The bigger beef between Tim Geithner and his critics

The two have a beef over whether Hubbard told Geithner that Romney would come out in favor of raising taxes but only after the election. Geithner, the former Treasury Secretary, makes that claim in his new book Stress Test: Reflections on Financial Crises, which came out on Monday. Hubbard says it’s not true.

But there is a much bigger and more important point of contention between Geithner and Hubbard.

In late 2008, Hubbard, along with Columbia University professor and housing market expert Christopher Mayer, came up with a plan that would have given millions of Americans the ability to refinance their mortgages into lower rate loans. The plan was floated to the incoming Obama Administration, but it was initially passed on. Later, in 2011, when I was working on a story about how to fix the still-struggling housing market, I got wind that the Hubbard plan was being seriously considered in the White House again. But, once again, nothing happened.

Hubbard contends his plan to help troubled homeowners never saw the light of day because of Geithner. “Tim Geithner personally and actively opposed mortgage refinancing, constantly,” Hubbard told Politico.

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Geithner has steered much of the discussion and the articles about his book toward the bank bailout, for good reason. No major bank failed after the TARP bailout fund was put in place. The financial system didn’t collapse. And, in the end, the government actually made money on the rescue, somewhere between $30 billion and $40 billion.

The experience of troubled homeowners is a more troubled part of Geithner’s — and Washington’s — financial crisis legacy.

In the book, Geithner spends a little over seven pages, more than most topics, recounting his and the administration’s efforts to stem the foreclosure crisis. He says they considered a wide range of plans and had the nation’s “best progressive talent working on housing.”

Geithner recalls one instance in which Elizabeth Warren criticized him for not doing more. He shot back, “So what would you do?” and says Warren, at first, had nothing to say. When she did come back, Geithner dismissed her proposals, saying they were all things that wouldn’t work or items that the Treasury was already working on. The anecdote is meant to show that Geithner tried everything. In the end, Geithner says he wished he could have done more to help borrowers behind on their home loans, but the rules of the mortgage market wouldn’t allow it.

Yet there is no mention of Hubbard’s plan, which was to get the giant government-controlled mortgage guarantors Fannie Mae and Freddie Mac to refinance the mortgages on their books into lower-interest-rate loans. Critics contended that more lending was not a remedy for a housing-credit bubble and handing out new loans to people who were already paying was not a fix.

But Hubbard and Mayer said such criticism was silly. The government, by way of Fannie and Freddie, was already on the hook for those loans. So why not try to make them affordable? Plus, all the money the borrowers saved on their monthly mortgage payments would presumably boost spending and help the economy.

Hubbard’s partner, Columbia’s Mayer, says Geithner never seriously considered their plan, though he’s not sure why. He says some of it was probably political. “The fact that the plan was tied to Hubbard didn’t help with the administration,” says Mayer.

More broadly, Mayer says it never seemed like Geithner and the administration were ever working that hard to help stop foreclosures. He says that it wasn’t until two to three years into the crisis that the administration hired a genuine expert on housing, and even then, the hire wasn’t made at the Treasury Department.

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It’s hard to say if Hubbard and Mayer’s plan would have delivered positive results. Geithner did eventually alter the government’s loan modification programs to make some of the changes that Hubbard and other critics recommended. But these programs still helped far fewer than initially predicted. Geithner says that most of those people ended up receiving mortgage modifications directly from their lenders, but that says nothing about whether those modifications were as good as the ones the borrowers would have gotten under a government plan.

More than five years later, 7% of the home loans held by the banks remain delinquent. That’s down from a peak of nearly 11%, but it’s still much higher than the less than 1% delinquency rate we had before the financial crisis.

“Geithner calls his efforts to help homeowners a failure, but that lets him off the hook, because it implies he tried,” says Mayer. “He didn’t.”