Home prices are down, and mortgage delinquencies are up. Experts say the spreading housing crisis is threatening to drive the U.S. economy into a recession—if we’re not there already. As might be expected, politicians—especially presidential candidates—have come up with proposed solutions to the credit crisis.
Presidential hopeful Hillary Clinton has proposed a $30 billion federal fund to buy out troubled mortgages, a plan which she discussed while addressing a Philadelphia audience at the University of Pennsylvania March 24. She parallels the plan to the Federal Reserve’s recent bailout of the investment bank Bear Stearns. “It’s now time for equally aggressive action to help families avoid foreclosure,” Clinton said.
In her speech, Clinton noted that some 2.2 million notices of foreclosure went out last year—up 75% from 2006. “Communities of color have been especially hard hit,” she said. “Subprime loans are five times more common in predominantly African American neighborhoods than predominantly white ones.”
Congress passed, and President Bush signed, a $168 billion stimulus package. “But this package did next to nothing to help homeowners and communities struggling with foreclosures,” she said. “I said at the time, if we did not address the housing crisis, we would not be able to stem the bleeding. Congress is trying to combat a recession caused by the housing crisis without doing anything to address that crisis.”
Earlier this week, she spelled out her four-part “Protect American Homeowners” plan. Highlights include:
Part One:Mortgage auctions. The first section of Clinton’s plan is actually in support of legislation already introduced by Rep. Barney Frank (D-Mass.) and Sen. Christopher Dodd (D-Conn.) It would create an auction system for holders of mortgages to sell their mortgages “in bulk” to investors, thus setting prices for hard-to-value mortgages and reducing the uncertainty that has caused so much of the problem. Under the proposed legislation, the Federal Housing Administration (FHA) would guarantee the mortgages, as long as the values were reset to reflect current housing prices. Clinton called for the FHA to stand ready to buy mortgages, if the federal guarantees don’t attract adequate bids. Then the FHA could restructure the mortgages it buys and resell them.
Part Two: Foreclosure moratorium. Clinton also proposed the creation of an Emergency Working Group on Foreclosures, led by well-known economic figures. She suggested former Federal Reserve Chairmen
Alan Greenspan and Paul Volcker as well as former Treasury Secretary Robert Rubin. The group would be charged with reporting to Congress in a few weeks on whether further federal intervention in the mortgage market is desirable. But Clinton won’t wait for this group to mull the mortgage market and get a response from Congress. Instead, she has called for an immediate 90-day moratorium on foreclosures of subprime mortgages, provided that the homeowners are residents rather than investors. In addition, Clinton has proposed a five-year freeze on interest rates for subprime mortgages on owner-occupied homes, so adjustable-rate mortgages won’t be reset.Part Three: Federal funds. A $30 billion housing stimulus package that would supply money directly from Washington to cities and states around the U.S. State and local governments could in turn use funds for counseling and refinancing to help homeowners avoid foreclosure, Clinton suggested. The funds also could be used to purchase foreclosed or distressed properties that cities and states could then resell these homes to low-income families or convert the real estate into affordable rental housing.
Part Four: Lawsuit protection. Finally, Clinton announced that she’ll introduce legislation to shield
mortgage companies from lawsuits. She contends that existing mortgages could be restructured, but lenders are reluctant to act because they’re afraid of being sued by the investors who actually own the mortgages.Sounds good but just how viable is the Clinton housing plan?
“Until people have a better idea of how bad the housing slump will be and how many foreclosures there will be, banks and other financial institutions will be scared to lend money,” says Lance Freeman, an associate professor at Columbia University and noted housing expert. “Ideally some type of program to help distressed borrowers would be put in place sooner rather than later. The sooner such a program is put in place, the sooner the foreclosure problem can be resolved, and the sooner the credit crisis will ease.
Freeman adds that aiding distressed homeowners would ease the suffering of many households and help economy get back on track. “A moratorium without a quick initiative to help homeowners would only delay the day of reckoning,” he says.
On the other hand, Freeman is less enthusiastic about Clinton’s proposed moratorium on foreclosures. “The sooner the housing market corrects itself, with or without additional government intervention, the sooner the credit crisis will end,” he says. “A moratorium would only delay the day of reckoning.”
Thomas Boston, Ph.D., a member of the BE Board of Economists, likes Clinton’s plan because it shifts emphasis towards giving relief to homeowners with sub-prime mortgages, rather than just bailing out banks that hold these mortgages. “If financial institutions want to be bailed out by the government, they should also be subjected to more stringent regulations in the future,” adds the CEO of EuQuant, a research firm in Atlanta.
However, Boston doesn’t agree with the senator’s proposal to freeze interest rates on subprime loans over five years. “This strategy could have devastating effects on financial markets,” he says.
“Freezing one set of interest rates in the economy while the others are free to fluctuate (could) cause financial chaos. The result would be like freezing gasoline prices in New Jersey while prices in New York remain flexible,” he explains. “Gasoline users in New Jersey would be happy but New Jersey suppliers would stop servicing the market and run instead to New York, where they can earn more money.”