoted to preventing foreclosures; banks never had to kick in their own share. "In order for the economy to be revived, we needed to write down the principal on these loans," he says. "The decision that was made amounted to debt peonage on U.S. families to the benefit of the banks."
Indeed, the administration missed or delayed several opportunities to provide relief and prevent foreclosures while also boosting the economy. During the 2008 presidential debates, John McCain proposed a $300 billion plan to buy up mortgages and renegotiate their terms, similar to the Depression-era Home Owner's Loan Corporation. There were also bipartisan calls for a mass refinancing program for underwater homeowners, which would save them billions in monthly payments. Ultimately, the administration never tried to buy mortgages (though plenty of hedge funds did), and their refinancing program didn't produce even its meager results until 2012, years after the crisis erupted.
Two critical moments perfectly illustrate the Treasury's priorities on HAMP and housing. First, the department laid out precise program guidelines-in a thick handbook-that banned many of the practices in which servicers engaged. But the Treasury never sanctioned a servicer for contractual non-compliance, and never clawed back a HAMP incentive payment, despite documented abuse. In the summer of 2011, the Treasury temporarily withheld incentive payments, but they would eventually hand over all the money. If the program had actually put borrowers first, they could have used sanctions to force better outcomes.
Then, in October 2010, it was revealed that, in order to verify standing to foreclose, servicers forged and backdated assignments, and "robo-signed" affidavits attesting to their validity without any knowledge of the underlying loans. Almost immediately, the top five servicers paused their foreclosure operations. Nobody knew how much legal liability servicers had, but with state and federal law enforcement investigating and potentially trillions of dollars in mortgages affected, the numbers were expected to be high.
At the FDIC, Sheila Bair immediately saw this as an opportunity. "When robo-signing raised its ugly head, I sent a proposal to Tim [Geithner]," Bair says. "I called it a super-mod. Any loan that's more than 60 days delinquent, take it down to face value-just take it down. Write off that principal. And if they held onto the house and kept making their mortgage payment, any subsequent appreciation they would have had to share with the lenders. But just take it down."
But the Treasury didn't use this newfound leverage to force losses onto the banks. Instead, they were more concerned with a "global settlement" with bankers to defuse the issue, limit bank losses, and make the situation manageable for the perpetrators.
After a perfunctory investigation, state and federal officials reached an agreement with the top five servicers, called the National Mortgage Settlement. Despite claims that a million homeowners would get principal reductions as a result, in the end only 83,000 received such help. Other settlements for fraudulent conduct delivered no jail time, the payment of penalties with other people's money, empty promises to never misbehave again, and cash awards to victims that were so low some didn't even bother to cash the checks. The administration refused to use the leverage from bank mistakes to the benefit of borrowers, because they didn't want to hurt banks. "We were just seeing the world through two different prisms," Bair says.
