Senator Chris Dodd: Obama Foreclosure Plan "Disgraceful"

A fresh Politico article (click here) has a great rundown of the current problems with the foreclosure disaster. It echoes basically what I've been saying, but for those new to the site I'll go through the article and review the parts summarizing the main problems. The juiciest quote from the article is from Senator Chris Dodd:

“Everybody understands that getting out of this broader crisis requires that we stabilize our housing market and stem the tide of foreclosures,” Senate Banking Chairman Chris Dodd (D-Conn.) said in a hearing Thursday. But in harsh wordsfor a Democrat, Dodd said that the Obama administration’s progress in stopping foreclosures has been “disgraceful” so far.

While I agree that the HAMP plan is disgraceful, it is pretty rich for Dodd to point the finger at the administration, when Congress itself rejected the bill that would have allowed bankruptcy judges to modify mortgages. After all, there is a limit to what the White House can do by executive order. First of all, the White House has no direct authority over private entities such as the lenders, servicers, and trusts holding the notes and mortgages that need to be modified. Second, the Constitution protects the right of contract, and prevents the White House from ordering anyone to give up all or part of their interest in a contract.

This is why the HAMP program works by "encouraging" servicers to basically become loan originators and review documents, verify tax returns, and analyze current loans. The White House can't force the servicers to do any of this. That's why you see assertions about "shaming" the servicers:

In addition, the administration announced that next month it will start publishing company-by-company results, including how many modifications each servicer has made and how quickly. At the least, that will give policymakers ammunition to shame recalcitrant lenders.

“We think that that type of disclosure, servicer-by-servicer, will be important to spurring greater activity on their part,” Herbert Allison, assistant treasury secretary for financial stability, told Dodd’s committee.

If the "policymakers" would pass a bill permitting bankruptcy judges to modify mortgages where servicers either cannot or will not do so, there would be no reason to "shame" anyone. It is confusing to me why so much effort and treasure is being invested in a sort of codified moral suasion and not in any effective legislation. A cynical person might conclude that the "policymakers" are less interested in actually solving the problem than appearingto tryto solve the problem.

The administration seems inclined to blame the servicers for not being sufficiently "shamed" into taking the actions the White House wants them to take:

Administration officials blame the mortgage servicers charged with carrying out the mortgage modifications and refinancing under the federal program. Many of their Democratic allies on Capitol Hill back them up, but others are criticizing the White House for fumbling the execution.

It's easy to blame the servicers - after all, they are the ones on the front line with the homeowners. Can't the servicers just do more modifications?  The simple answer is, 'no.'  The servicers are restrained both by logistical and legal constraints which make it very difficult to voluntarily modify these loans. The solution to this massive problem will never come from the servicing companies.