Last Man Standing

In late 2007, Seth Wheeler came to Washington to help the Treasury Department prepare for the impending financial crisis. Two weeks ago, he finally left, the last holdover from then-Treasury Secretary Hank Paulson's staff. After two and a half years that began with stopgap measures and ended with a massive program to systemically modify mortgages across the country, Wheeler was done.

He is most well known as a designer of the foreclosure-combating Making Home Affordable policy and its subsidiary, the Home Affordable Modification Program (HAMP). Both have come under heavy criticism from outsiders like Elizabeth Warren, who chairs the independent panel overseeing the bank bailouts, and Neil Barofsky, the special inspector general on the same beat. Critics say the Treasury did too little, too late to ameliorate the harsh effects of foreclosures on families and the economy.

"A year after Treasury first announced its foreclosure program, HAMP continues to lag well behind the pace of the housing crisis," Warren told the Prospect yesterday. "Treasury quickly took action to save the banks that brought our economy to the brink of disaster while struggling homeowners have been left sitting on the sidelines waiting for relief."

Wheeler's departure fueled speculation that he was frustrated with HAMP, but in an interview with the Prospect, Wheeler says that while the challenges facing the program are very real, his long-delayed departure is for personal reasons, and he takes pride in his work at Treasury. While it is not surprising to see Wheeler defend his work, his recognition of the obstacles to mitigating the foreclosure crisis clarify the challenges ahead.

"I came in with the Bush team, I was proud to be part of the Obama team, and I think under both teams the focus was on getting the job done, and less on the politics," Wheeler says.

In January 2008, Wheeler, then 33, came to Washington from Morgan Stanley to work on a variety of financial issues for Paulson, alongside Neil Kashkari, who would later head the TARP program, and Phillip Swagel, then the top Treasury economist. The three worked together to come up with solutions to complex problems at the intersection of housing and finance.

"It's just difficult to get the action on foreclosures that everyone wanted," Swagel says now, crediting Wheeler with an important contribution to ameliorating the problem. "One of the sad things about the crisis is that millions of people got into homes they couldn't afford."

Wheeler expected to leave the department with the change in administrations, but Obama's economic team asked Wheeler to stay and help develop their response to the foreclosure crisis. Millions of homeowners were in danger of default as home values began to plummet around the U.S., an effect compounded by joblessness during a crippling recession. Wheeler and other officials, ranging from Treasury's Michael Barr to the White House's Austan Goolsebee, plotted a response.

The policy they designed, Making Home Affordable, included broad refinancing opportunities for homeowners through Fannie Mae and Freddie Mac. It also drew on a model used by Federal Deposit Insurance Corporation Chair Sheila Bair during the receivership of failed bank IndyMac to create incentives for mortgage servicers to modify loans to fit new, government-mandated standards for affordability.

"Sheila Bair was a key part of early discussions and had developed a working model at IndyMac," Wheeler told me. "How do you keep a borrower in their home? You have to make the payment affordable but also respect [the original] contracts. You have to work with the servicer and find those borrowers who want to stay in their homes and [can] afford to make a payment on their modified loan. Avoid preventable foreclosures while recognizing that not every foreclosure can be prevented."

But the program quickly ran into trouble, notably because implementing these modifications was so hard.

"Getting people into permanent mods was more challenging than the Treasury team had anticipated," Wheeler says. "We're talking hundreds of [people involved in these contracts], millions of borrowers who do qualify and should qualify over the course of the program. You're not doing 50 transactions; you're doing a million at a very distressed time of their lives."

Critics, though, argued that mortgage servicers had little incentive to participate in HAMP and called for a change in bankruptcy law that would allow judges to modify mortgages, providing a final recourse for borrowers and a reason for bankers to cut a deal early. The measure failed in the Senate, in part due to a lack of support from the administration.

"We've been frustrated on this issue since day one," says Steve Adamske, a top aide to Chair Barney Frank, whose House Financial Services Committee oversees the federal foreclosure response. "They've kicked it up a notch, but I don't think [modifications are] going to be in the 3 [million] to 5 million range, which is what we need. I don't know if any program is [going to]. We tried legislation here to limit foreclosure; it never worked. Without the bankruptcy piece passing Congress, we're not going to have that leverage over the banks we need."

While Wheeler wouldn't speculate on what impact changing the bankruptcy law would have had on HAMP, he has acknowledged critiques on other issues: principal write-down (having banks match bubble-inflated loans to the real value of a house), short sales, procedural reforms, and deed-in-lieu of foreclosure (allowing borrowers to remain in foreclosed homes).

Several of these ideas were integrated into the program over the last year. "Clearly, there was continued discussion and dialogue," Wheeler says. Indeed, consumer activists came to respect Wheeler as an honest voice in the administration.

"He did convince me and others that he was really trying," John Taylor, president of the National Community Reinvestment Coalition, told the Huffington Post. "I think he's as disappointed as everybody else that this HAMP program failed so miserably."

As of March 2010, HAMP has permanently modified the mortgages of 230,801 households; some 1.1 million households have received temporary modifications, with a goal of permanently modifying 3 million to4 million loans by 2012. Meanwhile, in 2009 there were a record 3 million foreclosures, and an additional 2.4 million are expected in 2010. While some of these foreclosures were undoubtedly the result of speculators and investors abandoning homes, many are families caught by the bubble.

Wheeler's departure comes after two and a half years of high-pressure work away from his family and a lingering shoulder injury that he postponed rehab for during his tenure. He has no immediate plans except for some volunteer work with Habitat for Humanity. If any frustration plays a role in his departure, it is less about the response to the problem than its magnitude.

"The home is such a critical thing, maybe the most critical thing, in terms of somebody's sense of economic well-being," Wheeler says. "It's such high stakes: the difference it makes for that family. We knew the intensity of that reality, and it motivated us to give it everything we had, but the complexity of implementation continues to be a baseline reality. There's never going to be an easy, breakthrough moment where we finally get it perfect."

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