Keep People in Their Homes

Having worked in Washington for 16 years now, I've learned a bit about how an idea moves from the periphery of the debate here to its center.  And this week you could feel that happen for the rising concern about our economy.  Despite the President's emphasis on health care and climate change of late, there is a new and growing sense of urgency here about the worsening economy and whether the government's response so far has been adequate or effective.  

Unemployment in Michigan is over 15 percent now, and the US unemployment rate is now higher than the EU's.  In a Senate hearing on Thursday Chris Dodd publically criticized the President's mortgage foreclosure plan as not having delivered on its promise.  A new study finds dramatic drops in state government revenues, which foreshadow both what will happen at the federal level later this year and significant troubles again with state governments themselves.   While there was what appeared to be good news with the financial sector, a deeper analysis predicts significant troubles ahead even for banks who showed profits in the 2nd quarter.   Twice as many banks have failed this year already as failed in all of 2007 and 2008 combined.   Many friends of ours have talked in alarming terms about what is likely to happen to the commercial real estate market later this year, a coming crisis which could also devastate local and regional banks who have escaped the worst of the financial crisis so far.  Add to that what could our first national flu pandemic in a generation, which if it is virulent as some predict, could slow economic activity and productivity even further.

The President is clearly paying attention to all this, and has begun to address these growing concerns head on.  Last Saturday he devoted his weekly address to the economy.  On Sunday he offered up a thoughtful op-ed on the economy in the Washington Post.  On Tuesday the President proposed a compelling new community college plan which spoke directly to the struggle of existing American workers.   On Friday NEC chief Larry Summers gave a speech reviewing the Administration's economic progress so far, and where it hopes to go in the months ahead.   And next Wednesday night the President will hold a prime time press conference where one can be certain he will address the growing concerns about the economy to a national audience.  

As he prepares for his remarks next Wednesday, he would be wise to heed the warning from a new letter offered up by 21 freshman Democratic House members this week.  The NYTimes provides this summary: 

Representative Jared Polis, a freshman Democrat from Colorado who voted against the bill approved Friday in the Education and Labor Committee, said he worried that the new taxes “could cost jobs in a recession.”

To help finance coverage of the uninsured, the House bill would impose a surtax on high-income people and a payroll tax — as much as 8 percent of wages — on employers who do not provide health insurance to workers.

Mr. Polis said these taxes, combined with the scheduled increase in tax rates resulting from the expiration of Bush-era tax cuts, would have a perverse effect. “Some successful family-owned businesses would be taxed at higher rates than multinational corporations,” he said.

In a letter to the House speaker, Nancy Pelosi, Mr. Polis and 20 other freshman Democrats said they were “extremely concerned that the proposed method of paying for health care reform will negatively impact small businesses, the backbone of the American economy.”

There have been calls from some quarters for a 2nd stimulus plan, an acknowledgement that what the first stimulus has not done enough to stop the current economic deterioration.  This may be necessary, but I think what will need to be done is much more comprehensive than just a new stimulus plan.  Future action could include a much more aggressive action against foreclosures, a more honest assessment of the health of our financial sector, an immediate capping of credit card rates and a rollback of actions taken by credit card issuers in the last few months, a speeding up of the 2010 stimulus spending, a completion of the Doha trade round and a much more aggressive G20 effort to produce a more successful global approach to the global recession, the quick passage of the President's community college proposal, enacting comprehensive immigration reform which will bring new revenues into the federal and state governments while removing some of the downward pressure on wages at the low end of the workforce, and recasting both the President's climate and health care initiatives as efforts which will help stop our downward slide and create future growth.

The worsening economy has become the nation's number one problem.   We will need a new language to talk about it, moving beyond the words stimulus and recovery which no longer seem to speak to the gravity of the economic moment we are in.  This is the most important work in front of the government now, and I look forward to hearing the President on Wednesday night about his plans for the remainder of the year.

For more on this be sure to read this excellent Thursday essay from Rob Shapiro.

The Great Depression deeply affected the attitudes of the generation that came of age in the 1920s and 1930s. For example, it made the country thriftier and more Democratic. It took two full generations for other social changes to turn us into a society that was more Republican and saved much less -- shifts led, as before, by those who came of age in the bleak times of the 1970s. Our current economic upheavals are the most serious since the 1930s, so it’s appropriate to consider how they may affect American attitudes going forward. And the early surveys suggest that those who came of age during this crisis -- the Millennials born from 1982 to 2000 -- and now America’s largest generation by sheer numbers — already embody distinctive attitudes.

One way to glimpse how these tough times may affect our national psychology is to understand the forces that make times so tough. We’ll start today with an aspect close to people’s sense of themselves: their homes, or more generally, housing. We’ve all now lived through an historic housing bubble which, to begin, was very different socially from most bubbles in history: Unlike tulips, the South Seas, the 1920s stock market or other famous bubbles, this one was not primarily the business of speculators and affluent people. Nearly 70 percent of Americans own their houses, including most middle-class people as well as a broad swath of moderate and even low-income families. So, this bubble’s impact is being felt very broadly. That should be no surprise, since we give home purchases super-sized tax breaks and regulatory subsidies.

The irony is that while we go out of our way to encourage Americans to put their savings in this basket, in the form of home equity, we also encourage them to keep those savings small. First, we provide a large mortgage deduction which encourages people to buy houses -- and to buy way above what they could afford, but for that deduction. That’s one reason why housing prices generally trend upwards. But the way we provide the deduction actually cuts against saving much, since the deduction isn’t for what we “save” by owning our houses -- there’s no tax break for the downpayment, for example. Instead, it effectively encourages people to save relatively little, since they get to deduct only the interest on the mortgage loan, which represents what they don’t own or “save.”  The natural result is that most people borrow 90 or 95 percent of the value of their house --  just as Bear Stearns and Lehman Brothers did. We also encourage people to keep their “savings” in housing small, by providing tax breaks for them to pull out the equity in their houses in the form of tax-preferred refinancing and home equity loans.

The result is that large numbers of people end up saving relatively little by owning their houses -- and that’s especially the case when a housing bubble creates an illusion of significant savings. Federal Reserve data show that people’s home equity, or what they “save” through their homeownership, as a share of the value of their homes, has been generally falling for 60 years — which happens to be the time period since we enacted the major tax preferences for housing. Moreover, since 1985, that share has fallen from nearly 70 percent to 43 percent. Strikingly, this share remained stable during most of the bubble -- because as housing prices rose, people withdrew more and more of what they had “saved” as equity. And in the two years since the bubble first burst, home-equity savings has fallen by about one-third, from 60 percent to 43 percent.

Today, an estimated 12 million people are under water with their mortgages. Since they owe more than their houses are worth, the bursting bubble wiped out their life savings. Moreover, the data which show that people’s home equity is still equal to 43 percent of the value of their homes combines two very different groups of people: Nearly half of homeowners own their houses free and clear (mainly older people), while the other half has modest or little equity.
All of this could really change American attitudes toward saving. For one thing, the generation that came of age as these developments unfolded, along with everyone who staked their economic futures on ever-rising housing values, are much less likely to see housing as a safe way to save. That attitude correction in itself could provide a long-term drag on rising housing prices. There also are millions of people who counted on bubble-prices to fund their retirements. That’s been especially true of later Baby Boomers and early Baby Busters, the parents and older siblings of those coming of age in this period. A rude attitude adjustment is also coming for those who haven’t bothered to save much because they’ve counted on inheriting the elevated value of their parents’ houses.

The bottom line is that Americans once more may find themselves more inclined to save --  because now they have to -- and less inclined to use housing values to do it. Since stocks don’t seem much more attractive, that could mean more saving in the safest assets, which are Treasury bonds. And that would be just what an Administration and government determined to act big, bold and expensively, will need to carry out those plans.

Since September, NDN has argued that the federal government must place an emphasis on keeping people in their homes commensurate to that placed on the financial sector, as the housing crisis is at the root of the financial cave-in. Today in Phoenix, President Barack Obama will release his plan to keep people in their homes. In his remarks, he will say:

The effects of this crisis have also reverberated across the financial markets. When the housing market collapsed, so did the availability of credit on which our economy depends. As that credit has dried up, it has been harder for families to find affordable loans to purchase a car or pay tuition and harder for businesses to secure the capital they need to expand and create jobs.

In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen – a crisis which is unraveling homeownership, the middle class, and the American Dream itself. But if we act boldly and swiftly to arrest this downward spiral, every American will benefit.  And that’s what I want to talk about today.

The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it; by modifying loans for families stuck in sub-prime mortgages they can’t afford as a result of skyrocketing interest rates or personal misfortune; and by taking broader steps to keep mortgage rates low so that families can secure loans with affordable monthly payments.

In September, as NDN launched a campaign to keep people in their homes that included strong criticism of the Bush/Paulson Treasury plan, NDN President Simon Rosenberg and Globalization Initiative Chair Dr. Robert Shapiro wrote:

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.

For more on the Obama plan to keep people in their homes, click here. For more background on NDN's campaign to do just that, click here.

New York City - Debt crises, as I have written before, are as old as civilization. And history has shown that when debt exceeds the ability to repay, there is only one solution: debt reduction. This can take the form of a general release as in the Biblical jubilee or laws of Solon in ancient Athens, a moratorium on repayment and reduction of interest as in the decrees of the Roman emperor Tiberius, forgiveness of principle as in Bono's initiative for the developing world, bankruptcy at the level of the individual firm, or if all else fails, inflation as in Germany after World War I. However, there is no getting around the fact that when people can't pay, the only real answer is debt reduction. It is time for Congress and the Administration to face up to that fact in the arena of mortgages as we work through the current financial crisis.

Mortgages remain a key part of the current crisis, as evidenced by the vastly different fate of banks that currently hold mortgage-backed securities such as Citi (whose stock is trading at 3.7) and banks that avoided them such as JP Morgan Chase (whose stock is trading at 25).  The biggest casualties of the crisis so far -- such as Bear Stearns, Lehman and AIG, not to mention Fannie and Freddie -- fell, in large part, due to their involvement with mortgage- backed securities. Mortgage-backed securities and the mortgages that underlie them remain at the eye of the financial hurricane.

However, at the level of the individual household, the mortgages that underlie them are also hampering recovery. Forced to choose between keeping their homes and spending, people will try to keep their homes as long as possible. Unsustainable mortgage payments, thus, are a direct challenge to any effort to jump start the economy. Absent real action by the government, these mortgage payments will continue to drive foreclosures, lower home prices and eviscerate household budgets for the foreseeable future. Fortunately, there is something government can do.

While principle amounts as well as interest rates are a problem, the latter can be altered simply by allowing Americans to refinance into affordable fixed rate mortgages. Of course, banks themselves are not about to lend money to mortgage buyers at 4% in the current environment. That is why the federal government needs to step in with an ambitious new federally guaranteed mortgage to solve the mortgage crisis once and for all. 

A new low-interest mortgage is the key ingredient needed to get American households spending again. In other words, it is no exaggeration to say that economic recovery is hostage to mortgage reform.

Someone who has been writing about the need for debt reduction for some time is British historian Niall Ferguson who returns to the subject today in the Financial Times.  He notes that in the 19th century, it was common for governments to replace 5% notes with 3% notes through a process called conversion. When markets are working properly, it is often possible for borrowers themselves to practice conversion by refinancing at a lower rate. However, in today's environment in which underwater mortgages continue to cripple household budgets but replacement mortgages are hard to come by, Ferguson makes the point that conversion of the whole class of adjustable rate mortgages with a new low-interest mortgage is needed to work through the current crisis.

Not everyone would take advantage of the U.S. mortgage, as I would call it, nor should they.  If someone's house has depreciated well below the level of the mortgage, that mortgage is no longer worth par. Provision might be made to permit banks to sell underwater mortgages at a hefty discount. However, a large share of high-interest mortgages that are currently problematic for lenders and crippling for borrowers could be converted into stable-performing mortgages through an orderly refinancing into a 4% fixed-rate mortgage. A universal waiving of pre-payment penalties would be a small price to pay to fix a gigantic problem with one stroke. The program is doable today at rates south of 5% because of historically low costs to the government of borrowing. 

The benefits going forward would be immense. Ferguson argues that "permanently lower monthly payments for a majority of US households would almost certainly do more to stimulate consumer confidence than all the provisions of the stimulus package, including the tax cuts."  In my view, they would complement other efforts. And think of the long-term benefits after the current crisis subsides! A stable, low-cost mortgage for American families would improve family budgets, living standards and the U.S. economy for many years.

In short, America needs three things to stimulate the economy: the recovery package that is now approaching passage; a plan to revitalize the banking sector, which the Treasury Department should release soon; and finally, a 4% fixed-rate mortgage to address the housing crisis. Fixing the housing problem was mysteriously absent from the Bush efforts to address the crisis. Now that Obama economic team is in place, the Administration and Congress should work rapidly to develop this critical third piece of the economic recovery.

With President-elect Obama and congressional leaders meeting this week to discuss the economic recovery and reinvestment package, NDN is re-releasing a selection of its economic policy analysis and recommendations from the past few years. I hope you find these essays, memos, and papers helpful.

Background: Economic Recovery and Reinvestment

• Getting the Stimulus Right by Michael Moynihan, 1/6/2009 - Moynihan makes a number of suggestions for ensuring that the upcoming, record-size stimulus package is a success, including a board to oversee the vast expenditures.

• A Vision for a Modernized Electric Grid: Clean Infrastructure for a 21st Century Economy, 11/18/2008 - NDN's Green Project hosted this discussion with Congressmen Jay Inslee and Earl Blumenauer, FERC Comissioner Jon Wellinghoff, Kurt Yeager, and Reid Detchon on the benefits of modernizing the nation's electric grid as part of a clean infrastructure agenda.

• A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.

• Accelerating the Development of a 21st Century Economy: Investing in Clean Infrastructure
  by Michael Moynihan, 10/18/2008 – NDN Green Project Director Michael Moynihan outlines a strategy for investing in clean infrastructure that will help create long-term prosperity.

• Solar Energy: The Case for Action by Michael Moynihan, 8/1/2008 – This major paper on the dynamic solar industry argues that accelerating the deployment of solar energy must become a top economic policy priority of the United States.

• The Green Economic Opportunity and Energy and the American Way of Life, 8/1/2008 - This two-part event featured an address from U.S. Senate Assistant Majority Leader Dick Durbin on the benefits of a low-carbon economy and Roger Efird, Greg Kats, Jack Hidary, and Shyam Kannan discussing green buildings and clean technology.

• Investing in Our Common Future: U.S. Infrastructure by Michael Moynihan, 11/13/2007 - This
  far-reaching paper proposes a set of measures rebuild and advance our aging infrastructure. These proposals include a GREEN Act to require that federal infrastructure and buildings meet a higher set of environmental standards that not only address issues such as global warming but also establish American leadership in green technologies.
• Tapping the Resources of America's Community Colleges: A Modest Proposal to Provide Universal Access to Computer Training by Dr. Robert Shapiro, 7/26/2007 – This innovative proposal details how every American can have access to computer training, thereby upgrading the skills of the nation’s workforce.

• A Laptop in Every Backpack by Simon Rosenberg and Alec Ross, 5/1/2007 – Rosenberg and the One Economy Corporation’s Ross offer a modest proposal for putting a laptop in the backpack of every American sixth grader, as connectivity to and facility with the global communications network are essential for success in the 21st century.

Background: Keeping People in Their Homes, The Bailout

• If Detroit Goes Down, Will It Take the Economy -- and the GOP -- With It? by Dr. Robert Shapiro, 11/19/2008 - Shapiro argues that, since the Bush Administration is at least partially responsible for the economic situation facing the automakers, it should put its weight behind helping the industry and its workers.

• Notes on the Financial Crisis by Michael Moynihan, 9/26/2008 - Moynihan examines the panic fueled by the Bush Administrations inadequate response to the financial meltdown.

• Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective. 

• Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

• NDN to Congress: "Keep People in Their Homes" by Simon Rosenberg and Dr. Robert Shapiro, 9/17/2008 - NDN made this leading statement on the need for the federal government to keep people in their homes.

Background: A New Economic Strategy for America

• The Idea-Based Economy and Globalization: The Real Foundations of American Prosperity in the 21st Century by Dr. Robert Shapiro, 1/23/2008 – In this important paper, NDN Globalization Initiative Chair Dr. Robert Shapiro examines how and why U.S. companies and workers lead the world in developing and applying new intellectual property, and why this leadership in innovation constitutes a critical U.S. advantage in globalization.

• NDN Poll Memos: American Voters' Views on the Economy and Globalization - Clamoring for Change, Persistent Pessimism, Democrats dominating on economic issues, 11/2/2007; Americans’ Views of the Present and Future Economy: Anxiety and Opportunity, 11/6/2007 - NDN’s comprehensive polls of American attitudes in 2007 about the economy make it clear that that the American people understand the current era of globalization, but are frustrated with the inability of their leaders to provide an economic framework that adequately and effectively deals with its impacts.

• The New Landscape of Globalization: The Real Foundations of American Prosperity in the 21st Century by Dr. Robert Shapiro, 6/20/2007 – Shapiro offers this forward-looking paper on the current state of globalization and how America can thrive in this new economic era.

• Meeting the Challenges of the 21st Century: Crafting a Better CAFTA by Simon Rosenberg, Dr. Robert Shapiro, and Joe Garcia, 6/9/2005 - NDN calls on progressive policymakers to face squarely our own vision of how globalization can and should work, as well as how America can best promote economic and political progress by our Latin American neighbors.

According to Congressional Quarterly yesterday, House Democrats are gearing up to demand more TARP funding for foreclosure prevention. House Speaker Nancy Pelosi and House Financial Services Chairman Barney Frank have been collaborating on a bill that would close a loophole found in the original bailout language. This bill would take much needed steps towards redirecting funds and keeping people in their homes.

House Speaker Nancy Pelosi said Monday she has directed House Financial Services Chairman Barney Frank , D-Mass., to write a bill that would enforce language in the bailout law intended to keep people in their homes.

“It was very clearly spelled out in the initial legislation that funds would be used for mortgage foreclosure forbearance,” Pelosi said, adding that the foreclosure language was essential for winning Democratic support to pass the broader bailout bill.

But when Treasury Secretary Henry M. Paulson Jr. abandoned the asset purchase program, instead favoring capital injections for banks, the foreclosure prevention language also fell by the wayside. So far, Paulson has resisted calls to do more to offer direct help for struggling borrowers. 

Pelosi emphasized that some of the last batch of potential TARP funding should be provided to mortgage foreclosure relief, but she added that she had set no set goal for how much should be provided to help homeowners. “As much as is needed,” Pelosi said. “Because that is really what is going to get to the core of the financial crisis. . . . People are losing their homes. . . . Communities are affected.”

Many Democrats are outraged with how TARP bailout funds have been handled by the Treasury. While the bailout language states explicitly that efforts must be made to prevent housing foreclosures, Treasury Secretary Henry Paulson has largely ignored it and focused on capital injections for banks. NDN applauds Pelosi and Frank for undertaking this effort, as we have argued since September that keeping people in their homes is essential to abating the financial crisis. For more on NDN’s campaign to keep people in their homes, click here.

It has now become conventional wisdom that the housing crisis is at the root of the financial meltdown – an argument NDN has been making since September. 60 Minutes gave voice to that shared sentiment last night, devoting almost the entire program to housing issues and President-elect Barack Obama discussed the very same topic in his weekly YouTube address.

The first 60 Minutes segment, an interview of House Financial Services Committee Chairman Barney Frank, discusses the broad range of issues facing the influential Massachusetts Congressman, including the current financial and housing crises.

With news coming today that the United States lost 533,000 jobs in November, policymakers have begun to realize that, in addition to TARP like bailout plans and the stimulus package that President elect Obama will indubitably pass as his "first order of business," more must be done to address the underlying causes of the financial meltdown. High among these is instability in the housing market, and as NDN has argued since September, more must be done to keep people in their homes.

Thankfully, the effort to do just that is gaining steam, both here and abroad. British Prime Minister announced his effort to staunch foreclosures, and Federal Reserve Chairman Ben Bernanke "warned that the soaring number of foreclosures threatened the economy. He then proposed some ideas — government-engineered loan modifications, and more taxpayer money to help people refinance — to keep people in their homes."

More on the ideas being floated from the New York Times:

"The public policy case for reducing preventable foreclosures does not rely solely on the desire to help people who are in trouble," Mr. Bernanke said. "More needs to be done."

At the Treasury Department, meanwhile, top officials continued to work on a plan to bolster the housing market by subsidizing 30-year home mortgages with rates as low as 4.5 percent — a level that home buyers have not seen since the early 1960s.

Both actions highlighted how economic policy makers have come almost full circle. Since the financial crisis began last summer, both the Fed and the Treasury had focused almost exclusively on patching up the financial system — propping up banks, Wall Street firms, money market funds and issuers of commercial debt.

Months ago, NDN President Simon Rosenberg and Globalization Initiative Chair made the economic case for doing more to keep people in their homes. For more on that campaign, click here.

As he has through much of the financial crisis, Prime Minister Gordon Brown is again exerting impressive leadership, this time on staunching foreclosures.

On the BBC:

Many people hit by the downturn will be able to defer part of their mortgage interest payments for up to two years under plans unveiled by Gordon Brown.

The plan is designed to give those who lose their jobs or suffer a big cut in income extended breathing space if they are facing repossession.

The scheme will cover mortgages worth up to £400,000, the BBC understands.

The lender and homeowner will agree on the proportion of payment to be deferred, but it could be up to 100%.

NDN remains impressed by Brown's leadership in the face of these financial and economic crises and depressed by the Bush Administration's complete abdication of leadership. For more on NDN’s campaign to Keep People in Their Homes, click here.