03/07/2012 08:21 am ET Updated May 07, 2012

Mortgage Settlement Deal Confronts Legacy of Obama Foreclosure Failure

After years of incompetence, intransigence, malevolence and whatever else may explain how mortgage companies have managed to screw over millions of troubled American homeowners, a fix is finally at hand.

This is how the Obama administration invites us to view the broad, $25 billion state and federal foreclosure settlement that it struck last month with the nation's five largest mortgage companies.

Officials have presented the deal as justice for the so-called robo-signing scandal, whereby major mortgage companies improperly foreclosed on millions of properties. They have touted its centerpiece: a $20 billion fund stocked with fines paid by the mortgage companies, which will deliver relief to as many as 1 million troubled borrowers via lowered monthly payments, principal reduction and refinanced loan terms.

The president portrayed the deal as no less than a curative, calling it a "landmark settlement" that will "speed relief to the hardest hit homeowners" and "begin to turn the page on an era of recklessness that has left so much damage in its wake."

Yet anyone who has paid even minor attention to the administration's housing policy may be permitted to ask: For real? We have heard this sort of talk many times before from the Obama administration, only to see more homes slide into the foreclosure crisis. What's special this time?

A good deal, asserts Housing and Urban Development Secretary Shaun Donovan, who played a leading role in brokering the deal.

In a pair of recent conversations, his message essentially boiled down to this: Thus far much of what has happened on the housing relief front has been torturously frustrating, pinning millions of distressed borrowers in Hell's own filing cabinet. But this deal reflects crucial lessons learned, yielding a new program that will work better.

The keys to the deal, Donovan maintains, are new standards that mortgage companies must live by and an independent monitor empowered to watch over implementation, with possible fines reaching $1 million per violation. The deal will be filed in U.S. District Court in Washington, D.C., ensuring a venue for legal enforcement.

"The most important thing is that you require outcomes," Donovan said during a meeting this week with Huffington Post editors and reporters. "At the end of the day, the leverage is different."

He drew a distinction between this settlement and a previous deal struck with the notorious subprime lender Countrywide, now part of (notorious) Bank of America, whose very name can induce spontaneous shrieks of agony in many U.S. homes, along with file folders jammed with inscrutable documents. In that deal, Bank of America was able to satisfy its obligations, simply by reaching out to delinquent borrowers with offers for help.

"This is not 'You have to solicit X number of borrowers,'" Donovan said. "This is 'You have to deliver a result.'"

Donovan noted that the new settlement relies on reductions to principal balances, addressing the fact that roughly 1 in 5 homeowners with a mortgage now owe the bank more than their home is worth. Though he acknowledged that only about 10 percent of mortgages will be eligible for this treatment, he expressed hopes that this would spur other lenders to follow suit.

The HUD secretary is the right person to be talking up the settlement. Earnest and passionate, he comes off like he is generally interested in keeping homeowners in their homes, unlike Treasury Secretary Tim Geithner, who manages to convey an abiding interest in keeping bank executives in their corner offices.

Still, the legacy of failure from the Obama administration on the foreclosure front is so great that a proper assessment of the settlement must go beyond its terms. It will come down to the administration's resolve in following through. On that score, legitimate reasons abound for someone to harbor doubts that this deal will amount to anything meaningful for homeowners.

Three years ago, the president stood in Mesa, Ariz., a community ravaged by foreclosure and announced the creation of a new program that he said would spare 3 million to 4 million homeowners from that fate by lowering their mortgage payments. As of last month, fewer than 1 million homeowners had received permanent loan relief under the program, according to a recent scorecard.

From the beginning, millions of applicants who requested help have confronted chaos, disorganization and conflicting instructions. Mortgage companies have repeatedly lost documents and demanded new sets, only to mislay the replacements, too. Borrowers seeking customer service have been switched from office to office (as if it were some corporate version of speed-dating) while enduring maddeningly long hold times. They have received letters on one day congratulating them for gaining approval for lower payments, and the next day informing them of the pending disposition of their home at a sheriff's sale.

Treasury officials like to explain all this misery and confusion by noting that the banks were never built to handle loan modifications, or paperwork in general, which is perversely true. Back when they were handing out loans to anyone with a name, banks did not slow themselves down over concerns about niggling things like income verification. How can they be expected to suddenly become masters of the filing cabinet?

Yet this is no excuse for mortgage companies' horrific mistreatment of borrowers. Had the banks been enjoying, say, a lucrative boom in refinancing, they would surely have managed to hire enough people to answer the telephones and keep track of the requisite files.

They didn't do this for the simple reason that they didn't want to. Instead, they adopted a mode of strategic incompetence: They stocked themselves with the minimum number of people required to claim credit for participating in the program, while guaranteeing that not enough qualified people would be on hand to process the paperwork.

Why didn't the banks want to go along? Because they could generally make a lot more money by dragging out delinquency and eventually foreclosing than they could by keeping borrowers in their homes via manageable payments.

The mortgage companies are mere servicers, in industry parlance. They don't own most of the mortgages. They just send out the bills and collect the payments, while drawing fees from investors who do own the notes. When borrowers stop making payments, servicers put them into special insurance policies with hefty premiums, typically funneling this business through their own subsidiaries. They order up fresh appraisals, sending these orders through their subsidiaries as well. This foreclosure gravy train swiftly outperforms the meager financial incentives that the administration pays servicers when they agree to lower monthly payments.

One element has been consistent throughout this ordeal: the Obama administration's repeated failure to pressure mortgage companies to do what they were supposed to do.

When the program was first being crafted in early 2009, provoking complaints that it appeared toothless, a senior Treasury official who would speak to me only without being named, swore otherwise. He insisted that the agency had plenty of tools to force mortgage companies to deliver on their obligations. Once a servicer signed up for the program, this constituted a legal contract, with sanctions applicable, he said.

As the months passed and horror stories mounted, the Treasury Department repeatedly chastised mortgage companies for their poor performance and vowed consequences.

"The banks are not doing a good enough job," Michael S. Barr, then the Treasury Department's assistant secretary for financial institutions, told me in November 2009, amid the latest batch of lousy program data. "Some of the firms ought to be embarrassed, and they will be."

But as more months passed without improvement, the department's threats proved hollow and then officials began to describe the program in different terms: It was merely voluntary. Congress had not given the administration authority to do anything meaningful.

As the president's speech in Mesa, Ariz., receded into history, it began to seem more and more like a photo opportunity, with the program that he launched nothing more than an effort to buy a little time and public favor while we waited for the only real fix to the foreclosure disaster -- an improving economy.

The administration has said that its initial relief program was tailored to help borrowers saddled with mortgages whose interest rates have been reset higher, but not to address the defining problem of our time -- joblessness. Yet even a newer program, crafted precisely to help people who can't make their mortgage payments as a result of job loss, is foundering. Less than $218 million had been distributed from the $7.6 billion program as of the beginning of the year, according to a report in the Los Angeles Times.

So, here we are, three years after Obama's bold promise, still talking about the need for new plans. Maybe the terms of the settlement will prove beneficial. Maybe the enforcement will prove robust. We certainly need it.

But until the mortgage companies show genuine willingness to meet their obligations instead of gaming the system and until the Obama administration demonstrates resolve in forcing compliance, this settlement is best viewed as being like its predecessors -- an as-yet undelivered promise, with the bill long past due.