Book Excerpt: Neil Barofsky’s Bailout

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Neil Barofsky, special inspector general for TARP, testifies before the Senate Finance Committee hearing to examine the Troubled Asset Relief Program (TARP) in July 2010. (AP Photo/Manuel Balce Ceneta)

One all-too-typical story, reported by David Dayen of the online news site Firedoglake, captures the horror that HAMP visited on so many borrowers. Dayen wrote about Jeremy Fletcher, a swimming pool builder from California. Dayen explained that Fletcher’s business had been booming before the housing bubble burst, and in 2007 he moved into a $900,000 home in California. When the housing market crashed, people stopped buying pools, and Fletcher’s sales dropped from $250,000 in 2007 to $40,000 in 2008. Dayen reported that by early 2009, Fletcher was broke, “paying for his $4,200 mortgage out of savings and barely hanging on.”

After HAMP was announced, Fletcher called Citi Mortgage, his servicer, but Citi rejected Fletcher, telling him that he was not in default. Then, in the summer of 2009, just as Fletcher was considering selling and downsizing, Citi called him out of the blue, offering a HAMP trial modification that would cut his monthly payments nearly in half, to $2,170. As Dayen wrote, “They signed him up over the phone, he made his first payment by ATM card, and that was it. Within a few days, they sent over a modification package that put it in writing: if Fletcher made his trial payments for 90 days, and sent in his application with a full income statement that qualified, ‘we will give you a permanent modification.’”

Despite sending in the documents and making all of his new trial payments for a full year, Citi never provided Fletcher with a permanent modification. When Fletcher called the bank, Citi told him that everything was on track and that he should just be patient. Then, without warning, Fletcher got a call from Citi “telling him that he was 12 months due on his loan and owed $15,000.” Citi had dropped him from the modification. Though no one that Fletcher spoke to at Citi could explain why, they could tell him that if he didn’t pay up in thirty days they were going to take his home.

Fletcher couldn’t afford a lawyer but found a friend who agreed to help him out for free. After the lawyer poked around, Fletcher got a call back from someone at Citi who told him that there had been no valid reason for cancelling the modification, he’d “just got lost in the cracks.”

Next Citi demanded that Fletcher resubmit his HAMP application paperwork, which he did. Two days after being told by Citi that his paperwork was in order and the modification was about to go through, Fletcher was contacted by Saxon Mortgage, then a subsidiary of Morgan Stanley, which told him that Citi had sold Saxon the loan. It demanded that he make all of the past deficiency payments immediately.

After making a series of calls to Saxon, he found someone who was able to pull up “the history of the now-16-month modification process in her computer.” The specialist acknowledged that Saxon had made a “mistake” and told Fletcher to make the modification payments. But a couple of months later, Saxon dropped Fletcher from the HAMP trial modification, wouldn’t accept any further payments, and was about to foreclose.

Dayen’s article also brought to life the psychic toll that the dehumanizing process often took on borrowers. “‘This eats at me every waking moment of every day,” Fletcher told him. “The kids wake up every day wondering if they’ll have to leave. I think about it when I’m working, when I’m not working I’m on the computer, writing letters, making phone calls. even when I’m surfing, that was my one respite, now when I’m in the water, I start thinking about it.”

The collateral damage went beyond Fletcher’s mental state. The servicers reported Fletcher’s “delinquency” to the credit-rating agencies, and as a result “his contractor bond could not be renewed because of the credit history. When he finally found an insurer to renew, they charged him 6 times what he had paid before.”

The damage HAMP had inflicted on the Fletcher family was astonishing. As Fletcher summed up, “I was thinking, if we didn’t get the help from Citi, we could sell the house, we still had savings, a good credit history. We had options.” But after the HAMP nightmare, his savings account was drained, his credit history was shot, his home value had plummeted, and his hope had faded. “‘It’s in the waiting for the modification that everything got bad,’ he said.”

I remarked to Kevin at one point as the abuses were flooding into our hotline that it seemed as though Treasury simply didn’t care about the suffering of so many borrowers. Instead, Treasury officials seemed too busy congratulating themselves on the trial modifications the program was raking up. “The only ones benefiting from this debacle are the banks,” Kevin astutely observed. We would eventually discover that that was no mistake. Helping the banks, not home owners, did in fact seem to be Treasury’s biggest concern.

Treasury’s failure to be forthright with the American people would only increase in the coming months, along with the blowback against anyone who tried to challenge what was becoming an increasingly misleading narrative.
We learned that when, later that fall, we were invited to another oversight meeting with Geithner, GAO, and the COP. For a good chunk of our allotted meeting time, Elizabeth Warren grilled Geithner about HAMP, barraging him with questions about how the program was going to start helping home owners. In defense of the program, Geithner finally blurted out, “We estimate that they can handle ten million foreclosures, over time,” referring to the banks. “This program will help foam the runway for them.”

A lightbulb went on for me. Elizabeth had been challenging Geithner on how the program was going to help home owners, and he had responded by citing how it would help the banks. Geithner apparently looked at HAMP as an aid to the banks, keeping the full flush of foreclosures from hitting the financial system all at the same time. Though they could handle up to “10 million foreclosures” over time, any more than that, or if the foreclosures were too concentrated, and the losses that the banks might suffer on their first and second mortgages could push them into insolvency, requiring yet another round of TARP bailouts. so HAMP would “foam the runway” by stretching out the foreclosures, giving the banks more time to absorb losses while the other parts of the bailouts juiced bank profits that could then fill the capital holes created by housing losses.

All of a sudden, bits and pieces of conversations that I had had began to fall into place. Allison had used the phrase “helping them earn their way out of this” during part of a more extended conversation that summer about his worry that the banks could still collapse. HAMP was not separate from the bank bailouts; it was an essential part of them. From that perspective, it didn’t matter if the modifications failed after a year or so of trial payments or if struggling borrowers placed into doomed trial modifications ended up far worse off, as long as the banks were able to stretch out their pain until their profits returned.

Geithner’s revelation (he apparently similarly told bloggers in 2010 during an off-the-record conversation that HAMP had succeeded in extending out the foreclosure crisis) also helped explain one of the odder aspects of HAMP. For many borrowers, the modifications weren’t really all that “permanent.” Instead, after five years, the interest rate would be permitted to rise, much like the resetting adjustable rate mortgages of the financial crisis. This meant that within a handful of years after the “permanent” period of HAMP expired, the average borrower whose interest rate had been reduced to the minimum rate during his modification would eventually see his monthly payments rise by 23 percent, possibly putting him once again at risk of default. Though that policy might undermine the long-term success of the program from the borrowers’ perspective, it made perfect sense if an immediate “foaming of the runway” for the banks was Treasury’s primary goal. For the banks, five years was an eternity.

Unfortunately, once I got a chance to speak, the allotted time for the meeting was running down. I used the time I had to impress on Geithner that the administration was losing credibility through its administration of TARP and that that was a self-inflicted wound that could be healed by being more open and forthright with the public. As we wrapped up the meeting, Geithner came across the room to our side of the table to engage in a round of handshake good-byes. When he approached us, he pointed at Kevin.

“This guy, Kevin, he was glaring at me the whole time. I was getting nervous,” Geithner said with more of a smirk than a smile.

As Kevin gave his best fake laugh, I replied with a smile and said, “You should be, I never go anywhere without my muscle.”

Unfortunately, my warnings to Geithner at the meeting went unheeded. Treasury’s failure to be forthright with the American people would only increase in the coming months, along with the blowback against anyone who tried to challenge what was becoming an increasingly misleading narrative.

From BAILOUT by Neil Barofsky.  Copyright © 2012 by Neil Barofsky.  Reprinted by permission of The Free Press, an imprint of Simon & Schuster, Inc.  Available wherever books are sold.

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