Tag Archives: mortgage crisis

John McCain, New Deal Democrat?

Meet John McCain, New Deal Democrat.

In the presidential debate this week, McCain shocked many of fellow Republicans by proposing the largest and most expensive government intervention in the housing market in U.S. history.

Specifically, McCain announced that he would tell his treasury secretary to spend $300 billion to buy the mortgages of homeowners in financial trouble and replace them with more affordable loans.  The program, which McCain calls the American Homeownership Resurgence Plan -– there’s that word “surge” again — would be available to mortgagors for whom the property is their primary residence, who can prove they were creditworthy when the original loan was made, and who made a down payment.

According to the McCain campaign:

“John McCain will direct his Treasury Secretary to implement an American Homeownership Resurgence Plan (McCain Resurgence Plan) to keep families in their homes, avoid foreclosures, save failing neighborhoods, stabilize the housing market and attack the roots of our financial crisis.”

“America’s families are bearing a heavy burden from falling housing prices, mortgage delinquencies, foreclosures, and a weak economy. It is important that those families who have worked hard enough to finance homeownership not have that dream crushed under the weight of the wrong mortgage. The existing debts are too large compared to the value of housing. For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered.”

“The McCain Resurgence Plan would purchase mortgages directly from homeowners and mortgage servicers, and replace them with manageable, fixed-rate mortgages that will keep families in their homes. By purchasing the existing, failing mortgages the McCain resurgence plan will eliminate uncertainty over defaults, support the value of mortgage-backed derivatives and alleviate risks that are freezing financial markets.”

“The McCain resurgence plan would be available to mortgage holders that:

  • Live in the home (primary residence only)
  • Can prove their creditworthiness at the time of the original loan (no falsifications and provided a down payment).”

“The new mortgage would be an FHA-guaranteed fixed-rate mortgage at terms manageable for the homeowner. The direct cost of this plan would be roughly $300 billion because the purchase of mortgages would relieve homeowners of ‘negative equity’ in some homes. Funds provided by Congress in recent financial market stabilization bill can be used for this purpose; indeed by stabilizing mortgages it will likely be possible to avoid some purposes previously assumed needed in that bill.”

“The plan could be implemented quickly as a result of the authorities provided in the stabilization bill, the recent housing bill, and the U.S. government’s conservatorship of Fannie Mae and Freddie Mac. It may be necessary for Congress to raise the overall borrowing limit.”

This certainly doesn’t sound like a Republican plan to me.

In fact, it isn’t. 

As the New York Times has pointed out, “The mortgage renewal idea actually originated with Senator Hillary Rodham Clinton, said Charlie Black, a senior adviser to Mr. McCain. And Mrs. Clinton, who proposed the idea in a recent newspaper column, borrowed it from a Depression-era New Deal agency, the Home Owner’s Loan Corporation.”

How seriously should we take McCain’s plan?

First, we should appreciate what a stunning turn-around this proposal is for John McCain, who has previously railed against the “moral hazard” of bailing out homeowners who took out larger mortgages than they could afford.

Only last March, McCain declared — in response to the Hillary Clinton plan that McCain has now closely appropriated — 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.” 

As the New York Times then observed, “Mr. McCain’s remarks on Tuesday represented a stark tonal shift from the increasing calls for helping homeowners, as he faulted not only borrowers who engaged in risky lending, but suggested that some homeowners engaged in dangerous financial practices. ‘Some Americans bought homes they couldn’t afford, betting that rising prices would make it easier to refinance later at more affordable rates,’ he said. Mr. McCain argued that even during the ongoing crisis, the vast majority of mortgage holders continued to make their payments. ‘Of those 80 million homeowners, only 55 million have a mortgage at all, and 51 million homeowners are doing what is necessary — working a second job, skipping a vacation and managing their budgets to make their payments on time,’ he said. ‘That leaves us with a puzzling situation: how could 4 million mortgages cause this much trouble for us all?’”

Second, we should note that McCain’s point man for the plan is his senior economic advisor Douglas Holtz-Eakin.  Holtz-Eakin was the Chief Economist for the President’s Council of Economic Advisors under President George W. Bush and Senior Staff Economist for President George H. W. Bush’s Council of Economic Advisors.  He was, therefore, as responsible for the deregulation that lead to the mortgage mess as any single economist could be.  (He was also the person who claimed that McCain was responsible for the invention of the Blackberry phone.)   If we are to take McCain’s proposal seriously, then we must assume that Holt-Eakin has also had a Saint Paul-like sudden conversion and is now not a Bushite but a New Deal Democrat.

Third, we should look at the conservative reaction to McCain’s plan.  If they thought that McCain was serious about his plan, they’d be exploding with condemnation and accusations of betrayal.  But, so far, the National Review has nothing to say about it.  Conservative blogs mostly call it “pandering”  — and while they’re not happy about it, they understand it as an election ploy.  The Wall Street Journal doesn’t seem very upset either, taking an uncharacteristically wait-and-see attitude toward a proposal that would violate the foundational principles of modern Republican economics: “The idea must have puzzled many viewers and we’ll reserve judgment until we see the fine print,” the Journal said.” At a glance, it doesn’t sound like something Democrats would oppose — and elections are decided on differences.”

Our conclusion?

The McCain proposal isn’t serious, and few conservatives believe that either (1) McCain will win (and therefore be in a position to implement the plan) or (2) that McCain would implement the plan if elected.

We think that McCain’s new homeowner bailout program should really be called the “McCain Campaign Resurgence Plan.” 

Falling precipitously behind in the polls, especially in so-called “swing states” like Ohio, Florida and Michigan that have been hit hard by foreclosures and falling home prices, McCain has suddenly — and unconvincingly – decided that his favorite president is not Ronald Reagan but Franklin Roosevelt.

We’re not buying it.

Nevertheless, it is a watershed moment in American political history when the Republican candidate for President — and self-described foot soldier in the Reagan Revolution — attempts to outdo the Democratic candidate as a New Deal Liberal.

UPDATE:

Now that a few days have passed and the McCain campaign has repeated its call for a $300 billion bailout of mortgage holders at taxpayer’s expense, conservatives have taken the proposal seriously enough to lambast it.

CNN.com offers a good roundup of conservative commentary: 

” In a sharply worded editorial on its Web site Thursday, the editors of The National Review — an influential bastion of conservative thought — derided the plan as “creating a level of moral hazard that is unacceptable” and called it a “gift to lenders who abandoned any sense of prudence during the boom years.”

“Prominent conservative blogger Michelle Malkin went one step further, calling the plan “rotten” and declaring on her blog, ‘We’re Screwed ’08’.”

“Matt Lewis, a contributing writer for the conservative Web site Townhall.com, told CNN the plan only further riles conservatives upset with McCain’s backing of the massive government bailout plan passed last week.”

“‘Fundamentally, the problem is John McCain accepts a lot of liberal notions, unfortunately. There is somewhat of a populist streak,’ he said. ‘Most conservatives really did not like the bailout to begin with, and this was really kind of picking at the scab’.”

 

McCain’s Economic Plan: Blame Minorities

Fox News’ Neil Cavuto made news of his own this week by suggesting that the credit crisis was caused by loans made to minorities

On Fox’s “Your World” on September 18, Cavuto asked Rep. Xavier Becerra (D-CA), “[W]hen you and many of your colleagues were pushing for more minority lending and more expanded lending to folks who heretofore couldn’t get mortgages, when you were pushing homeownership … Are you totally without culpability here? Are you totally blameless? Are you totally irresponsible of anything that happened?” Cavuto also said, “I’m just saying, I don’t remember a clarion call that said, ‘Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.’” 
 
This wasn’t the first time that Cavuto blamed loans to minorities for the credit crisis.  In an exchange with House Majority Leader Steny Hoyer (D-MD) on September 16, Cavuto said “[Y]ou wanted to encourage minority lending — obviously, a lot of Republicans did as well. There was a lot of — expand lending to those to get a home,” Cavuto then rhetorically asked, “Do you think, intrinsically, it was a mistake, on both parties’ part, to push — to push for homeownership for everybody?”  Unlike Becerra, Hoyer either didn’t understand what Cavuto was saying or simply rolled over. “I think clearly what happened,” Hoyer replied, “ is Fannie and Freddie got caught up in trying to do what the Congress wanted done.”

This is not just a generic attack on minorities.

What is going on here is an attempt by Republicans to deflect public outrage from the credit industry, the investment banks and their Republican deregulators and to place the blame for the crisis credit on the government and the Democrats. 

That’s why John McCain and his Republican apologists have focused their ire on the quasi-governmental institutions Fannie Mae and Freddie Mac rather than on the wholly private companies and individuals behind the credit meltdown.

Every time McCain or one of the Republican talking-pointers blasts Fannie Mae and Freddie Mac, the message is: “These are government institutions, run by Democrats. They caused the credit crisis by pushing the Democratic Party agenda, including homeownership for minorities who could not afford to buy homes and should have been content to be renters. Blame them, not us.”

But are they right?  How big a problem are loans to minorities?  And should any future regulation of the credit and mortgage industry eliminate the mortgages that allowed so many minorities to become homeowners?

The answer is No.

The facts show that there has been tremendous racial disparity in lending is growing, and that the subprime mortgage crisis has disproportionately affected minority borrowers. Banks such as JP Morgan Chase, Citigroup, Bank of America, and Countrywide issued high-cost subprime loans to minorities more than twice as often as to whites and, at some institutions, the number of high-cost subprime loans issued increased even amid a growing credit liquidity crisis.

Citigroup in 2007 made higher-cost subprime loans 2.33 times more frequently to blacks than to whites. During the same period, JP Morgan Chase made higher-cost subprime loans 2.44 times more frequently to blacks and 1.6 times more frequently to Hispanics than to whites. Bank of America extended to blacks higher-cost loans 1.88 times more frequently, and Country Financial extended to blacks higher-cost loans 1.95 times more frequently than to whites. A study released in 2006 found that blacks and Hispanics were often two or three times more likely to receive high-cost subprime mortgages than were white borrowers.

So, yes, minorities were very much more likely to receive high-cost subprime loans than whites. Yet as Robert J. Shiller of Yale University and Austan D. Goolsbee of the University of Chicago have pointed out, although minorities have been hit hard by the subprime bust, the overall affect of the subprime mortgage boom for minorities was mostly positive.

Both Shiller and Goolsbee think that minorities benefited tremendously by financial innovations created by the mortgage and banking industries, and they have cautioned against reacting to the subprime crisis by restricting innovative mortgage practices that allowed minorities greater access to the American Dream of home ownership than ever before.

In testimony before Congress in September 2007, Robert J. Shiller, professor of economics at Yale, author of the bestseller Irrational Exuberance and co-developer of the Case-Shiller National Home Price Index, put the issue in context.  As the news of the study findings hits the media, Shiller’s nuanced Congressional testimony is worth recalling:

“The promotion of homeownership in this country among the poor and disadvantaged, as well as our veterans, has been a worthy cause. The Federal Housing Administration, the Veterans Administration, and Rural Housing Services have helped many people buy homes who otherwise could not afford them. Minorities have particularly benefited.”

“Home ownership promotes a sense of belonging and participation in our country. I strongly believe that these past efforts, which have raised homeownership, have contributed to the feeling of harmony and good will that we treasure in America.”

“But most of the gains in homeownership that we have seen in the last decade are not attributable primarily due to these government institutions. On the plus side, they have been due to financial innovations driven by the private sector. These innovations delivered benefits, including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”

The same point was made by University of Chicago economics professor and Barack Obama economic advisor Austan D. Goolsbee in his essay in the New York Times entitled “‘Irresponsible Mortgages’ Have Opened Doors to Many of the Excluded.”

Goolsbee cautioned against the “very old vein of suspicion against innovations in the mortgage market.”  He cited a study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, “Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market,” showing that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans.” “These innovations,” Goolsbee observed, “mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.”

Goolsbee wrote that these economists “followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.”

In regard to racism in mortgage lending, Goolsbee noted that “Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.”

He concluded that “When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.”

In the search for villains in the credit crisis, Congress should be careful not to  eliminate the mortgages that have opened doors for many who have historically been excluded from homeownership and the American Dream.

It is also important to recognize that it was the Bush adminstration that pushed for greater access to homeownership for minorities, and specifically tasked Freddie Mac and Fannie Mae with expanding home loans to minorities.

As CNN reported on June 17, 2002:

“President Bush touted his goal Monday of boosting minority home ownership by 5.5 million before the end of the decade through grants to low-income families and credits to developers. ‘Too many American families, too many minorities, do not own a home. There is a home ownership gap in America. The difference between African-American and Hispanic home ownership is too big,” Bush told a crowd at St. Paul AME Church in Atlanta. Citing data he used Saturday in his weekly radio address, Bush said that while nearly three-quarters of white Americans own their homes, less than half of African-Americans and Hispanic-Americans are homeowners. He urged Congress to expand the American Dream Down-Payment Fund, which would provide $200 million in grants over five years to low-income families who are first-time home buyers. The money would be used for down payments, one of the major obstacles to home ownership, Bush said. … Fannie Mae, Freddie Mac and the federal Home Loan Banks — the government-sponsored corporations that handle home mortgages — will increase their commitment to minority markets by more than $440 billion, Bush said. Under one of the initiatives launched by Freddie Mac, consumers with poor credit will be able to obtain mortgages with interest rates that automatically decline after a period of consistent payments, he added.”

In the political battle over blame for the credit crisis, Democrats need to be careful both to counter claims that the crisis was caused by loans to minorities and also not to allow conservatives and Republicans to use the crisis as a pretext to scuttle these programs.

Catastrophe Worsens for Housing Market — Home Prices and Home Sales Fall Again

As Congress meets to bailout the financial industry and George Bush vies with Freddie Krueger for the nation’s archetypal face of visceral terror, the latest report from the Census Bureau shows that the housing catastrophe continues to get worse. 

Here’s the summary of the bad news:

  • New homes sales in August dropped to the lowest level since January 1991.
  • Home prices hit a four-year low. 
  • Inventory continues to rise, creating more downward pressure for home prices.

And here are some of the ugly new numbers:

  • New home sales had a seasonally adjusted annual rate of 460,000, down 11.5 percent from a revised 520,000 in July and down 24.5 percent from a year ago.
  • Only 39,000 new homes were sold in July, the lowest level since December 1991.
  • Prices for new homes were at their lowest level since September 2004.
  • The median price of a new home sold in August was $221,900, down 5.5 percent from $234,900 in July and down 6.2 percent from $236,500 a year ago.
  • 166,000 new homes came on the market in August, bringing total inventory to a seasonally adjusted 408,000, equal to 10.9-month supply, up from a 10.3 month supply in July.
  • New home sales fell 31.9 percent in the Northeast, 2.1 percent in the South and 36.1 percent in the West. Only the Midwest showed an increase in new home sales, up 7.2 percent.
  • Three out of four builders reported having to pay buyers’ closing costs or offer other incentives such as expensive features for free in order to maintain sales.

The housing market is so bad that the main cheerleader for an I-can-see-the-light-at-the-end-of-the-tunnel approach to the real estate crisis – the National Association of Realtors (NAR) – has finally admitted, albeit with NAR’s typical understatement of the obvious, that “the pendulum in the mortgage market has swung too far.”

But if you’re looking for a bright side to the nation’s residential real estate fire sale, NAR’s number one Pollyanna-in-Chief, economist Lawrence Yun, still has a bromide to offer.

“August sales reflect higher interest rates before the government takeover of Freddie Mac and Fannie Mae, and the sudden drop in mortgage interest rates over the past couple weeks is improving housing affordability,” Yun said. “With higher loan limits and a beefing up of the FHA program, all the mechanisms have been falling into place to increase mortgage availability.”

Yeah.  Right.

Fire Sale Continues for American Homes

The fire sale of American homes continues unabated, according to the latest report of the Standard & Poors’ Case-Shiller Index.

All 20 cities measured by the Case-Shiller Index reported annual declines in June, with seven cities showing price drops of more than 20 percent.

The worst losses, both for the year and for the past month, were in the former boom regions in the West and Florida.

Las Vegas lead the nation with the most severe annual decline, with values dropping 28.6 percent in the past year. Prices in Miami fell 28.3 percent, values in Phoenix dropped 27.9 percent, and in Los Angeles prices fell 25.3 percent.

The cities with the least annual declines in home value were Charlotte (-1.0 percent), Dallas (-3.2 percent), Denver (-4.7 percent), and Portland (-5.3 percent).

San Francisco led the nation with the greatest loss from May 2008 to June 2008.  The cities with the biggest drop in the past month were San Francisco (-1.8 percent), Miami (-1.7 percent), Las Vegas (-1.6 percent), San Diego (-1.5 percent), and Los Angeles (-1.4 percent).

Cities showing the greatest price increases for the past month were Denver (1.5 percent), Boston (1.2 percent), Minneapolis (1.0 percent), Dallas (0.7 percent), and Cleveland (0.7 percent).

Given these catastrophic figures, we can take some small comfort in the belief that home prices must eventually stop falling.

After all, American homes can’t be worth zero.

Can they?

Ed McMahon Finds Solution to Beverly Hills Housing Crisis

We’re sure you’ve heard about Johnny Carson’s former “Tonight Show” side-kick Ed McMahon’s financial troubles and the near foreclosure of his Beverly Hills estate.

You’ve probably also heard the news that Donald Trump offered to buy McMahon’s house and let him continue to live there.

Now the news is that the home was sold, but not to Trump.  When the sale is complete, the McMahons will move on to live somewhere else.

The home was offered for $4.6 million, marked down from an original asking price of $7 million.  McMahon had apparently taken out a loan of $4.8 million to buy the home in 1990.  According to CNN.com, he was $644,000 in arrears.

The home is located at 12000 Crest Court, Beverly Hills, CA 90210.  According to the website of real estate agent Alex Davis, the house is 7,013 square feet and on a 14,736 square foot lot with ocean views.

The agent’s website notes that “The foreign imported doors and meticulously chosen fireplaces are unlike any other. The master suite with his and hers baths and closets, overlooks the yard and sweeping canyon.” 

It is an amazing home — and you can see pictures of the house here and here.

Just this week, the New York Times published an article on the trend toward real estate downsizing by the wealthy in Los Angeles.  The article focused on Candy Spelling, widow of the television producer Aaron Spelling, who is downsizing from a 56,500-square-foot French chateau-style home called The Manor (compete with a wine-tasting room, a bowling alley, a silver room, a china room and a gift-wrapping room) to a $47 million, 16,500 square foot condominium. 

Perhaps Ed McMahon read the article and thought “Gee, if Candy Spelling can move into a condo, maybe I can, too.”

It is nice to know that there is a solution to the Beverly Hills housing crisis.

“What You Get for…$1.00” — The Housing Crisis Gets Crazy

The New York Times has a weekly real estate feature called “Property Values” that shows “What You Get for…” a certain a mount of money. 

This week the Times shows you “What You Get for…$10 Million” and it pictures palatial estates in Newport, Rhode Island, Kauari, Hawaii, and Whitefish, Montana.

But this week’s most interesting — and relevant — “What You Get for…” story wasn’t published in the Times, and the property isn’t situated in an up-scale locale.

The story was published in the Detroit News.

And the property — a cozy two story — is located in the foreclosure-ravaged Motor City.

It recently sold for $1.00 — after being on the market for for 19 days.

After reading the story, we tried an experiment. 

We went to realtor.com and looked up houses in Detroit.  For the minimum amount would put $0 and for the maximum amount we put $1000. 

The result was four more houses for $1, eight more for $100 or less, and a total of 172 properties at or under $1000.

Then we tried Cleveland, Ohio. 

The result was 10 properties available for $1 and five more for $1000 or less.

You can try the same experiment with other cities.  We think you’ll find similar results.

We noticed, too, that this example of America’s housing misery was providing aid and comfort to an old — and perhaps renewed — enemy.

The online edition of Pravda — which used to be the official newspaper of the Soviet Union and is now the official newspaper of Russia’s new bosses — put the Detroit Press story on the front page of its English language edition, just below the news about its shooting war in Georgia and South Ossetia.

Bankers Reject Free Market Ideology and Call for More Regulations and Protections for Investors

Free-market ideologues tend to blame most economic problems on government interference in the market.  And their response to economic crisis is invariably to call for the reduction or elimination of government regulations.

But free-market ideologues are usually pundits, professors, and politicians, and not capitalists themselves.

Real capitalists care less about ideology, and more about what is actually important — that is, capitalism.

That’s why it should come as no surprise that in the face of the potentially catastrophic crisis that is now gripping the banking industry, it is the bankers themselves who are calling for more, rather than less, government regulation.

As the Financial Times reports, “Many of the world’s biggest banks are proposing reforms that would limit the size and scope of their businesses in one of the most dramatic responses to the credit crisis. The proposals would hold down the number of investors who can buy complex financial products, bring large swathes of the derivatives markets into regulators’ sights and call on banks to spend more on technology and risk management.”

“Backed by banks including JPMorgan Chase, Merrill Lynch, Citigroup, HSBC, Lehman Brothers and Morgan Stanley, the proposals are being delivered to global regulators in the hope of producing rules for credit markets that would cut risk of contagion and restore confidence.”

Here is the story:  Last week, a panel of high-power bankers calling themselves “Counterparty Risk Management Policy Group III,” lead by Goldman Sachs managing director E. Gerald Corrigan, issued a report to Treasury Secretary Henry M. Paulson Jr. and Mario Draghi, chairman of the international Financial Stability Forum, calling for more regulation and governmental oversight of the banking industry and new standards for monitoring and managing risk.

The Washington Post reports that the bankers’ panel “suggested that big investment houses regularly perform ‘liquidity stress tests’ to measure their expected flexibility in the face of a crisis. It also urged firms to make sure they have accurate snapshots of their exposures to institutional trading partners, with the ability to compile detailed reports within hours.”

“In the current crisis, ‘some of the worst failures were in risk monitoring, which was before you even got to risk management,’ Corrigan, a former chief executive of the Federal Reserve Bank of New York, said in an interview.”

Included in the panel’s recommendations is a prohibition on selling high-risk and complex financial products to anyone except “sophisticated investors.” 

According to the Financial Times, under the panel’s recommendations “even pension funds and other institutional investors would no longer be automatically allowed to buy bonds backed by assets such as subprime mortgages. All but the wealthiest retail investors would be barred from buying structured products, such as auction rate securities, a $330bn market used by municipalities and student loan providers to raise funds.”

Corrigan said “the ‘markets had been sandbagged by complexity’ and suggested the new rules would help ensure sophisticated financial products were only sold to investors with the resources and skills to understand and monitor them.”

We agree with the panel’s report and recommendations. 

It is long overdue that investors in financial products have at least the kind of “qualified investor” protections that exist under the Securities and Exchange Act — both for the sake of the investors and the stabiliity of the financial markets.

And it is good to see that real capitalists care more about preserving the world’s financial markets than about preserving some ideologically pure notion of free-market capitalism.

On other hand, in the short term, it would not be good for the economy if the banks used these recommendations as a rationale to further restrict the availability of credit to qualified borrowers.