Last week, Federal Reserve Chairman Ben Bernanke uttered the words everyone else has been saying for months: “A recession is possible.” During his testimony before the Joint Economic Committee and the U.S. Senate Committee on Banking, Housing, and Urban Affairs, he cited problems with housing and mortgages as key factors in the economic slowdown. Bernanke urged Congress to pass measures to bolster the housing market and to help people avoid losing their homes.
Presidential hopeful Sen. Hillary Clinton has already made public her four-point plan for remedying the housing situation, including 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. Presidential hopefuls Sens. Barack Obama and John McCain have also released their own plans to put a floor under the plummeting housing market.
Obama’s plan has three main parts:
- Better regulation. He has called for the Federal Reserve to take charge, rather than have some regulators watch banks and other regulators eye investment banks. More disclosure from financial firms would be required, while a financial market oversight commission would be formed to identify problems before they become so severe they drag down the economy.
- Help for homeowners. Obama’s plan includes support for Sen. Christopher Dodd (D-Conn.) to create a program in which lenders buy or refinance existing mortgages. Those mortgages would be converted into 30-year, fixed-rate loans with a federal guarantee. The Illinois senator would also ask lenders to compose mortgages to reflect current housing values. In addition, he has supported a tax break for homeowners who don’t itemize deductions. (Currently, you have to itemize deductions on Schedule A of your tax return to get tax savings for paying mortgage interest.)
- Federal funds. Much like that of his Democratic rival, the third part of Obama’s plan calls for a $30 billion stimulus package. What differs is that of those funds, $10 billion would go into a “foreclosure prevention fund” which would apply to homeowners occupying a principal residence, not to investors or to owners of vacation homes. Another $10 billion would go to state and local governments to help forestall cuts in vital services. The rest of the money would be used for extending and expanding unemployment benefits.
McCain has said that it is “not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.” He has proposed limited, temporary measures to help housing. The McCain plan includes:
- Mortgage transparency. McCain would require mortgages to be written so they are more easily understood by borrowers. In return, borrowers would be penalized for submitting false information on loan applications.
- Lender accountability. Responsibility for the quality and performance of loans would be in the hands of lenders, and strict lending standards would be applied to the lending process.
- Down-payment realism. For loans to be insured by the Federal Housing Administration, larger down payments would be required.
- Stronger safety nets. In McCain’s plan, financial institutions would be encouraged to increase capital reserves to serve as protection from losses.
How do Obama’s and McCain’s plans measure up? That may depend on whether you favor more government intervention or prefer to see Uncle Sam on the sidelines.
“McCain really doesn’t have a plan,” says Lance Freeman, an associate professor at Columbia University and noted housing expert. “He has a set of principles that would guide him. In general, he would take a hands-off approach.”
With this approach, Freeman says, those who make bad choices in the future would have less expectation that the federal government would
bail them out. “In addition,” he points out, “the housing market is overvalued now. If the government does nothing, housing prices will probably decline to normal levels more quickly.”On the downside, people would lose their homes as the housing market returns to normalcy. There is also an “enormous risk” that other people and other sectors of the economy will be harmed as well, during the revaluation process.
“Foreclosed properties harm entire neighborhoods, not just the people losing their homes,” Freeman says. “If large numbers of properties are foreclosed, the housing market will decline further and this could damage the economy even more.”
Freeman finds that Obama’s ideas go a long way toward reducing some of the inequities in the government’s treatment of homeowners. “In particular, extending the mortgage interest tax benefit to families that do not itemize will help low- and moderate-income homeowners,” he adds.