The negotiations between mortgage servicers and state and federal officials are a distracting sideshow to the serious debate we should be having about how to solve the nation's chronic housing problems.
Endless meetings, drafts of dueling documents, hand-wringing, finger-pointing solve nothing.
The sad fact is millions of people have mortgages they can't afford, no matter how much their monthly payment is reduced. It may sound harsh, but the national interest is not served by policymakers' hatching yet another bad idea for how to keep those people in their homes.
"Everybody has been obsessed since the crisis began on preventing foreclosures. Everyone keeps coming up with these magic bullets, some scheme that is going to prevent 1 million foreclosures at little or no cost to anyone," said Paul Willen, a senior economist and policy adviser in the Federal Reserve Bank of Boston's research department. "But there is no cheap, easy way to fix this."
Policymakers don't want to admit that.
Most government officials have adopted a wait-and-hope approach, and those who do talk about housing make earnest statements about keeping hardworking people in their homes. That's a worthy goal, for sure, but it's ignoring reality: from 2007 to 2010 there were 8.6 million foreclosures. Another 2 million foreclosures are in the works now, according to William R. Emmons, an assistant vice president and economist at the Federal Reserve Bank of St. Louis, and another 4 million mortgages are so underwater that they are headed toward foreclosure.
"And if house prices keep falling, then you just keep replenishing the pipeline," Emmons said in an interview Monday.
But rather than own up to that, the federal government is, once again, standing by while the states step in.
Innovation at the state level would be nice, and that's exactly what the billions pledged to the Hardest Hit funds more than a year ago were supposed to accomplish. But the state AG settlement has hijacked center stage, commanding more than its fair share of everyone's attention.
The AGs started out with an admirable goal: establish mortgage servicing standards so we never have another mess like this. But then they pivoted to the more controversial idea of reducing borrowers' principal. Rather than being a silver-bullet solution, principal reductions have derailed the settlement. Lenders balked because they consider principal reductions an invitation to anyone who has ever considered walking on their mortgage to grab their running shoes.
It doesn't matter which side is right.
Say the servicers agreed to cough up the $20 billion that's been suggested, and say that leads to $20,000 being written off the mortgages held by 1 million people. That would hardly make a dent in the problem.
The other big "solution" is a hodgepodge of loan modification programs that haven't worked. Redefault rates are high and no one wins when a modified loan goes into default again. All that does is postpone pain and weigh down the market and the economy.
The government's wait-and-hope strategy hinges on an upswing in home prices, and that's not happening.
The S&P Case Shiller home price index reversed its upward trajectory and has been slumping for six months now.
"The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery," David M. Blitzer, the chairman of the Index Committee at Standard & Poor's, said last week in a statement. "At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing."
Plenty of smart people think the mortgage mess could drag on for decades. Some even wonder, given how protracted the foreclosure process is, why we haven't seen a surge of strategic defaults. "More people are going to say, 'I am not going to try to solve this. It's going to be in my best interest, with the average time for foreclosures being 525 days, I am just not going to pay,' " said Ricardo Byrd, executive director of the National Association of Neighborhoods. "We are getting close to the tipping point where the stigma of not paying is being reduced."
Asked what he thinks should be done, Byrd said, "The president needs to bring everybody in a room and say we are going to figure this out today."
At a minimum, someone in the federal government — I nominate HUD Secretary Shaun Donovan — needs to get to work on a comprehensive strategy.
Stop trying to not offend anyone and impose some pain on all sides. Servicers, investors and borrowers all have varying interests in seeing the foreclosure mess cleaned up. But only the federal government has the incentive and the capacity to craft a comprehensive solution that can work.
The government should shift its focus from trying to keep current borrowers in homes at all costs to figuring out how to get people who can afford it to live there.
"We have to come to the realization and stop fooling ourselves that for some people there is no solution," said Cliff Rossi, who has worked in both government and the industry and is currently an executive-in-residence of the Center for Financial Policy at the University of Maryland's business school. "There are borrowers who are so underwater and have no capacity to repay, and as unfortunate as it is, we are just going to have to move those people through the foreclosure pipeline fast."
Willen, who holds a PhD from Yale and has intensively studied the mortgage market for years, agrees the federal government has to find a way to make the foreclosure process easier and faster.
"We need to get these properties back into the hands of long-term, sustainable owners," he said.
Short sales and some sort of cash-for-keys plan are two more essentials to clearing the backlog of troubled mortgages.
Say you took that $20 billion and you gave 2 million people who can't pay their mortgages $10,000 to walk away. Seems smarter than the principal-reduction alternative outlined above. The borrower would have enough money to rent a new place and the lender would have the title without the hassle or cost of foreclosure.
The Obama administration is going to have to bite some political bullets. Borrowers who don't deserve help are going to get it. Speculators will cash in. Lenders with lousy underwriting standards may avoid some losses (though they will still absorb plenty). Servicers with lax controls may be left off some hooks. Taxpayers will get stuck with some of the bill.
It won't be politically popular, but the alternative is another decade or more of a real estate market strangled by foreclosures.
Barb Rehm is American Banker's editor at large. She welcomes feedback to her weekly column at
