Article 43

 

Monday, September 05, 2022

Student Debt Relief and Memories of HAMP

image: career paths yesterday and today
 
The Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to $10,000 in debt cancellation to non-Pell Grant recipients.

The Department of Education is proposing a new income-driven repayment plan that protects more low-income borrowers from making any payments and caps monthly payments for undergraduate loans at 5% of a borrowers discretionary income -half of the rate that borrowers must pay now under most existing plans.

Fixing the broken Public Service Loan Forgiveness (PSLF) program by proposing a rule that borrowers who have worked at a nonprofit, in the military, or in federal, state, tribal, or local government, receive appropriate credit toward loan forgiveness.
- Fact Sheet: President Biden Announces Student Loan Relief for Borrowers Who Need It Most, Aug 24, 2022

Why Obama-Era Economists Are So Mad About Student Debt Relief
It exposes their failed mortgage debt relief policies after the Great Recession.

By Lindsay Owens, David Dayen
Prospect
August 31, 2022

President Biden’s long-awaited decision to wipe out up to $20,000 in student debt was met with joy and relief by millions of borrowers, and a temper tantrum from centrist economists.

Moments after the announcement, former Council of Economic Advisers Chair Jason Furman TOOK TO TWITTER with a dozen tweets skewering the proposal as “reckless,” “pouring gasoline on the inflationary fire,” and an example of executive branch overreach (”“EVEN IF TECHNICALLY LEGAL, I DON’T LIKE THIS AMOUNT OF UNILATERL PRESIDENTIAL POWER.”) Brookings economist Melissa Kearny CALLED the proposal “astonishingly bad policy” and puzzled over whether economists inside the administration were “all hanging their heads in defeat.” Ben Ritz, the head of a centrist think tank, went so far as to CALL FOR THE STAFF who worked on the proposal to be fired after the midterms.

Histrionics are nothing new on Twitter, but its worth examining why this proposal has evoked such strong reactions. Elizabeth Popp Berman has argued in the Prospect that student loan forgiveness is a threat to the economic style of reasoning that dominates Washington policy circles. That’s correct. But President Bidens elegant and forceful approach to tackling the student loan crisis also may feel like a personal rebuke to those who once worked alongside President Obama as he utterly failed to solve the debt crisis he inherited.

Let’s be very clear: The Obama administrations bungled POLICY TO HELP UNDERWATER BORROWERS and to stem the tide of devastating foreclosures, carried out by many of the same people carping about Biden’s student loan cancellation, led directly to NEARLY TEN MILLION FAMILIES losing their homes. This failure of debt relief was immoral and catastrophic, both for the lives of those involved and for the principle of taking bold government action to protect the public. It set the Democratic Party back years. And those throwing a fit about Bidens debt relief plan now are doing so because it exposes the disaster they precipitated on the American people.

One reason the Obama administration failed to swiftly help homeowners was their obsession with ensuring their policies didn’t help the “wrong” type of debtor.

President Obama campaigned on an aggressive platform to prevent foreclosures. Larry Summers, one of the critics of Bidens student debt relief, promised during the Obama transition in a LETTER TO CONGRESS that the administration “will commit substantial resources of $50-100B to a sweeping effort to address the foreclosure crisis.” The plan had two parts: “helping to reduce mortgage payments for economically stressed but responsible homeowners,” and “reforming our bankruptcy laws by allowing judges in bankruptcy proceedings to writedown mortgage principal and interest,” a policy known as “cramdown.”

The administration accomplished neither. On cramdown, the administration didn’t fight to get the House-passed proposal over the finish line in the Senate. CREDIBLE ACCOUNTS point to the Treasury Department and even Summers himself (who LAST WEEK SAID his preferred method of dealing with student debt was to allow it to be discharged in bankruptcy) lobbying to undermine its passage. “Summers was really dismissive as to the utility of it,” Rep. Zoe Lofgren (D-CA) said at the time. “He was not supportive of this.”

Summers and Treasury economists expressed more concern for financially fragile banks than homeowners facing foreclosure, while also openly worrying that some borrowers would take advantageӔ of cramdown to get undeserved relief. This is also a preoccupation of economist anger at student debt relief: that its inefficient and untargeted and will go to the “wrong” people who don’t need it. IT WON’T

For mortgage modification, President Obama’s Federal Housing Finance Agency repeatedly refused to use its administrative authority to writedown the principal of loans in its portfolio at mortgage giants Fannie Mae and Freddie Mac - the simplest and fastest tool at its disposal. Despite a 2013 CONGRESSIONAL BUDGET OFFICE STUDY that showed how modest principal reduction could help 1.2 million homeowners, prevent tens of thousands of defaults, and save Fannie and Freddie billions, FHFA repeatedly refused to move forward with principal reduction, citing their own efforts to study whether the policy would INCENTIVISE STRATEGIC DEFAULT (the idea that financially solvent homeowners would default on their loans to try and access cheaper ones).

Virtually everyone involved with the housing system was stunned that the options of cramdown and principal reduction werent taken. Banks literally HELD MEETINGS in expectation of Obama’s team requiring writedowns, until they didn’t.

Instead, the Obama administration rolled out the industry-backed Home Affordable Modification Program (HAMP), relying on the voluntary cooperation of servicers to modify mortgages. The program was, even by the administrations own modest objectives, A FAILURE, ultimately reaching less than a quarter of the three to four million homeowners it hoped to target. In the critical first two years, the administration did not even spend 3 percent of what they were allotted to save homeowners.

Just as with cramdown, one reason the Obama administration failed to swiftly help homeowners was their obsession with ensuring their policies didn’t help the “wrong” type of debtor. When Obama first announced HAMP in 2009, he said the program would “not reward folks who bought homes they knew from the beginning they would never afford.” The resulting “Goldilocks” proposal, with its focus on weeding out undeserving borrowers, would not be available to homeowners with incomes too high or too low and would be backstopped with voluminous income and financial verifications (in many cases, more than what was required to take out the loan in the first place). Treasury also tweaked the program numerous times as they went along, confusing servicers and borrowers. The barrage of paperwork ground the program to a halt at many servicers, and ultimately NEARLY A QUARTER of modifications were rejected on the grounds that incomplete paperwork was provided.

But it was much worse than that. The mortgage servicers used HAMP LIKE A PREDATORY LENDING PROGRAM, squeezing homeowners for as many payments as possible before canceling their modifications and kicking them out of their homes. These companies had financial incentives to foreclose rather than modify loans. In one particularly excruciating example, the servicer arm of Bank of America OFFERED ITS EMPLOYEES TARGET GIFT CARDS as a bonus for placing borrowers into foreclosure.

This was also by design, or at least benign neglect. Then Treasury Secretary Timothy Geithner candidly told officials that the program was intended to help banks, not borrowers. The purpose was to “foam the runway for the banks,” Geithner said, with homeowners and their families being the foam crushed by a jumbo jet in that scenario. If the goal was just to let the banks use HAMP for their own benefit, it’s not surprising that would come at homeowners expense.

And those banks executed their plan fraudulently, using millions of forged and fabricated documents to illegally foreclose on people.
Even with this new leverage against the banks, the administration failed to provide equitable relief. A new program, the National Mortgage Settlement, promised one million principal reductions but DELIVERED ONLY 83,000. Meanwhile, millions more unlawful foreclosures ensued, and no high-level executive was convicted in association with any of these crimes.

In short, the policy apparatus ultimately failed to assist the majority of people who sought help, a suboptimal policy outcome by any metric. Student debt relief skeptics like Furman spent the Obama years ADVOCATING FOR PRIVATIZING FANNIE AND FREDDIE, rather than apologizing for falling so short on dealing with the massive debt overhang, which STUNTED THE ECONOMIC RECOVERY.

President Biden’s approach has been markedly different and, if WELL IMPLEMENTED, is poised to be extremely effective. The simplicity of the program design, with its straightforward cancellation thresholds ($10,000/$20,000) and eligibility criteria (Pell status and household income), means the policy should deliver nearly 90 percent of its relief dollars to those making less than $75,000 a year. Will some small amount of relief dollars land in the bank accounts of borrowers who will make higher incomes in the future? Absolutely. Is preventing that outcome more important than delivering relief to 43 million borrowers? Of course not.

It’s not just the policy design that is a rebuke to the old guard’s theory of debt relief; its also the rhetoric. Notably, in his 20-minute speech announcing the rollout of the student loan relief program, President Biden didn’t mention “bad debtors.” once. He didnt spend a single breath on the individual failings of borrowers, make any reference to their poor decision-making, or nod to a handful of unscrupulous debtors trying to game the system.

Instead, he talked about the failings of our higher-education system, in which “an entire generation is now saddled with unsustainable debt.” Instead of blaming borrowers, he showed them empathy. Instead of talking about borrowers taking advantage of the system, he vowed to hold Ӕcolleges accountable for jacking up costs without delivering value to students and crack down on Ӕschools luring students with the promise of big paychecks when they graduate only to watch these students be ripped off and left with mountains of debt. And he headed concerns about moral hazard off at the pass, vowing to Ӕnever apologize for helping the working and middle class.

Moreover, Biden wasn’t afraid to use all of the tools available to him to get results for indebted borrowers. The Obama administration was given funding from Congress, an explicit mandate for foreclosure prevention, and at the end, a settlement with the banks that authorized even more money. They still failed, because they were more interested in deluded notions of “personal responsibility” than acting to avert disaster.

Biden has flipped the Beltway consensus on policy design around debt forgiveness and modeled a path for viewing student debt as a national crisis, rather than an individual failing. Its a stunning reversal of the Obama-era consensus and one that casts that failed legacy of mortgage debt relief in an even darker light. Biden has shown us there was an easier, softer way all along.

SOURCE

Posted by Elvis on 09/05/22 •
Section Dying America
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