A Program Designed to Fail
After the 2008 collapse, the Wall Street banks that caused the crisis got spectacular sums in the form of the Trouble Asset Relief Package (TARP) and discount loans from the Federal Reserve. According to one estimate, they received a staggering $29 trillion in cash and loans.
For homeowners, the largest source of potential relief was, ironically, that same bank bailout, which contained an unspecified appropriation to “prevent avoidable foreclosures.” The Obama administration designed and implemented the foreclosure relief effort, calling it the Home Affordable Mortgage Program (HAMP), and set aside $75 billion for the effort.
But HAMP proved to be an abject failure. The basic problem was that the government paid mortgage servicers (who process the payments and paperwork for the mortgage owner) to conduct mortgage modifications. Servicers have an incentive to keep people paying on a high principal, since they receive a percentage of the outstanding debt. They even have an incentive to foreclose, because they are paid from the proceeds of a foreclosure sale before the actual owners.
Lax oversight from both the Treasury Department and the Department of Justice made things worse. Some servicers tricked people into foreclosure, according to several investigations and sworn testimony from Bank of America whistleblowers. And by repeatedly “losing” people’s paperwork or engaging in other tricks, the servicer squeezed out a final few payments and fees before foreclosing.
This kind of chicanery was illegal, and also violated the administration’s rules. But they didn’t bother to seriously investigate servicer abuses. The Treasury Department didn’t even permanently claw back a single one of its payments to abusive servicers.
Why not? Neil Barofsky, the bailout inspector general, later testified that protecting the banks was the actual goal. The administration’s aim was to “foam the runway” for the banks, as Barofsky witnessed Tim Geithner tell Elizabeth Warren. HAMP failed, in other words, because it was not designed to help homeowners.