How Failed Obama Foreclosure Relief Plan Contributes To Jobs Crisis [UPDATE]

WASHINGTON -- The Obama administration's inability to stem the foreclosure crisis ricocheted dramatically on Friday, as the Labor Department released unexpectedly low job-growth numbers that pushed the unemployment rate back over 9 percent. The jobs report comes on the heels of both a devastating report that found housing prices hit new lows in March and warnings from economists that the tumbling real estate market threatens to drag the economy back into recession.

"The jobs numbers, they ain't pretty, man," economist Jared Bernstein told HuffPost. Bernstein left the Obama administration last month to join the Center on Budget Policy and Priorities, a highly respected left-of-center Washington think tank. "You don't wanna make too much out of one month, but when that month reflects other trends in the economy, you want to take note."

"The bottom line is that the job market simply isn't meeting the basic employment and income needs of working families," he said.

"This is an emergency," said Preeti Vissa, community reinvestment director of the Greenlining Institute, a foreclosure relief advocacy group. "The ongoing foreclosure crisis is well on the way to dragging the whole economy into a double-dip recession if strong action isn't taken immediately."

The connection between the foreclosure crisis and rampant unemployment is well known by economists and the administration. Diving home values and heavy debt burdens force cutbacks in both consumer spending and tax revenue for local governments. These reduced spending levels and lower government revenues force layoffs in both the public and private sector. And those layoffs, in turn, spur more foreclosures. A July 2010 report from the International Monetary Fund suggested that foreclosure problems added 1.25 points to the unemployment rate -- or more than 10 percent.

On Thursday, President Barack Obama warned House Democrats in a private meeting that the housing situation could drag down the entire economy. His stated concern about foreclosures, however, doesn't match up with the administration's public response.

One House Democrat who was in the meeting complained that the president "said housing was the main thing dragging down the economy, with Geithner nodding solemnly like they'd done everything humanly possible for the last 27 months to fix the housing market."

Rep. Dennis Cardoza (D-Calif.) said Obamas approach to the foreclosure crisis has been "an absolute failure" and predicted it will continue to drag down the economy unless he changes tack.

"For the life of me, I can't figure out why a community organizer who says he cares about families, who says he cares about communities, has just turned his back on one of the biggest problems in America, said Cardoza, who co-chairs the Democratic Caucus Housing Stabilization Task Force. "The way they get defensive when you point out it's been a failure just underscores to me they don't have a clue about what to do."

Cardoza's central California district has been hit hard by foreclosures. The three cities he represents -- Modesto, Stockton and Merced -- all rank in the top 10 cities with the highest foreclosure rates in the country. Three out of five homeowners in his district are "underwater," owing more on their home loans than their houses are worth.

"I dont blame [the administration] for causing the housing crisis," Cardoza said. "But at two-and-a-half years in office, if they can't figure out something to do soon that turns us around, I guarantee you they will pay for this at the ballot box.

Sen. Jeff Merkley (D-Ore.) said Tuesday that he plans to renew his push on the administration in the coming weeks to put housing issues on the front burner. Specifically, he called for a better mortgage modification system and foreclosure intervention that includes third-party mediation.

"Our economy cannot recover until our housing market recovers, Merkley said in a statement.

Republicans took shots at Obama for botching both the economic policy and the messaging.

"There's an old axiom in politics: under-promise, but over-deliver," said a Senate GOP leadership aide. "He did the opposite."

For nearly a year, the Obama administration has been boasting to voters of economic improvement. The White House embarked on a PR blitz dubbed "Recovery Summer" last year and toured the country to spread the good news that jobs were finally coming back.

Political strategists say that message is not convincing businesses, consumers or voters. The heavy losses sustained by congressional Democrats in the November 2010 elections were largely the result of the sagging economy.

"They've gotta show that they're gonna be on the side of the middle class in these hard times," said Mike Lux, CEO of Progressive Strategies, a Democratic political consulting firm. "The only way an administration wins when they're governing during hard times is by convincing people you're still working for them in the middle of a very tough moment. I just don't think there's any way to convince people that the economy is good, because it ain't."

That call for a new economic narrative from Obama reflects consistent polling results from Democratic pollster Stan Greenberg, who urged Democrats on Thursday to alter their message to reflect "a real economy" outside Washington "that's not changing."

"The indicators are all speaking together that something more needs to be done," Bernstein told HuffPost. "I'm not sure there's any magic to such a pivot other than to stand up and say something needs to be done."

Bernstein recently defended the administration's inaction on housing , saying that it had been very difficult politically to provide relief to borrowers.

In an early May interview with HuffPost, White House economic adviser Austan Goolsbee cheered what appeared to be three consecutive months of stronger job growth.

"It's clearly a trend," Goolsbee said. "We've had, in the last three months, an average gain of a quarter of a million private-sector jobs a month. That could not be more different than the three-quarters of a million jobs we were losing when the president took office."

But today's numbers undermine confidence in the trend. The Labor Department revised prior months' job gains so that the past three months -- March, April and May -- showed an average climb of just 160,000 jobs per month, only marginally better than the 152,000 increase seen in the prior three-month period.

The administration's claims of job market improvement have frequently been coupled with caveats. Even the triumphant Goolsbee warned last month that "we've got a long way to go" on the economy. But the administration has been unwavering in its claims that its signature foreclosure relief effort, the Home Affordable Modification Program, has been a success.

Anti-foreclosure advocates have long bemoaned the program as overly reliant on the very Wall Street banks whose reckless lending helped spark the housing and financial mess.

HAMP was also thoroughly criticized in several reports from the Congressional Oversight Panel for the bank bailout , and a new report from the Government Accountability Office indicated that over 75 percent of housing counselors have a negative view of HAMP.

The program has only helped a small fraction of the 3 million to 4 million borrowers that President Obama claimed it would aid when the initiative was announced in February. Some homeowners have reported being stuck in limbo for more than a year.

Advocates say several other plans could provide relief without creating "moral hazard" -- a term economists use to describe a policy that could inadvertently encourage economically destructive behavior. By revising bankruptcy law to allow judges to write-off mortgage debt in bankruptcy, struggling homeowners could receive aid, provided they were willing to subject themselves to the financial hardships of filing for bankruptcy.

Alternatively, economist Dean Baker, co-director of the progressive Center for Economic and Policy Research, has promoted a "right-to-rent" policy, in which borrowers on the brink of foreclosure would be given the right to rent their homes for up to five years. Since banks are reluctant to operate as landlords, Baker says the policy would encourage banks to offer meaningful loan modifications.

Still, Bernstein added, the administration needs to resist the "cut spending craze," which "threatens to make an already tough situation worse."

While congressional Republicans are unlikely to let up in their political assault on government spending, he noted that a bipartisan commission led by former Federal Reserve Vice Chairwoman Alice Rivlin and ex-Sen. Pete Dominici (R-N.M.) in Nov. 2010 proposed a payroll tax cut that could create jobs by putting more money in workers' pockets. The Rivilin-Dominici plan recommended that the government lift all payroll taxes for both companies and employees for one year.

This report has been updated to include comment from Cardoza, Merkley and the Senate GOP aide.

Ryan Grim contributed to this report.