Bolstered by a variety of government stimulus programs, the U.S. economy expanded at a 2.8 percent annualized rate in the third quarter of 2009, the strongest growth in two years. This, along with a report that indicated slight decline in the unemployment rate and the Dow Jones Industrial Average topping 10,500 for the first time in a year has led most economists to conclude that the recession is over.
However, as Dr. Christina Roemer, chair of President Obama’s Council of Economic Advisors, rightfully points out, many Americans will not feel like the recession is over until unemployment and foreclosure rates approach their pre-bubble levels of 2004 — and even the most optimistic economists do not project that to occur until well after 2010, with a likely prospect of increasing unemployment and foreclosures continuing throughout the early part of next year.
Meanwhile, many of the nation’s largest banks that helped lead the country into recession have seen their stock prices rebound and executive bonuses restored. These banks have managed to rebound from the brink of insolvency only as result of the unprecedented support from the Treasury and the Federal Reserve Bank whom together provided the banks with all the funding they needed at near zero interest rates. At the same time there are numerous complaints that banks are not lending to previously credit-worthy small businesses or helping people to reduce their mortgages to levels that they can afford.
Since it took a massive and unprecedented intervention by government to save the banks and our economy from a near total collapse, is there something that can be done to help homeowners who are temporarily distressed from unnecessarily losing homes and small business owners from unnecessarily losing their businesses? The answer should be yes.
A Full Toolbox
In fact, the Obama administration has already provided the banks with some if not all of the tools needed to address a significant portion of the cash flow needs of small businesses and the foreclosure problem. The economic stimulus legislation (ARRA) provided significant funding for the expansion of Small Business Administration loan programs. By replacing the credit of these businesses with sovereign credit, SBA loan programs simulate what was done for the banks but at a small fraction of the cost. However recent media reports indicate that SBA loan volumes by the larger banks have declined substantially from their 2007 and 2008 levels.
Similarly, the Home Affordable Modification Program (HAMP) announced by Treasury in March 2009 is designed to provide an incentive for mortgage servicers to offer troubled borrowers some relief as an alternative to foreclosure. However, a recent government report indicated that only about 4 percent of the borrowers who have signed up have received long-term help offered by the program.
Why have the large banks not been successful in using these programs? Are there serious and fundamental flaws in the design? If so, the bankers should deploy their highly effective lobbyists to push back so that changes can be made to make the programs more accessible. Meanwhile, many smaller banks and credit unions have dramatically increased the use of SBA loans. Similarly the quasi-public MassHousing reports nearly 100 percent success with borrowers using the HAMP. One of the main differences being that MassHousing uses the approach of verifying the borrower’s eligibility prior to a trial period as opposed to the approach used by larger servicers who enter into trial agreements before verification; a cheaper process but with results that mirror the no-doc loan syndrome that helped create the current mess.
Perhaps, the banks need more motivation in the form of increased regulation that at least measures their effective use of these tools as a means of meeting the credit needs of the nation’s homeowners and small businesses under stress. At a minimum, these measures could serve as important criteria for obtaining future taxpayer=funded assistance.
