One of the major problems with the Obama administration’s foreclosure prevention efforts has been that it does not include a mechanism for reducing principle (the total amount owed) for mortgages that are underwater (where the outstanding mortgage balance is greater than the worth of the house). Part of this is due to the demise of mortgage cram-downs, which the banking industry has managed to defeat time and time again in the last few years.

But according to senior Treasury Department adviser Seth Wheeler, the administration hasn’t been pushing for principle reductions because it’s been hoping that mortgage servicers would implement them voluntarily:

“When the administration came into office last year, from the get-go, it has certainly been aware of the link between negative equity and challenges in housing,” said Wheeler. “As the administration initially designed the modification program last year, it was aware of negative equity, was aware that some servicers were doing principal reductions”…So for the past year, the administration had a policy of “rather than us endorsing a uniform approach to principal reductions, let’s give flexibility to servicers and hope that they do it on their own in the right circumstances,” Wheeler said.

One big problem with the mortgage modification portion of the administration plan (which does not address underwater mortgages) is that it relied too much on voluntary servicer action. It’s unfortunate to see the administration acknowledging that it had the same expectation when it came to principle reduction.

Currently, about one in four homeowners is underwater, which amounts to 10.7 million households. By June, a staggering 5.1 million borrowers are projected have home value’s that are below 75 percent of their outstanding mortgage balances, which new research suggests is the point when “the owner starts to think hard about walking away, even if he or she has the money to keep paying.”

“Negative equity is the single most important driver of defaults,” said Laurie S. Goodman, senior managing director at Amherst Securities. “If the other measures in [the Home Affordable Modification Program] aren’t working, the government will have to look at principal reductions,” added Brian Bethune, chief financial economist at IHS Global Insight.

While the administration is reportedly examining ways in which to incentivize principal reductions, the assistant Treasury secretary for financial stability, Herbert Allison Jr., said in a recent briefing that “we haven’t yet found a way of dealing with this that would, we think, be practical on a large scale.” But as I pointed out last month, not only is finding a way to reduce principal good economically, but it is good politically, as it will show that the administration is willing to go toe-to-toe with the banks in order to keep homeowners in their homes. So it would behoove Treasury to find a way to make this work.

Today, the House will be voting on a debt limit increase, and as CAP’s Michael Linden wrote earlier, there’s sure to be plenty of demagoguery on the part of Republicans, despite the fact that much of the recent increase in publicly-held debt is attributable to their policies. In fact, only a small portion of the publicly held debt (about $600 billion) is attributable to President Obama.

When the Senate voted last month to increase the debt limit, Republicans voted no as a bloc, which was essentially a vote for the U.S. to default on its debt. Before the vote, the GOP portrayed its collective action as a stand against spending. “It’s like the drunken sailor asking to have the bar open all night,” said Sen. Judd Gregg (R-NH).

But Rep. Mike Simpson (R-ID) told it straight to Congress Daily, and explained the real reason for blanket GOP opposition:

On the other side of the aisle, Republicans contend it’s not their responsibility to take this unpopular debt vote and not to expect their help. Rep. Mike Simpson, R-Idaho, a member of the Budget Committee, said, “That is the burden of the majority.“

The Senate’s vote was the first time in more than a decade that no Republican supported an increase in the debt limit. Under President Bush, the debt was increased at least seven times, and the “publicly held debt went from $3.3 trillion at the start of fiscal year 2002 (his first full fiscal year in office) to $6.3 trillion on the day he left office.” That constitutes the largest increase under any President in history, and accounts for nearly 40 percent of the total publicly held debt.

As Open Congress pointed out, “worth noting, of course, is the sudden drop off in Republican support for raising the debt ceiling as soon as Obama took office”:

A little number crunching shows that under Bush the Republicans provided, on average, 39 of the 50 votes that were generally needed to raise the debt ceiling. But under Obama, the Republicans have provided only 1 vote on average each of the three times the Senate has voted on it.

Yes, Democrats did the very same thing when the GOP was in power, lending little support to debt limit increases. But it’s the height of hypocrisy to now lampoon debt increases as the product of Obama’s profligate spending after the last eight years. Voting against an increase is a crass political vote, since debt increases are easy to criticize, while defaulting on the debt is simply not an option. At least Simpson is willing to acknowledge that.

Our guest blogger is Michael Linden, Associate Director for Tax and Budget Policy at the Center for American Progress Action Fund.

Today, the House of Representatives will vote on increasing the nation’s debt limit. Presumably, this will spur conservatives and deficit peacocks to claim that the President Obama has gone on some kind of spending binge and has run up tons and tons of new debt. Despite these claims, the truth is that only a tiny fraction of our current debt burden is due to actions taken by President Obama.

On the day President Obama was inaugurated, publicly held debt was $6.3 trillion. Today it is $7.8 trillion. But, of course, pinning that entire $1.5 trillion increase on President Obama would be incredibly dishonest since Obama was handed a massive budget shortfall. After all, the Congressional Budget Office was projecting a deficit of $1.2 trillion for fiscal year 2009 even before Obama was sworn in. To blame the current administration for all the new debt accrued last year is to deliberately ignore that inconvenient fact.

But it is also true that President Obama did take actions that increased the deficit and therefore incurred additional debt. President Obama signed a 2009 omnibus appropriations act that increased non-defense discretionary spending by about $30 billion (with more than a third of that increase going to veterans’ health programs and international affairs), and a defense budget that increased spending by about $36 billion.

He also signed a reauthorization of the Children’s Health Insurance Program which increased spending by $1 billion. And of course, he supported and signed the American Recovery and Reinvestment act which resulted in $112 billion in additional spending, and $88 billion in tax cuts. All together, President Obama’s actions led to $267 billion worth of new debt in fiscal year 2009.

On October 1, 2009, fiscal year 2010 started, and since then we’ve amassed another $300 billion in debt. While it is probably unfair to ascribe even all of this debt to President Obama (given the economic conditions and the lingering budgetary damage from the Bush administration), for simplicity’s sake, let’s go ahead and do so anyway. All together then, President Obama is responsible for less than $600 billion of our current tally of publicly held debt. That’s less than 8 percent of the total.

It’s worth noting that a much larger percentage of our current debt was run up under President Bush. During his eight years in office, publicly held debt went from $3.3 trillion at the start of fiscal year 2002 (his first full fiscal year in office) to $6.3 trillion on the day he left office. That $3 trillion was the largest increase in publicly held debt under a single President in the history of the United States, and accounts for nearly 40 percent of our current total.

That’s why it’s the very definition of peacockery for Republican Senators to vote against raising the debt limit (as 39 of them did last week) claiming to be all for fiscal discipline, when it was a Republican president who got us here.