Business Reality vs. Wonk Theory
By Arnold Kling
And while the state attorneys general — at least in states like New York and California — might have a more aggressive stance towards the big banks than Treasury does, the fact is that they, too, are simply not set up to implement real enforcement. Which is the main reason why the banks have de facto impunity in this country. Even when the government tells them to do something, they face no real negative consequences from failing to do it.
He is dismayed that the government failed to “enforce” its mortgage modification program.
I put “enforce” in quotes, because anyone with any experience in the mortgage industry could have told you that it would take years to get the machinery in place to make something like this work. I pointed this out when I testified at a Congressional hearing, when HAMP was only a few months old.
I tried to explain that Freddie Mac and Fannie Mae had spent years training banks to follow guides contained in two enormous notebooks. One for originating mortgages (the seller’s guide) and one for servicing mortgages (the servicer’s guide).
HAMP combines issues in mortgage origination (determining borrower eligibility, creating proper loan documents, and much more) with mortgage servicing (instructions on how to process an existing loan, including procedures for dealing with delinquent loan payments, and much more). It is as if you ripped out hundreds of pages from the seller’s and servicer’s guides, rewrote them, shuffled them, flung them in the air, and told banks to pick them up and follow them.
In business, you take the principal-agent problem seriously. If you want your agent to comply with your expectations, you allow for the fact that you will need to clarify your expectations and train the agent to carry them out.
If you are a policy wonk, you can skip those steps if you want to. Just assume that you can snap your fingers and everything will take place the way you intend it.
The HAMP program was a creature of policy wonks. Not people with business experience.