It’s been more than eight years since the United States plunged into a recession and an enormous housing crisis. Shortly after President Obama took office, top officials scrambled to remedy a housing crisis and stabilize the economy. This post highlights the major themes of a recent event at the Urban Institute called “Housing Policy Past and Future: Lessons Learned Through the Crisis and the Path Forward,” where a number of these officials discussed their experience.
Diagnosing the economic problems
When the Obama administration’s economics team met for the first time in December 2008, the country’s gross domestic product (GDP) was already contracting significantly and millions had already lost their jobs. Jared Bernstein, then chief economist for Joe Biden, said that the larger banking issues they faced were “of terrifying import.”
Bernstein said he and other administration policymakers and economists had to address multiple aspects of the crisis at the same time. There was an insolvency issue, wherein homeowners who couldn’t pay were driven to foreclosure, and an illiquidity issue, which is when banks don't have enough money readily available to pay debts.
According to the National Bureau for Economic Research, the recession itself lasted less than two years, but the effects were incredibly damaging. From December 2007 to June 2009, the United States lost more than 8.8 million jobs, unemployment rose to nearly 10 percent, the GDP fell by trillions of dollars, and more than 14 million homeowners faced foreclosure. All told, it cost $23 trillion to address the problem.
“You’re attacking a tidal wave with pencils,” said Jim Parrott, a former senior advisor to the National Economic Council, citing the critics who claimed the administration’s programs weren't aggressive or expansive enough to adequately address the housing crisis.
On the other hand, some thought the federal government was doing too much. Bernstein recalled being at CNBC studios waiting to appear on television when correspondent Rick Santelli, reporting from the Chicago Mercantile Exchange, made a now-infamous “Tea Party” rant about how the administration was “subsidizing the losers’ mortgages” and that the administration should instead be focused on policies that would people who could pay their mortgages without assistance. Phyllis Caldwell, who was the former chief of the US Treasury’s Homeownership Preservation Office, showed the audience a bumper sticker she had saved that said, “honk if I’m paying your mortgage.”
Working with banks to change mortgage terms
Knowing the different causes of the housing crisis didn’t make it any easier to create and implement a plan. Caldwell said the incoming Obama administration's mission for her office was to place three to four million homeowners into programs that could help them keep their homes.
The Homeownership Preservation Office, which oversaw several programs that provided assistance to homeowners, faced several challenges after the Obama administration took office, particularly with regard to the Home Affordable Modification Program (HAMP) and the Home Affordable Refinance Program (HARP). HAMP’s goal was to modify mortgage terms so that monthly payments could be reduced and homeowners could afford to resume payments. HARP’s goal was to help homeowners who were underwater in their mortgages (i.e., they owed more than their homes were worth) refinance (replace) their mortgage.
Caldwell said that processes in place during the time weren’t designed for mortgage modification required under HAMP. Legislation required the office to work through banks and not directly with homeowners, and because the program was voluntary, the office had to create and balance incentives to get the banks to participate. Caldwell said that consumer advocacy groups helped her office understand consumer behavior in order to communicate the program’s goals and instructions for reaching out to financial institutions.
The housing crisis increased the government’s role in insuring mortgages
From 2011 to 2014, Carol Galante served as the head of the Federal Housing Administration, whose primary role is to guarantee (insure) mortgages. The Wall Street Journal reported that in 2006, the administration only insured $55 billion in mortgages but by fiscal year 2009 it was insuring $330 billion. Galante said that from the beginning there were many challenges, including sequestration and budget cuts that kept the FHA from implementing policy quickly.
During the housing crisis to the end of the Obama administration, housing experts had to grapple with a complex problem in need of complex solutions. The mortgage modification program and refinancing program were only two of several measures implemented to handle the housing crisis and start recovery, but they were two of the most significant programs because they were implemented during the peak of the crisis.
This article is the first in a two-part series about the experiences of leaders and economists who had a front-row seat for the housing crisis. The second article will be about key takeaways from the housing crisis and the future of housing policy.