We sometimes hear that Barack Obama and his top people read The New Republic, but they must not have been paying attention during the campaign when we ran an article titled “History Lesson: FDR Solves the Mortgage Crisis,” by Andrew Jakabovics. If they had done so, they might have proceeded a little differently in dealing with the current crisis and with the controversy over foreclosures.
In 1931, the United States began to suffer from a foreclosure crisis similar to the one today—in that year, 1.4 percent of all homeowners lost their homes. In 1932, President Herbert Hoover responded, typically, with a Federal Home Loan Bank that was supposed to provide money to lenders rather than to homeowners. This approach failed to stem the crisis, and it helped lead to the election of FDR.
Once president, Roosevelt decided to take a different path. In 1933, he set up the Federal Home Owners’ Loan Corporation (HOLC), which loaned directly to homeowners. The HOLC bought up existing loans for less than their original appraised value, and then loaned money at longer-term rates to people who were already in default on their mortgages. It wasn't a great deal for banks: They had to write-down the value of their loans; but they went along with it because it gave them a chance to receive something rather than nothing. And the program, which operated primarily between 1933 and 1936, and was very popular, ended up owning about 14 percent of the value of existing mortgages. Today, however, President Obama's approach more closely mirrors Herbert Hoover's than FDR's.
As Obama took office, about one in ten homeowners were in default on their mortgages, and as many as six million homes were expected to go in foreclosure. But instead of dealing directly with homeowners, Obama has relied primarily on efforts to encourage the banks to make loans and rewrite existing ones. The government has bought up toxic assets in order to free up loan capital and has offered financial incentives for banks to reduce homeowners’ monthly payments, but neither initiative has significantly stemmed the rate of foreclosure. According to housing expert Pat Garofalo of the Center for American Progress, the problem with the administration’s Home Affordable Modification Program is that “banks have dragged their feet getting borrowers into the program.” In 2009, foreclosures went up 21 percent.
As reports have circulated that banks ignored the law while obtaining foreclosures, many Democrats have called for a foreclosure moratorium. But the Obama administration has balked. In a Huffington Post article, Housing Secretary Shaun Donovan has responded by warning that a moratorium, even though temporary, would “do far more harm than good—hurting homeowners and homebuyers alike at time when foreclosed homes make up 25 percent of home sales.” Appearing on PBS, Treasury Secretary Tim Geithner called a moratorium “very damaging.”
Maybe so, but it’s worth noting that those advocating a moratorium have been calling for a temporary freeze while the government develops a more effective approach. In their statements, though, Donovan and Geithner seem to be referring to the effects of an extended moratorium. It’s also true that temporarily preventing banks from throwing people out of their homes wouldn’t necessarily depress home prices. And, further, by leaving the policy on autopilot we’re allowing vast numbers of avoidable foreclosures to go forward unnecessarily, something that doesn’t help people as much as it helps banks.
A recovery will depend on increasing consumer demand, not boosting bank capital. And to do that, the administration needs an effective program that will allow working Americans to liquidate their debts without being thrown out on the streets. In the end, Americans may have to look elsewhere—toward, for instance, public investment in green technology—rather than to the revival of the housing market in order to achieve a full recovery.
And what about politics? On that level, the administration’s approach makes no sense at all. Among the top ten states suffering from foreclosures are Nevada, Florida, California, Michigan, Arizona, Ohio, Colorado, and Indiana. These are all electorally important states where many Democrats (think of Harry Reid) are in deep trouble, and opposing a moratorium isn't going to help.
The administration seems to be convinced that their main problem is with something called the “left.” Why else would they have their housing secretary publish his comments in the Huffington Post, or Geithner make his case on "Charlie Rose"? But it’s not. The left will support Obama and Democrats. It’s the working-class voters who reluctantly backed Obama in 2008, but have been turned off by the impression that the administration cares more about the banks than about them. And there’s little in the administration’s rhetoric to persuade them otherwise.
In his defense of the administration’s position, Donovan reverts to Hooverism by offering moral injunctions rather than real help: “Banks need to provide more help, more people, more resources to those families facing a crisis long before they ever get to a foreclosure—so more families can keep their homes. And where foreclosure is not avoidable, having been processed legally and appropriately, banks should help families transition to sustainable housing situations with dignity.” (Italics mine.)
Roosevelt didn’t rely on bankers’ goodwill. He understood that in a severe downturn, government has to act directly, whether in providing jobs or preventing people from losing their homes. He also knew who his constituency was: His was the party of the common man. The Obama administration, meanwhile, worries about the people who listen to "Charlie Rose." And they and the Democrats are going to pay a steep price for their inattention to common concerns this November.