By Martin Bosworth
For those who don’t know, last week President Bush and Treasury Secretary Henry Paulson unveiled a “mortgage rescue plan” (NOT a bailout, they desperately stressed) that would enable qualifying homeowners to qualify for a five-year freeze of their mortgage at the current rate, preventing the rate from resetting into a payment they can’t afford. The detailed version of the plan is here, and you can read my overview article discussing the plan as well.
The general consensus of the plan is that (to use a scientific term) it sucks. Homeowners who aren’t behind the 8-ball are angry at what they perceive as the government subsidizing irresponsible behavior of people who were “living beyond their means.” Wall Street is furious at the idea of investors in mortgage-backed securities not recouping the full value of their investment. And consumer advocates are disappointed that the plan doesn’t cover people who have already fallen behind in their payments and are facing foreclosure.
There’s a lot going on here, so I’m addressing this in three sections: First, do we need a bailout? Second, will Bush’s plan actually work? And third, who benefits from Bush’s plan?
Part One: Do We Need A Bailout?
My colleague and friend Joe blogged eloquently in opposition to the bailout plan over at CenterBlue.org, saying that “Every real estate closing I’ve been to has the closing officer state the terms of the loan clearly to borrowers so that they know exactly what they’re signing. They always have the chance to get up and walk away, but they don’t…People have to learn to live within their means and accept responsibility for their own choices, and having the ‘nanny state’ swoop in and rescue people from really dumb real estate purchases flies in the face of that.”
Now, I agree with this statement in part. There are a lot of people who thought that they could “flip” homes for a quick profit, and so signed off on loans with no money down and huge adjustable-rate mortgages on the horizon, hoping they could sell the home before the rate changed. Anyone who knew about the consequences of shady business like this and did it anyway deserves what they got.
But not everyone did. There’s a reason why predatory lending has become a phrase in the common parlance–unscrupulous lenders and brokers took advantage of a hot housing market and buyers’ financial ignorance to steer them into loans with excessive fees attached, or even away from “prime” market-level loans they could qualify for into more expensive “subprime” loans. The Center for Responsible Lending’s “Seven Signs Of Predatory Lending” is a good overview of what kind of nasty “gotchas” were attached to these loans. These practices are disproportionately targeted at Black and Hispanic borrowers, who (not coincidentally) were the same groups to benefit from the easy availability of credit that triggered the housing boom in the first place.
The mortgage industry in the last few years has become very much like the auto industry or any other retail industry–the salesman does everything in their power to play on people’s fears, desires, and insecurities to get them to sign on the dotted line, even if it is to their detriment in the long term. As Joe astutely notes, our consumer culture and desire to be seen as affluent pushed many people to ignore their common sense and buy into dangerous loans that would only leave them poorer–but this is also a function of the almost total eradication of the middle class’s ability to build wealth in the last thirty years. For many, buying a home is the only path to generating enough capital to pay for the kids’ college education, or funding a decent retirement, or simply having an investment one can pull money from in tough times. And the mortgage industry knows this–thus the deceptive and vile tactics that push people into bad loans.
The best way to combat these tactics is with clear, comprehensive disclosures of the terms and conditions of every loan and abolition of punitive or unnecessary fees, points, and costs attached to a loan–but even mild voluntary guidelines like what the Fed has proposed are violently opposed by the mortgage and finance industries. As long as the people who predicated this financial crisis refuse to take even the slightest step to police themselves and behave ethically and responsibly, then yes, a bailout may be necessary. People shouldn’t be punished simply for trying to fulfill the American Dream of home ownership.
Part Two: Will Bush’s Bailout Plan Work?
In a word, no. The plan as crafted is entirely voluntary in terms of industry cooperation, meaning that any lender that participates can set the terms of the plan as they see fit or choose not to participate at all. Despite Paulson’s repeated invocation that as many as 1.8 million adjustable-rate mortgages may reset in the future, the plan stands to help (at most) 360,000 people. The narrow cast of the bill only supports homeowners who are currently paying on time and may face a rate increase in the future–anyone who’s already behind is out of luck. As Harvard Law professor Elizabeth Warren said in her criticism of the bill, “Much as I would like to see some sort of ‘fix’ happen to the mortgage market, I find it ironic that the borrowers it would help most are those who are not already in default, i.e., the ones who have the least urgent need for relief. The lenders really need to address the problems of those whose rates have already re-set, and who may have already missed a payment or two. These folks are still headed for foreclosure.”
The plan has already touched off a wave of angry resentment from responsible buyers who interpret the plan as rewarding bad behavior. So why even do it? Why propose a plan that offers almost nothing in terms of concrete solutions, and as Kevin Drum notes, practically everyone hates?
Part Three: Who Really Benefits From The Bush Bailout?
The answer is in the typical Bush calculus of raw political greed and crass self-interest. The voluntary freeze plan is designed to give the lending industry an out in order to forestall proposed legislation that would grant homeowners more protection in bankruptcy, preventing them from losing their homes and enabling them to continue to pay their mortgages. This move is bitterly opposed by the financial industry, and it’s a typical stance they take–rather than accept hardcore laws from Congress, they propose softer, voluntary modifications to their practices in order to forestall legislation.
Not only that, this plan will support just enough people to keep the economy from tilting into recession until Bush is out of office, assuming it’s fully adopted. This is another case of “moving the goalposts” in order to delay a bad outcome, and leave the consequences sitting squarely in the lap of the next President–most likely a Democrat. Bush can say he “did something” about the very crisis he and Alan Greenspan set off, while not actually doing anything about it at all, and leaving the mess to be cleaned up by those who will come after.
A bailout of some kind was inevitable–our economy has predicated too much of itself on the American obssession with home ownership, especially since we’ve gutted our manufacturing sector and turned ourselves into a debtor country. But not only does this plan do almost nothing in terms of actual substance, it will fan the flames of resentment against people who genuinely need help, and harden the hearts of homeowners who are too well-off to qualify, but too poor to do much of anything else.
In other words, like I said at the beginning, it sucks. A commenter on the Post article sums up my feelings about this debacle accurately:
The moral of the story, is that houses make good places to live, but they should not be the entire focus of our national economic policy. Let’s stop tinkering with housing, and start tinkering with ways to rebuild our industrial base.
Amen.
Categories: American Culture, Crime/Corruption, Economy, Politics/Law/Government
Progressive Culture | Scholars & Rogues 
I find it interesting how not even the blogosphere seems to see the obvious solution to this whole mess.
If the housing prices of homes in US were lowered 30 to 40% now, instead of going through years of reccession to achieve the same result, the whole crisis of value would evaporate.
The losses would be squarely borne by the mortgage industry, and Wall Street, which is where the blame belongs.
This whole crisis is one of value, not of credit. Until this is aknowleged, the depression is inevitable.
Well done, Martin.
Long live Chrysler via federal loan guarantees (I guess I’m dating myself now …)!
Dr. Denny:
Those guaranteed Chrysler loans were paid off really early due to good management.. I remember the 30 year Chrysler commercial paper with a 9% coupon was going for 32 cents on the dollar. My dad bought a lot of that paper right after the guarantee at somewhere around 43. That paper eventually went past par. Those were the days..
While overzealous mortgage commission sales people, shady companies, the government, and Wall Street have complicity in the natural real estate cycles, so do the actual buyers and sellers. Real estate is a market, just like any other financial or commodity market. Since there’s less liquidity in the real estate market, corrections generally last a long time. I knew the market was overblown when I saw mortgage loan offers of 130% equity. Signals like that always signal a top of a market.
I’m not a fan of Bush’s bail out, and wonder how the investors are going to get full pay-out of on their securities. I hope Merrill takes it on the chin on this one, and the lawyers get rich. Meanwhile, there’s a huge float of ineligible sub-prime paper out there that could offer good returns, with substantial risk to the buyer. I think the risk is priced into the paper, as it’s so cheap. However, buying distressed paper isn’t my gig, but it might fit into someone’s portfolio.
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Mr Churchill said:
“I find it interesting how not even the blogosphere seems to see the obvious solution to this whole mess.
If the housing prices of homes in US were lowered 30 to 40% now, instead of going through years of reccession to achieve the same result, the whole crisis of value would evaporate.
The losses would be squarely borne by the mortgage industry, and Wall Street, which is where the blame belongs.
This whole crisis is one of value, not of credit. Until this is aknowleged, the depression is inevitable.”
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Real estate is a market, and it would be hard to put a mechanism in place to whack the real estate prices 30-40% immediately. A gradual price decline over a prolonged time frame is much better for the economy, as it gives the whole market time to adjust. A 30-40% immediate reduction would ruin the bond market, ruin the insurance industry, cripple the banks, evaporate the credit markets, melt your 401-K’s and other retirement accounts, and would cause at least 50% of the banks in the country to close because of the runs that would follow such a foolish move.
Since most housing is the source of most people’s net worth, the negative equity would make immediate paupers out of millions of people. You are right, that the issue is of value, ont of credit. That being said, for everyone that sells at the top of the market, there has to be someone buying at the top. Real estate is a risk,just like any other market.
Actually William, if housing values were reset, the responsible homeowners who are able to keep their houses are the ones who would bear the brunt of the crisis.
If the ‘irresponsible’ are not bailed out or given some assistance, the ‘responsible’ will ultimately suffer nonetheless. More foreclosures mean more supply of homes at heavily discounted prices; more dilapidated homes in the neighborhood, pulling down values.
You are right – its all about values. To keep that from collapsing one needs to contain the foreclosure effect.
Unchecked capitalism will result in shooting oneself in the foot.
A few months ago, I read that some big bank (BoA?) was foreclosing on homes & properties and then was picking the properties up at auction for small change (one house property for $2).
Once again, watch where the money trail leads and who benefits.
Here’s an out of the blue comment that I think relates:
When he came into office Jimmy Carter signed the Plain English Executive Order as his first E.O. which would have eventually forced almost everybody to put legal documents into language that an ordinary citizen could read and understand. As you might guess, the financial industry was up in arms…Had Carter’s E.O. remained in force, lots of innocent people might have been aware of the danger into which they were putting themselves – and avoided it. The idea was to make it possible for the consumer to protect him/herself.
Carter’s post WH legacy – building houses for the disadvantaged.
When he came into office Ronald Reagan’s first E. O. was a rescinding of Carter’s Plain English E.O. Back to the legal mumbo jumbo that effectively made lenders the only ones who knew what those documents meant. Reagan made sure that banks and mortgage companies (among others in the Republicans’ favorite groups – the “haves” and “have mores”) were able to prey upon citizens and hide their conniving in legalese….The idea was to protect the corporation from liability, culpability, – or, as they interpreted his actions (with his tacit blessing), responsibility to the citizenry.
Reagan’s post WH legacy – giving speeches at a million bucks a pop to companies who benefited from his economic policies.
Jim,
I didn’t know that (I was five at the time), but it doesn’t surprise me at all. Plain, honest language is always the enemy of hucksters and shysters.
OK. What i don’t get is how these closings took place with out the buyer’s attorney present. Has anyone closed on any property transaction WITHOUT THE ADVICE AND COUNSEL OF AN ATTORNEY??????? Why would anyone do that? Who what average american could possibly comprehend the legalese of the tons of paperwork pushed in front of them? I don’t get it.
Just have a stupid tax… Just tax the stupid people :-0
I guess I’m not as altruistic as many of you above. I think the best thing for the country is the complete collapse of the corporatist/banking/insurance system. I don’t suggest for one minute that what would arise in its place from the chaos would necessarily be better, but the current system is so rigged, and the people kept so ignorant, that it makes life-time indentured servants of most Americans, especially for the foreseeable future. We’ve replaced the company towns of last century w/ a corporatist nation. I guess I am rooting for catastrophic failure, and I’ll take my chances w/ the fallout.
Rick: I’m as unhappy about some elements of the system as you are, but I’m not yet convinced that complete economic collapse would help my already iffy situation.
good post. I’m going to quibble on this:
“The best way to combat these tactics is with clear, comprehensive disclosures of the terms and conditions of every loan and abolition of punitive or unnecessary fees, points, and costs attached to a loan–but even mild voluntary guidelines like what the Fed has proposed are violently opposed by the mortgage and finance industries. As long as the people who predicated this financial crisis refuse to take even the slightest step to police themselves and behave ethically and responsibly, then yes, a bailout may be necessary. People shouldn’t be punished simply for trying to fulfill the American Dream of home ownership.”
The best way is to make it so that if you sell the loan you have to keep it on your books, so you’re responsible for it forever. Knowing that they aren’t offloading it would make lending standards go way up, way fast.
At the rate the US is going, the housing market may be settled by a plague of some sort. Just as we refuse to acknowledge the private right to property (Kehoe vs. City of New London), right to common sense documents (your average legalese for even buying a parakeet), we also refuse to acknowledge that science is far too important to be decided by a Bart Simpson president, so we have useless and dangerous drugs on the marketplace instead of “natural cures” that are not patentable. Also, like Lyme-similar diseases, as an example, are now acknowledged to have fleas as vectors, but do we use science to examine possibilities? No. If there’s no “bull’s eye”, you don’t have Lyme (or any similar disease), and you can’t get the antibiotic treatment quickly (as the Bart Simpson president immediately got) and must resign yourself to the onset of a plethora of arthritic diseases because “science” is “not a silver bullet” in medicine–not when pharmacologic industries need far more money than even entire nations can provide them for patenting their medicines. The uber-rich think they are immune, but short-changing “science” in medicine will mean staph infections, Hanta virus, and ebola for the rich also.
Ian,
Thanks for the shoutout. I can’t argue with your logic either–forcing mortgage lenders to hold on to those loans would make them much more accountable. I was just approaching it from the consumer perspective.
It’s a testament to the scope of how awesomely awful the problem is that all of these solutions are necessary.
There are still lots of billion of dollars left from the $700 billion bank bailout, and, according to news, there could be a debate in congress on how the remaining money be dealt with. IMO, the bailout plan somehow help some companies but there are still lots of them who are under crisis. I just hope that the remaining fund will be used wisely to lessen the economic crisis.