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Via Outside the Beltway, I see that the administration is pressing New York’s attorney general to drop its investigation into dodgy foreclosure practices and settle with the banks.Doug Mataconis, who wrote the post, says, “I’m sure the large amount of donations coming from the financial sector into the coffers of the Democratic National Committee and Obama For America have nothing to do with this pressure. I also believe the guy who tells me he has a bridge in Brooklyn to sell me.”
I quite agree that the administration should not be intervening, but let me suggest a more charitable explanation, contained within today’s edition of the New York Times: “U.S. May Back Refinance Plan for Mortgages”.
It looks like the administration has convened a working group to explore more aggressive options for dealing with underwater mortgages.
“One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 per cent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.
A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.
Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along — the administration requested ideas for execution from the private sector earlier this month.”
How much these proposals will actually accomplish seems rather questionable–I doubt lowering interest rates is going to do much to fix the housing market, given how highly correlated default seems to be with a) losing your job and b) the simple fact of being underwater. But leave those concerns aside.
If the administration actually wants any of these programs to work, it is going to need the cooperation of the banks.
And no, I do not mean “because they can’t move without the OK of their corporate paymasters”. I mean that the administration is going to need some active cooperation from the banks that hold and service all these mortgages.
Corporate and social reformers tend to get caught up in the notion that with a combination of steely will and brutal intolerance of misbehavior, you can simply force all those twerps in a misbehaving organisation to do what you want: the only reason people don’t, they believe, is that they have somehow been paid off, or brainwashed, by the twerps.
This is why most corporate reorganizations, and social reforms, fail miserably. Not even Stalin or Pol Pot exercised this level of total control over the workers. There are all sorts of way that unwilling people will subvert your efforts.
That’s not to say that reforms should be all carrot, no stick. Indeed, sometimes the way to deal with a tricky organizational problem is to fire all the workers. But even this doesn’t work as well as you might think. I once spent some time talking to an in a turnaround situation whose solution to a deeply dysfunctional corporate culture at a firm that had been losing money for more than a decade was ultimately a mass firing that axed more than 90% of the staff. Eighteen months later, I asked him whether the old culture had died out, or re-established itself among the new workers.
“Honestly?” he said, “The culture won.”
You need some level of buy in; if you don’t have it, your reforms won’t work unless you can actually fire everyone. And a “clear the decks” approach is not an option the administration has. They cannot fire the owners of these mortgages, nor do I think they’ll have much luck forcing the owners to fire their servicers. If they want to do anything serious in the mortgage market, they’re going to have to have the active cooperation of the banking industry.
And that, in turn, means that they have to trade the industry something that they want . . . like a quick settlement in this foreclosure fraud investigation. I don’t know that this is the particular quid-pro-quo that led to the administration’s pressure. But after three years of covering their economic policymaking, I find it eminently more plausible than the idea that they’re doing this because some banker made a well-timed phone call to David Axelrod.
I frequently disagree with administration policy, but however much you question their priors or analysis, it’s always operated within an admirably consistent technocratic framework. The technocratic wonks are shocked because they cannot believe that this is what technocracy actually looks like in the real world: it involves a lot of side-deals to get buy in from the affected parties.
That’s not to say that I approve of making this deal. I don’t. But this is the sort of devil’s bargain we accepted when we got the government into the business of guaranteeing mortgages. The problem is not that politicians are making the kind of distasteful backroom agreements that politicians have ever made, and ever will. The problem is that we put the government in the position where these kinds of deals are necessary.