mortgages

President Barack Obama today announced a plan to cut foreclosures and reboot new mortgage financings, at least when the economy shows signs of new life. The fact of offering a plan is an advance, given that Bush and his people did nothing and proposed nothing, even as the crisis reached critical mass. As we have written here since the crisis first broke, keeping people in their homes is fundamental to solving the larger economic problem. Again, it’s the fast-rising foreclosures and mortgage delinquencies that are eroding and destroying the value of hundreds of billions of dollars in mortgage-backed securities and the credit default swaps that “back them up” (sic). And it’s the falling value of those securities and swaps, in turn, which has led to the effective bankruptcy of financial institutions that had leveraged themselves to their eyeballs to buy them or issued them and then kept them (and how dumb was that?).

While the act of proposing anything serious puts the Obama Administration ahead of its predecessor, passing such a low threshold is hardly very meaningful -- especially since the problems continue to worsen. More than nine percent of mortgages today are either in foreclosure or delinquent, two to three times the numbers from just two years earlier; and if everything continues to unravel, those numbers could double in another year. If that happens, there won’t be many large, U.S. banks left standing. Many of the homeowners now in trouble could manage, if they just could refinance at current rates. But banks quite naturally see someone in financial trouble as a poor credit risk for a new loan, which is what refinancing is. And the fall in housing prices means tens of millions of those people can’t qualify to refinance. That’s because refinancing is available today only if you owe no more than 80 percent of the original mortgage’s value. The catch for millions of families is that as the value of their home goes down, their existing mortgage (the one being refinanced) accounts for a greater percentage of the value being refinanced. In the worst cases, people just walk away from a $200,000 home with a $300,000 mortgage -- and who would refinance one of those? In millions of other, less extreme cases, the falling prices simply disqualify people for refinancing.

The Administration wants to address this precise part of the problem, by providing $75 billion in subsidies to banks to defray half of the cost of refinancing for several million homeowners at risk of losing their homes. Mortgages owned by Fannie Mae and Freddie Mac are also eligible here, and they’re the ones most likely to actually see their interest rates reset, since the government owns Fannie and Freddie and can direct them to do it. It will be harder to convince bankers already staring at enormous losses already on their books or soon to be there, especially if they’re worried that their bondholders could sue them for resetting loans. The plan also has some $100 billion for the Treasury to keep buying more of Fannie and Freddie’s failing mortgage-backed securities since, as we also have said repeatedly, until foreclosure rates return to normal, the biggest bank bailout in the world won’t prevent more banking losses.

There are more direct ways to address foreclosures. We could provide direct loans to tide over those in trouble, or Fannie and Freddie could reset the loans of everyone in trouble. The problem is that anyone advancing such a common sense approach would become a very large political target -- and not just for reflexively-critical House Republicans.

How could the president or his advisors explain to those who work hard and spend less, so they can keep their mortgage payments up to date, why they don’t qualify for a lower interest rate from the government, when their neighbor who spent more or just had harder luck does qualify? More plainly, how does the government choose who would qualify for such direct help without enraging most of those who wouldn’t? In effect, the Administration plan finesses this problem by letting banks choose, without compelling them to do so. But what if the economy continues to worsen and the plan doesn’t work, which is a very real possibility? Indeed, don’t be surprised to see the Administration revisit it six months from now with a much less “voluntary” approach.

Barack Obama's historic election as a new, national agent of change will face a daunting test as the economic crisis continues to accelerate, and the political pressures arising from what must now be called “The Great Recession” begin to reshape the response.

The latest evidence is today’s unemployment data: one million jobs lost in two months; the sharpest eight-month rise in the jobless rate since 1945, when tens of millions of soldiers and sailors were demobilized; and losses across every sector and every region. Jobs are in freefall along with the markets, investment, consumer spending and household wealth. And economists are now genuinely frightened by the course the Great Recession is taking, because there’s been nothing like it in anyone’s experience.

That’s why long-time advocates of fiscal probity now call for stimulus topping $1 trillion, and why every spending and tax idea floating around Congress for the last decade is back on the table again. The political pressures and real concerns are so overwhelming that there’s talk of large tax cuts, despite the consensus among economists that when people and businesses are as economically downcast as they are today, tax relief has little stimulus power. That’s not only politics at work; it also reflects a sense of grave foreboding among many of those same economists.

We do need unprecedented stimulus – but all of the stimulus in the world won’t change the course of this crisis until we also address its underlying forces. The wealth of American households and the portfolios of American financial institutions will continue to tank until the housing market stabilizes -- or at least until foreclosure rates return to normal. And the most aggressive, easy policy in our history won’t be enough, and financial institutions won’t begin normal lending again, until they’re more confident that the hundreds of billions of dollars in mortgage-backed securities and other derivatives they still own aren’t headed for the drain as well.

The new Administration can take on these challenges directly, as candidate Obama pledged to do with extraordinary foresight. For example, we can impose a 90-day moratorium on foreclosures and use the time to renegotiate the terms of tens of thousands of distressed mortgages held by Fannie Mae and Freddie Mac. One idea promoted by many economists is to convert those mortgages to 30-year fixed at 5.25 percent, which happens to be long-term mean rate for Fannie and Freddie mortgages. It won’t stop foreclosures, but it should bring down foreclosure rates to near-normal levels, which would do more to stabilize the financial system than the bailouts in the Bush Administration’s own Wall Street version of tsunami stimulus. And some tough love from the new Treasury Secretary could help restart the lending process: having done what we can to stabilize the value of their portfolios, we should consider requiring institutions receiving federal aid to use a real share of that assistance to restart their lending.

We need large-scale stimulus, but it will only work if we first address the underlying problems. Otherwise, 18 months from now, we could be $1 trillion poorer and have little to show for it.

Nine days ago, Dr. Rob Shapiro, Chair of NDN's Globalization Initiative, and NDN President Simon Rosenberg launched a "Keep People in Their Homes" effort to ensure that any proposal to put our financial markets and economy back on track include provisions to do just that. 

This strategy is now one of the core points of the Obama plan. Yesterday, Senator Hillary Clinton embraced the idea in a powerful op-ed, "Let's Keep People in Their Homes," in the Wall Street Journal. Today, the New York Times embraced it in its lead editorial, "What About the Rest of Us?"

On Tuesday of this week, Rob and Simon released a more detailed essay, entitled, "Keep People in Their Homes." On Wednesday, Rob wrote an important piece, "Back to the Basics: The Treasury Plan Won't Work." Rob's arguments from that essay received excellent coverage today in an insightful Wall Street Journal article, "Bailout Proposal Gets Hung Up Over Central Issue: Will It Work?" by Deborah Solomon and colleagues. Also today, NDN Fellow and Green Project Director Michael Moynihan argued in his essay, "Notes on the Financial Crisis," that the Administration needs to stop using panic as a negotiating tactic in an effort to reach an agreement.

I encourage you to read the Obama statement, Senator Clinton's op-ed and the New York Times editorial above.

NDN's argument is simple: among all the things the government can do to address the financial crisis, there is at least one thing it must do -- keep people in their homes. Keeping people in their homes will help stabilize the declining assets that are causing the current financial market collapse. We must drastically reduce the foreclosures that have destablized  the housing market underneath all the leveraged debt that is weakening our financial markets. Unless we do so, those markets will continue to weaken, even with a $700 billion bailout. And homeowners will continue to lose their homes. 

Passing an economic rescue plan that does not directly address declining home prices by helping people keep their homes is a risk too great for the American people to take. 

That's why we are asking today for you to do more than just read our e-mails. We are asking you to take action. We are asking you to call or e-mail your Senators and House Members, regardless of party, and insist that this provision be in any final economic plan. If you know Members of Congress outside of your state, call or e-mail them as well. 

While it is critical for Washington to act this week, it is more important that we do the right thing rather than the expedient thing. We cannot accept any deal that doesn't address the struggles of everyday people, particularly a deal crafted by an Administration that has gotten so little right these last 7 1/2 years. Please join us and make sure our elected officials do what they need to do in these next few days. The stakes are too great for us to get this one wrong.

In an op-ed published in today's Wall Street Journal, U.S. Sen. Hillary Clinton (D-NY) makes a forceful and compelling argument that any proposal to bail out Wall Street financial institutions must include provisions to help the millions of Americans who have lost or in are danger of losing their homes as a result of mortgage defaults and foreclosures.

Senator Clinton writes: 

There is a broad consensus that Congress must act to stave off deeper turmoil on Wall Street. Irrespective of the final agreement yet to be reached, there are several principles that must be part of a broader reform effort that begins this week and continues in the coming months.

This is not just a financial crisis; it's an economic crisis. Therefore, the solutions we pursue cannot simply stabilize the markets. We must also deal with the interconnected economic challenges that set the stage for this crisis -- and reverse the failed policies that allowed a potential crisis to become a real one.

First, we must address the skyrocketing rates of mortgage defaults and foreclosures that have buffeted the economy and ignited the credit crisis. Two million homeowners carry mortgages worth more than their homes. They hold $3 trillion in mortgage debt. Nearly three million adjustable-rate mortgages are scheduled for a rate increase in the next two years. Another wave of foreclosures looms.

I've proposed a new Home Owners' Loan Corporation (HOLC), to launch a national effort to help homeowners refinance their mortgages. The original HOLC, launched in 1933, bought mortgages from failed banks and modified the terms so families could make affordable payments while keeping their homes. The original HOLC returned a profit to the Treasury and saved one million homes. We can save roughly three times that many today. We should also put in place a temporary moratorium on foreclosures and freeze rate hikes in adjustable-rate mortgages. We've got to stem the tide of failing mortgages and give the markets time to recover.

The time for ideological, partisan arguments against these actions is over. For years, the calls to provide borrowers an affordable opportunity to avoid foreclosure as a means of preventing wider turmoil were dismissed as government intrusion into the private marketplace. My proposals over the past two years were derided as too much, too soon. Now we are forced to reckon with too little, too late.

As a result, the home-mortgage crisis slowly erode d the value of debt instruments upon which Wall Street firms were depending. That is how this house of borrowed cards began to fall. If we do not take action to address the crisis facing borrowers, we'll never solve the crisis facing lenders. These problems go hand in hand. And if we are going to take on the mortgage debt of storied Wall Street giants, we ought to extend the same help to struggling, middle-class families.

Senator Clinton's op-ed, entitled, "Let's Keep People In Their Homes," echoes NDN's statements of last week and this week. On Tuesday of this week, NDN Globalization Initiative Chairman Dr. Robert Shapiro and NDN President Simon Rosenberg released an op-ed, "Keep People in Their Homes," which can be read here.

NDN applauds Senator Clinton's leadership on this critical issue.

(For a PDF version of this essay, click here)

Last Wednesday, Rob and Simon staked out early and important ground, making a forceful argument that of the many steps the government needs to take to address the worsening financial crisis, one of its top priorities must be to keep people in their homes. 

We at NDN are pleased to see how central this argument has become in the important debate taking place now in Washington and across the country. Building on this initial statement, Rob and Simon offer this new essay, which offers further analysis and additional recommendations:

Keep People in Their Homes

by Rob Shapiro and Simon Rosenberg

A decade of reckless deregulation, mismanaged regulation and equally reckless private mismanagement has now brought the American and global economies to a crisis point. Investment banks, hedge funds and other financial institutions have borrowed hundreds of billions of dollars to sink into securities widely recognized to entail extraordinary risk, passing that risk along to millions of Americans whose retirement plans, pension funds and money market accounts found their way into funds set up by such mismanaged financial titans as Lehman Brothers, Bear Stearns, Merrill Lynch and AIG.

Through it all, the White House, Treasury and Federal Reserve have practiced their own reckless regulatory mismanagement, allowing the gradual accretion of the biggest financial house of cards in history. Now it has caught up with them and the rest of us, and those who let it happen are asking taxpayers to spend hundreds of billions of dollars to clean up this mess.

This crisis is far from over, and its effects are still spreading. We need a broad plan that will actually work to restore financial and economic stability. But those who have had little or no hand in it - America's taxpayers and most Members of Congress - should not be steamrolled into giving a blank check to those in the Administration who failed to head off this crisis. There are three primary reasons this plan is the wrong solution to the problem.

First, the check they want us to write is unlike any ever written before during financial crises. When Washington last took over the failing assets of private institutions, during the savings and loan bailout, taxpayers first took over the institutions themselves and then sold the assets, while the regulation of the remaining S&Ls was tightened and reformed to preclude another round of the same problems down the road. This time, Congress is being told that it must use taxpayers' money to buy up the degraded assets of hundreds of financial institutions while they continue operating as private entities and without any guarantee of regulatory changes that will prevent it from happening the next time. That's a bad bargain and terrible policy.

Second, it's doubtful that the plan will even work in its own terms. If the Paulson Treasury plans to buy the deteriorating securities at their current, low market values, it may help the institutions holding them to avoid further deterioration, but it won't reduce the losses they've already taken. Consequently, this bailout cannot actually lead us out of the crisis - unless the Treasury plans to pay these institutions above-market prices for the tanking securities they now hold, which would produce the largest direct transfer of money from taxpayers to shareholders and executives ever seen.

Third, the plan does not address the forces which continue to drive this crisis. At the base of the pyramid scheme that has infected our financial markets - underneath the credit default swaps and collateralized debt obligations created with borrowed money to "guarantee" mortgage-backed securities created with more borrowed money, in a housing market swollen by a historic bubble - lies the only real assets in the picture, the mortgaged homes of tens of millions of Americans. On that critical score, the Administration plan offers nothing

The only way to stop the cascading financial crisis consuming not only investment banks, investment funds, mortgage lenders and insurance companies, but also pieces of most Americans' retirement security, is to stabilize the housing market from which all of the rest arises. The Treasury and the Administration propose to use taxpayers to bail out the institutions which speculated in the securities based on that market. Given the system's current precarious position, a bail out of some kind cannot be avoided. But our government owes at least as much attention to homeowners facing foreclosure. If the Treasury and Fed had been willing to spend $85 billion on loans to strapped homeowners, as they did to AIG last week, the crisis might never have crested into the conditions that now require a system-wide bailout.

These mortgages are at the root of the crisis. It's their mounting defaults driving down the overall housing market which has brought venerable banks like Lehman Brothers and Bear Stearns. Before Congress leaves this week or next, it should enact legislation that either provides a mechanism for direct loans to people to avoid foreclosure or allows them to renegotiate their mortgages. This single step will keep untold numbers of people in their homes, help stabilize the housing market, help contain the crisis at one of its critical origins, and thereby help shore up the financial system. Paired with a program to provide more liquidity to financial institutions and an orderly way to write down their failing holdings, this step could finally take us past this crisis.

Even so, only a small share of the costs of this historic mismanagement are apparent today. This financial shock, on top of the housing and energy shocks that preceded it, have almost certainly pushed our economy into recession. That will further reduce the value of the assets held by tens of millions of American through their pension funds, retirement accounts, money market and mutual fund investments. The squeeze will be hardest on the rising numbers of Americans who will also lose their jobs. The need to help these people and millions of others keep their homes is urgent, then, for a host of economic and social reasons.

When Congress returns in December or next year, it will find itself with far fewer resources to finance badly-needed new initiatives in health care, climate change and tax policy. One urgent order of business, however, will be entirely within its capacity: adopt and apply strict and appropriate transparency, capital and other regulatory standards to all financial institutions. And the politicians who hailed the hands-off attitude that enabled this crisis to fester and break out, and who now blame greed instead of their own negligence, must be held accountable.