Keep People in Their Homes

Leonhardt on the Administration's Housing Plan

NDN Chair Dr. Robert Shapiro today blogged on the Administration's plan for the housing crisis. Here's what David Leonhardt of the New York Times had to say about who the Administration's plan would help:

Certainly, some who took out a reasonable mortgage and later lost their job will be helped. But people who bought too much house — and banks that allowed people to do so, or even encouraged them to do so — will also benefit. As distasteful as this may be, it’s the only way to make a serious dent in foreclosures and, in the process, to help the financial system.

These same political calculations help explain the public emphasis that the White House is giving to the relatively modest steps it is taking to help underwater homeowners — those with a mortgage worth more than the value of their house — who can afford their monthly payments.

These homeowners are precisely the sort who seem as if they have done nothing wrong. They seem like innocent victims of the housing crash.

The new plan will help some of them refinance their mortgage at a lower rate. But only loans backed by Fannie Mae and Freddie Mac — not many of the subprime loans at the heart of the foreclosure problem — will be eligible. And the loan cannot exceed 105 percent of the current value of the property. Since prices have fallen almost 50 percent in some areas, like Phoenix, Las Vegas and parts of Florida, the cap will exclude many homeowners.

More here.

Leonhart and Shapiro both point out that the politics of the housing situation are incredibly difficult. The Administration's plan certainly attempts to deal with this, and Obama was very careful today about the language of who the plan will help. These multiple economic crises have tested the American ethic of personal responsibility many times. One would imagine that attempts to keep people in their homes will not be the last we hear of this conundrum.

An Economic and Political Primer on the Administration's Plan for the Housing Crisis

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.

Obama Plans to Keep People in Their Homes

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.


NDN Backgrounder: Recovery, the Financial System, and Protectionism

With the economic recovery plan on the verge of final passage, please find some of NDN's best and latest thinking on the plan, the great recession, and the financial system: 

  • The Fallout of the Great Recession for Trade by Dr. Robert Shapiro, 2/11/2009 - Shapiro argues that the world is currently experiencing the economic symptoms of protectionism without actual protectionist measures being put in place, which could have dangerous consequences for the global economy.
  • Optimism and Hope by Michael Moynihan, 2/11/2009 - Moynihan points out that an optimistic message is the best way for the Obama Administration to lead the country through these difficult economic times.
  • Stabilizing the Financial System by Michael Moynihan, 2/10/2009 - Moynihan examines the reaction to Treasury Secretary Tim Geithner's speech and the necessary next steps for the financial system.
  • Recovery Without E-verify and Buy American by Simon Rosenberg, 2/10/2009 - Rosenberg advocates for the removal of "Buy American" and E-verify provisions from the stimulus, provisions that will not stimulate the economy and will do more harm than good. 
  • Politics and the Economic Crisis by Dr. Robert Shapiro, 1/9/2009 - Shapiro argues that, for an economic recovery plan to be effective, we must also address the underlying causes of the "Great Recession," including the housing crisis.
  • 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.
  • 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.

For additional recent thinking from NDN on the economy, click here for last week's backgrounder and click here for more on NDN's work to keep people in their homes.

Replacing Mystery Meat Mortgages with USA Prime

New York City - In previous posts I have written about the advantages of a low interest, 4% USA mortgage to make mortgages again affordable and reduce the risk of further defaults.  In the last couple days a proposal has been emerging that would not only accomplish this but also go a long way to restoring the health of our financial system.  Here's my version of how it would work.

Recall what ails us. Back in 2007, borrowers of high interest mortgages began to miss payments and then default.  If this were the 1990s, banks might have seen their revenues drop, stopped buying such paper and moved on.  However, in 2008, strict mark-to-market rules created by the Sarbanes Oxley law, turned rising defaults into an instant crisis by requiring holders of the securities to reprice them every quarter and take any differences as an instant loss.  Huge paper losses quickly threatened the solvency of America's largest financial institutions.  The Bush Administration after first promising to buy up the "troubled" assets through the TARP instead injected capital to make up for the paper losses.  Why the change of course?  Mainly because when pressed, Treasury could not figure out how to price the hard-to-value assets. (While markets can value long term  government bonds, pricing a 30 year security with an unknown default rate is akin to figuring out the chances of your home team winning the Superbowl in 30 years.  You can guess but you can't know.)

One solution, of course, might have been to relax the Sarbox mark-to-market rules for long term securities where there is no market.  How, after all, are investors supposed to reprice something with no active market that they might choose to hold to maturity.  Senator Dodd is said to favor changing the rule.  But others argued against and the rule remained in force.

Fast forward to this week.  Plans to offload the hard-to-value assets into an aggregator bank have run up against the same old problem of how to value them not to mention the cost of buying them up.

So here's the proposal. 

The difficulty of valuing mortgage backed securities and their derivatives largely stems from their unknown risk of default, lack of conformity and lack of a common guarantee.  Uncertainty, in turn lowers their value.  What better way to solve the problem, therefore, than to retire these mystery meat mortgages and securities and replace them with standardized, low interest, and thus low default, government guaranteed alternatives.

Under the plan, the government would guarantee a new low interest, standardized mortgage.  Old, complex mortgages would be swapped out for the new ones.  In this way, a substantial portion of the "troubled", read hard-to-value mortgages could be replaced with transparent, healthy ones.  The loss of juicy returns to investors owning the mystery meat would be more than compensated for by the lower risk of owning USA Prime.

There is no reason the government should have to make huge outlays to carry out this plan.  The government guarantee would make these securities attractive to private investors including those holding the mystery meat today.  Borrowers with equity in their home would readily swap high rate mortgages for the USA mortgage.  Interested banks might want to make the swaps at a wholesale level.  A provision that you can only finance up to 80 or 90% of market value would protect taxpayers but prohibit underwater borrowers from making the swap.  However, banks could be incented to make the swap at a discount as an improvement on foreclosure that would also enable people to stay in their homes.

What would the plan accomplish?  It would create transparency in the market, promote price discovery and minimize losses of the banks while providing Treasury with a healthy buffer of 10-20% against losses.

Ultimately, this proposal not only can replace mystery meat mortgages and securities with USA Prime but also keep people in thier homes and free up a great deal of demand in the economy for years to come thanks to lower payments for American families.

Stay tuned.

OTS Calls for Foreclosure Moratorium

From the Washington Post:

The Office of Thrift Supervision today called for the mortgage lenders it regulates to halt foreclosures until the Obama administration puts in place a program to help struggling homeowners.

After presenting a plan to boost the financial sector yesterday, Treasury Secretary Timothy F. Geithner said that a $50 billion initiative to help homeowners facing foreclosure is not expected for at least a week. The delay and the price tag -- it was the low end of expectations -- disappointed consumer advocates and lawmakers anticipating the announcement.

OTS is joining consumer advocates and some in Congress, including Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, who have called for lenders to institute a moratorium on foreclosures in the meantime. This adds to the pressure facing the administration as it finalizes details of the plan amid growing frustration about the ineffectiveness of government and industry efforts to stem foreclosures.

NDN has long argued that more must be done to keep people in their homes. We look forward to the Obama Administration's program to do just that, but, in the interim, the additional attention placed on staunching foreclosures and stabilizing the housing market is incredibly important. For more of NDN's thinking about the need to keep people in their homes, please see:

In support of The USA Mortgage: Why Gary Becker is Wrong

New York City -- The New York Times reports this morning that the financial rescue framework to be announced by Treasury Secretary Geithner later today will not include a housing or mortgage component to help keep people in their homes.  Instead, what is best viewed as the third leg of the Administration's economic recovery program--the first two being the Recovery Act and the program to stabilize lending--will be announced next week.  $50 billion of TARP money is said to be on tap to address the housing problem NDN has long argued is central to working through the current crisis.  There is thus time to get this housing proposal right and, I hope, include a new low cost mortgage for American families.

There are a variety of proposed measures to help keep people in their homes.  One simple idea, vigorously opposed by the mortgage lobby but championed by Senator Durbin and many Democrats, would be to allow bankruptcy judges to modify mortgages as they currently may do with commercial loans.  Lenders (except Citi which has dropped its opposition) fear this because, they worry that borrower friendly judges by reducing principle would cloud recovery prospects for any loan.  Their worries are excessive because--even if modifications were allowed--the negative consequence of Chapter 13 are so large that most defaulting borrowers would not opt to go this route.  By the same token, while allowing modifications would improve the leverage of delinquent homeowners, help in some cases and is, thus, on balance a good idea, this change alone cannot resolve the mortgage crisis.

A second idea is to expand cookie cutter modification programs such as the FDIC's modification in a box.  Under this plan which the FDIC is using to modify loans it has acquired in taking over failed banks such as Indy Mac, loans are modified based on the borrower's ability to pay and payments cut to 31% or so of the borrower's income.  However, the borrower still owes the full principle amount upon sale.  So, in the end, this is a recipe for keeping people in their homes but underwater.  It has the downside of encouraging people to go into default to take advantage of the program and would not encourage new purchases of homes.  It is best thought of as a limited program.

A third idea is to encourage investors in the mortgage securities market to buy up mortgages to pump more money into the market.  The Fed has already been buying up mortgage backed securities of Fannie, Freddie and Ginnie Mae but, according to one study, without appreciably impacting the affordability of loans.  The Fed, might, however upon acquiring enough of these, begin to modify them in the event of foreclosure.  This approach is no silver bullet either.

The last idea which I believe has the best prospects of stabilizing the housing market is a 4% fixed mortgage (for the time being) to be guaranteed by the Federal Government.  The potential advantages of a simple, USA mortgage for the American public are huge.  First, a simple program would not discriminate against new buyers or those making their payments, eliminating any incentive to default or go into bankruptcy.  It would end defaults due to option ARMs and, take interest rate reset risk for homeowners off the table for many years to come.  Finally, by lowering the payments of American families it would free up considerable demand in the economy for many years.  It would, in short, go a long way to stabilize housing and strengthen the economy  Of course, certain banks still collecting on high interest loans would lose their supercharged returns.  But reducing risks of default would suitably compensate them.  Like some of the great social programs in American history, such as Social Security and the GI Bill, this program has the advantage of being a universal benefit and would be in the best spirit of putting all Americans on an equal footing.

However, no sooner did I put forth my idea for the USA mortgage than Republican support for a similar idea led to an avalanche of attack, from of all places, conservative economists.  Conservative Harvard urban economist Ed Glaeser said it reminded him of the New Deal and argued that Republicans should look to Ronald Reagan not FDR for inspiration.  And today, none other than Nobel Laureate Gary Becker attacks the idea in the Financial Times.  Becker won his Nobel Prize for extending economic ideas into non monetary social relations such as marriage, fertility and crime.  Along with only a handful of other economists, he helped engineer the spread of faith in markets.  Here's why he is wrong, however, on the 4% mortgage.

His argument against the 4% mortgage is largely that the program would require a substantial government guaranty, cost $100 to $150 billion net and raise home prices by at most 5% if at all.  Let me take these in turn.  First, the government is already guaranteeing about 5 trillion in mortgage backed securities since its seizure of the GSEs, Fannie and Freddie.  A properly structured loan program would be no more risky than these assets and increase guarantees, even using Becker's numbers by about 15%.  Second, the actual cost to the Treasury, if any, would be far less than under alternative scenarios where high interest mortgages would be more likely to encourage defaults.  However, perhaps the real flaw with Becker's argument is that this program is not about raising home prices.  Rather, it is about ending the raft of foreclosures from resets, stabilizing the market so that it can recover in due course and finally increasing demand in the economy by keeping payment manageable.  If it happens to increase home prices by 5%, than that is merely icing on the cake.

Indeed, the assault on the 4% mortgage idea by conservative economists--as brilliant as they may be in their academic work--is evidence that this is a benefit, above all, for ordinary American people, not for the free market faith.

The Obama Administration and Congressional Democrats should take the unexpected support for this idea by Senate Republicans and run with it.  A good starting point is including it in the housing plan to be announced next week  This is a rare opportunity to create a historic benefit for the American economy and the American people.

President Obama Hits Road to Sell Recovery Plan

President Obama took his campaign for the economic recovery plan to the road today, heading to the especially hard-hit Elkhart, Indiana. Here's what he had to say about the economy and the recovery plan.

You know, we tend to take the measure of the economic crisis we face in numbers and statistics.  But when we say we’ve lost 3.6 million jobs since this recession began – nearly 600,000 in the past month alone; when we say that this area has lost jobs faster than anywhere else in America, with an unemployment rate over 15 percent; when we talk about layoffs at companies like Monaco Coach, Keystone RV, and Pilgrim International – companies that have sustained this community for years – we’re talking about Ed Neufeldt and people like him all across this country.  

We’re talking about folks who’ve lost their livelihood and don’t know what will take its place.  Parents who’ve lost their health care and lie awake nights praying the kids don’t get sick.  Families who’ve lost the home that was their corner of the American dream.  Young people who put that college acceptance letter back in the envelope because they just can’t afford it.

That’s what those numbers and statistics mean.  That is the true measure of this economic crisis.  Those are the stories I heard when I came here to Elkhart six months ago and that I have carried with me every day since.  

I promised you back then that if elected President, I would do everything I could to help this community recover.  And that’s why I’ve come back today – to tell you how I intend to keep that promise.   

The situation we face could not be more serious.  We have inherited an economic crisis as deep and as dire as any since the Great Depression.  Economists from across the spectrum have warned that if we don’t act immediately, millions more jobs will be lost, and national unemployment rates will approach double digits.  More people will lose their homes and their health care.  And our nation will sink into a crisis that, at some point, we may be unable to reverse.

So we can no longer afford to wait and see and hope for the best.  We can no longer posture and bicker and resort to the same failed ideas that got us into this mess in the first place – and that the American people rejected at the polls this past November.  You didn’t send us to Washington because you were hoping for more of the same.  You sent us there with a mandate for change, and the expectation that we would act quickly and boldly to carry it out – and that is exactly what I intend to do as President of the United States.  

That is why I put forth a Recovery and Reinvestment Plan that is now before Congress.  At its core is a very simple idea: to put Americans back to work doing the work America needs done.  

The plan will save or create three to four million jobs over the next two years.  But not just any jobs – jobs that meet the needs we’ve neglected for far too long and lay the groundwork for long-term economic growth: jobs fixing our schools; computerizing medical records to save costs and save lives; repairing our infrastructure; and investing in renewable energy to help us move toward energy independence.  The plan also calls for immediate tax relief for 95 percent of American workers.

Full text here.

It's No Time for Politics as Usual

The U.S. Senate’s “Dr. No,” Republican Judd Gregg of New Hampshire, best captured the need for political leadership in this time of crisis in accepting his nomination by President Barack Obama to be U.S. Secretary of Commerce: "Now is not the time for partisanship. Now is not the time to stand in our ideological corners and shout at each other. Now is the time to govern and govern well."

Unfortunately, many in Congress, including much of the leadership of both parties, still don't understand that the United States has entered a new civic political era, demanding new rules of behavior in response to our dire economic circumstances. Even as President Obama expresses the "fierce urgency of now," pointing out that if government does not act soon and vigorously it "will turn a crisis into a catastrophe," Congress still seems unable to put aside the ideological arguments and constant efforts to win partisan advantage that characterized American politics in the era the country has just left.

Congressional Republicans seem to believe that the economy can only be revitalized by tax cuts while Democrats say that only vast federal spending, some of it on the pet projects of Members, will produce economic recovery. As demonstrated by the recent House vote on final passage of the economic recovery bill, in which virtually all Democrats voted against all Republicans, working across party lines remains an elusive dream. Republican Members of Congress seem intent on following the strategy from their ideological battles with President Bill Clinton a decade ago in which the goal was to enforce party discipline in the hope that the President and his party would fail and Republicans could blame the Democrats in the next election. But with the stakes as high as they are now, the GOP should instead be listening to the author of that earlier strategy, Newt Gingrich, who has publicly made it clear that the country cannot afford for Obama’s economic recovery plan to fail.

Meanwhile, Democrats need to learn some new rules of behavior as well. While NDN's Globalization Initiative Chair Dr. Rob Shapiro has correctly noted that the recovery package now before the Senate contains only the "normal quotient of special interest subsidies on both the spending and tax sides -- think of it as a 'congressional tax,'" -- these clearly aren’t normal times. It may be true that, as Rob says, "they really can’t help themselves." But like others recovering from an addiction, Democrats will have to at least try to change their approach to building legislative consensus in this new era, one step at a time. 

The American public clearly sees the distinction between Congress' approach and that of President Obama. A compendium of national surveys indicates that 70 percent of Americans have a favorable opinion of President Obama and 63 percent approve of his performance. By contrast, only 17 percent approve of the job Congress is doing, while 78 percent disapprove. More to the point, in a recent Rasmussen Reports survey, a plurality (42 percent) perceives Obama to be governing in a bipartisan manner. By contrast, only half that number believes the same of both congressional Democrats and Republicans (22 percent each).

Of course, there is a way out. Unlike the social issues that dominated American politics during much of the last four decades, the economic and fiscal issues that are the current focus can be bridged with a non-ideological, post-partisan, and pragmatic approach recognizing that each side may have something to offer. If properly targeted, the tax cuts advocated by Republicans should be useful. If aimed at the right mix of projects, the Democratic spending proposals should help the economy in the short run and provide the conditions for growth in the long run. Keeping people in their homes, as both parties seem to advocate, will help families, neighborhoods, and society.

In short, as Rob Shapiro points out the recovery package can be "a useful first step, and one for which NDN has long argued."

Unlike their legislative representatives, the public has moved on from the cultural wars of the last decade. In a late January Pew survey, more than eight in 10 named the economy (85 percent and jobs (82 percent) as top policy priorities for the federal government, significantly above the numbers saying this about any other issue. In a January Wall Street Journal/NBC News poll, only seven percent cited “social issues” as an area on which government should focus compared to 21 percent who cited such cultural issues a decade ago. Paul Helmke, The Republican former mayor of Fort Wayne, Indiana, summed up the historical nature of the shift, telling Naftali Bendavid of the Wall Street Journal, that in a time of war and financial crisis, "people tend to focus on pragmatic issues rather than what the framers meant in 1789."

Throughout our history, major transformations or civic realignments have occurred at a time of intense national crisis that threatens the viability or even existence of the Republic. One such crisis occurred in the mid-19th century when the nation, led by Abraham Lincoln, overcame secession and a civil war to preserve the Union and end the moral blight of slavery. Another took place in the 1930s as America, spurred by Franklin D. Roosevelt, created the governmental institutions that allowed it to overcome the greatest economic downturn in its history and later to overcome the threats of fascism and communism.

The makeovers stemming from these crises change almost everything about U.S. government and politics -- voting alignments, public policy, and the rules by which politicians are expected to act and are judged by the American people (as we recently wrote in our essay, New Rules for a New Era). In the idealist periods before these civic realignments political figures more often than not act as moralists bent on the uncompromising advancement of ideological positions across virtually every policy concern--economic, international, and cultural -- and, more often than not, the public applauds and rewards this behavior. But, after civic realignments, faced with overwhelming and severely threatening crisis, the behavioral expectations and evaluative standards of politicians are altered. The public wants politicians to work across party and institutional lines on a non-ideological basis to produce pragmatic policies that deal with the crisis facing the nation. It's time for the House and Senate to follow the lead of President Obama and the American people and adopt new rules for a new era.

The USA Mortgage

New York City-- On Tuesday, I endorsed a 4% federally guaranteed mortgage to finally give some government aid to homeowners instead of Wall Street and, at the same time, pave the way for household economic security for many years.  For the last few days, Senate Minority Leader Mitch McConnell and the Republican leadership have been calling for a similar plan.  The McConnell variant expands on an earlier, more limited plan proposed by Glenn Hubbard.  The latest version that would benefit all homeowners and indeed all Americans--in line with my proposal--is far larger.  So what do I think about the Republican leadership supporting this idea? 

Very simple.  The Obama Administration and Congressional Democrats should take the Republican support and run with it.

It is, in all likelihood, too late to include a 4% mortgage in the stimulus bill--McConnell's proposal--that could pass as soon as today.  However, if it's a good idea today, it will be a good idea on Monday when the Treasury Department announces its plan to reform the financial sector and address the housing crisis that started the meltdown.  And it will be a good idea, later this month, once this is all debated, when Congress passes legislation to address the financial and housing crises.  It is arguably amazing that Republicans are supporting a 4% mortgage, and the chance for bipartisan action should not be wasted.  If the Obama Administration can pass this proposal into law, it will be one of the best things to happen to the middle class in decades.

Why is this such a good idea?

It is a good idea, first because homeownership remains central to the American Dream.  Notwithstanding the bad rap that homeownership has gotten as a result of confusing, bait and switch mortgages offered during the boom, there is no substitute for owning a home on affordable terms to create middle class family security and stability.  The problem, after all, with the rise in homeowhership over the last decade from about 65 to 70% of American households was not that it happened but that it proved unsustainable.  And it proved unsustainable not because the people at the 30 to 35% level in American society do not not deserve to own a home or participate in the American Dream, but, too often, because the teaser rate mortgages offered them were deceptive, adjustable rate mortgages highly vulnerable to interest rate changes.

Since the mortgage crisis began, efforts to modify problem mortgages to make them sustainable have fallen into three categories: what might be called the good, the well intentioned, and the ugly.  The good modifications took place before TARP.  Then, banks actually changed terms--lowering interest rates and even reducing principle--as a better deal for them than foreclosure.  The labor involved in working out individual modifications, however, meant that these modifications were too few and far between to make a difference to many people. 

The well intentioned mortgage modifications were those imposed by the FDIC--and this appears to be the direction the Obama Administration is now embracing.  Under the FDIC's modification in a box, loans are modified based on borrowers' ability to pay.  However, these modifications only benefit people who have already defaulted, in effect encouraging people to default.  They do nothing to encourage home buying and largely kick the problem into the future by requiring homeowners to pay off principle reductions when they (hopefully) sell the house.  They may make sense for some problem loans the government has assumed but they will do little to address the overall housing crisis.

The ugly modifications are those that banks such as JP Morgan Chase and its Wamu subsidiary adopted after TARP.  Under one program, adopted since TARP, homeowners can swap their current mortgages for a five year one with the entire balance due in five years in a balloon payment.  This was a common mortgage in 1929 and led to millions of Americans losing their homes.  It is no better today.

In contrast to the above modifications, the 4% USA mortgage, as I am calling it, would be open to all, reduce payments for millions of Americans, and stabilize home ownership.  So why isn't everyone rallying around the idea?

It would not help everyone, for example, people who are way underwater in their homes.  However, most of those truy underwater will eventually turn in the keys. If banks want to modify these loans, then modification in a box or a one off modification may make sense.  But these are only a minority of problem loans.

The majority are those where monthly payments are unsustainable.  A simple 4% interest mortgages would help millions of Americans stay in their homes and--over time, free up a great deal of income to create new demand.

The other main objection to a 4% mortgage is it that it would increase the government's exposure to defaults through an extension of its gurantees.

The fact is the government has already guaranteed trillions in loans.  These loans, by contrast, would be comparatively safe--as who would want to default on such an attractive mortgage?  Other objections--for example that banks could not handle the volume--can be easily overcome.

Provision needs to be made to insure that banks don't push truly bad loans into the program to get trash off their books.  However, by limiting the program to a reasonable loan to value ratio and leaving it up to homeowners to elect to refinance, this problem can be overcome, and the program can still benefit millions of homeowners.

Ultimately the appeal of the 4% loan is that, like Social Security and the other most successful US government programs, it is a universal program open to all.  It does not favor those who default, who borrowed more than they could afford or indeed anyone.  And like Social Security, it should be open to everyone.

In short, this is a great benefit for the middle class that the Democrats, in order to stick to their traditional values, should embrace.  It would be a tragedy to miss this opportunity, not only to address the current housing crisis, but also to benefit American families and the American economy for many years.

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