July 7, 2008 – Page 1834
U.S. companies eliminated 91,000 jobs in June, on top of 487,000 dumped in the previous six months. Car sales fell last month to their lowest level in 15 years. Starbucks has announced that it will close 600 stores and cut loose up to 12,000 workers as sales of lattes aren’t keeping up with the company’s costs.
Much of this bad economic news comes back, at some point, to the collapse in house prices and the resulting rise in home foreclosures.
Houses are a principal source of Americans’ net worth — and their self-worth. Until recently, home equity has been used to finance everything, college as well as cars. Now that has come to a crashing halt, leaving many in the middle class working harder than ever and yet still hard-pressed to make ends meet.
On top of deepening concerns about soaring health care costs and record gasoline prices, the mood of the American electorate has progressively darkened.
Lawmakers, who have struggled unsuccessfully to find straightforward solutions to those problems, are now directing their full attention to a housing crisis that has proved to be unexpectedly severe and of outsized political importance.
That is why, in an otherwise lackluster legislative year, virtually all Democrats and many Republicans are rallying around a mortgage relief and housing market overhaul measure that is the best bet to address middle-class economic anxiety before Election Day.
From a practical standpoint, the bill will be the last lever Congress has to press this year, because lawmakers have been unable to agree on any broad economic salves since they enacted $107 billion in immediate tax rebates in mid-February to give the weakening economy a spending lift.
No less solid a conservative than Republican
Gregg, who during a quarter-century in Congress has assiduously fought for cuts in entitlement programs and tight caps on domestic spending, while promoting market-based solutions to many of society’s ills, called the relief plan a necessary backstop. “Our goal shouldn’t be to have foreclosures occurring all across this country,” Gregg said. “Our goal should be to keep the homeowners in their homes, those who do have the wherewithal to pay for their mortgages, as long as their mortgage is properly priced. That is what this bill will accomplish in many ways.”
Lawmakers are mindful that their institutional futility hasn’t gone unnoticed. Respondents to a Gallup Poll of 822 adults conducted June 9-12 ranked Congress dead last among 16 American institutions in which they were asked to gauge their confidence. Just 12 percent of those surveyed said they had high confidence in Congress; lawmakers fell just below health maintenance organizations and big businesses and well below the presidency. Daily tracking polls by Gallup show that more than 80 percent of Americans hold negative views about the state of the economy.
Political scientists say this sour outlook among voters poses major challenges for Democrats as they plan for the remainder of this year and the next Congress. Even if the Democrats enlarge their House and Senate majorities in November, they will have to carefully tailor their legislative agenda as they simultaneously face broad dissatisfaction with government and inflated expectations for change.
At a minimum, however, the housing bill is intended to send a signal that Congress isn’t running away from the crisis. The legislation would create a $300 billion trust fund within the Federal Housing Administration (FHA) to help lenders refinance mortgages that are worth more than a home’s current value. The federal loan guarantees would be paid for in essence with money supplied by the two federally chartered mortgage giants, Fannie Mae and Freddie Mac.
Opponents of the bill, which is currently stalled in the Senate over unrelated energy tax proposals and other potential riders, are mostly conservatives. They maintain that it would bail out scam artists and speculators who they say precipitated the mortgage meltdown and would perpetuate lending to borrowers considered too financially risky to qualify for conventional loans. This line of thought holds that the government, by enacting the relief bill, would contribute to what economists call the “moral hazard” of encouraging people to take on inappropriate risks, knowing they won’t bear the cost of any subsequent damage. (Economic concerns, p. 1838)
“American taxpayers should not be forced to pay for lenders’ bad decisions,” said Republican Sen.
Experts say the plan opponents’ protestations ignore some of the grim realities of the housing crisis, which extend far beyond just those cash-strapped borrowers who are unable to make their monthly house payments.
That’s because home ownership and rising home equity have been so crucial to sustaining middle-class lifestyles this decade. A typical single-family home is bigger and nearly twice as expensive as it was in the 1980s. Federal Reserve statistics show that in 2004, the last year for which such data is available, the value of primary residences, or first homes, was equal to 50 percent of non-financial assets held by all American families, counting the richest and the poorest. When all of Americans’ stocks, savings and other financial holdings are factored into the mix, personal residences alone still amount to a third of all family assets.
Over the past two decades, millions of Americans have responded to rising costs for health, education and other essentials by borrowing against their homes. And for most of that period, housing prices in many parts of the country escalated, allowing many families to maintain comfortable lifestyles. That was particularly true in this decade, when on a national average prices doubled from the middle of 1999 until they peaked in mid-2006.
But the current crisis has suddenly and severely impeded the ability of families to live on credit, eroding middle-class borrowing power at a time when real household incomes are also falling. Last year, for the first time in at least 30 years, the sum of Americans’ equity in their homes was exceeded by the amount of mortgage debt they had incurred.
As a result, many Americans feel frozen in their tracks. In a Pew Research Center survey released in April, of 2,413 adults, 79 percent said it is more difficult now than five years ago for people in the middle class to maintain their standard of living.
“A growing portion of society has come to see a house as a way of moving up the economic ladder,” said Stephen C. Brooks, associate director of the Ray C. Bliss Institute of Applied Politics at the University of Akron. “When prices fall, people feel frozen, or trapped. Politicians see a need to at least assist these people so they can participate in the housing market, even if they’re unable to fix all of the underlying problems.”
The nation’s economic troubles also may deepen. Treasury Secretary
The impetus to act is especially acute among lawmakers from states that have been particularly hard hit by foreclosures, such as Ohio and Florida. Those senators and representatives have an added incentive to want Congress to step in, knowing that state and local property taxes will only erode if more cash-strapped homeowners walk away from their properties, and that state and municipal governments will have to pick up the cost of preventing an increase in blight. House lawmakers from those states made up a large percentage of the 39 Republicans who crossed over to vote for the centerpiece of a House Democratic version of the housing bill that passed that chamber, 266-154, on May 8.
“We cannot stick with the status quo,” said Republican
Congress has mulled responses to the housing crisis since the first wave of borrowers with adjustable-rate subprime mortgages began defaulting in large numbers more than a year ago. But the legislative efforts began gaining momentum only early this year, as defaults threatened the value of securities backed by home loans and drove credit markets into a tailspin. The focus on housing relief intensified as Congress failed in other attempts to address economic woes bedeviling middle-class voters.
For example, the House and Senate in mid-May moved to address voter anxiety over surging gasoline prices by overwhelmingly voting to halt crude oil deposits to the Strategic Petroleum Reserve as long as oil prices remain above $75 per barrel. Although that boosted oil supplies by about 70,000 barrels a day, its effects have been negligible. The U.S. benchmark price for crude stood at about $124 a barrel on the day of the Senate vote and crested above $142 a barrel last week.
Meanwhile, efforts to address rising health costs and fortify the federal Medicare program — perennial sources of angst among all segments of the electorate, especially older voters — have faltered. An effort to avert a reduction in Medicare reimbursements to physicians by making some cuts in bonus payments to private Medicare Advantage health plans fell victim to partisan fighting in the Senate before the July Fourth recess and faces an uncertain outlook.
Jacob Hacker, a political scientist at the University of California Berkeley and author of “The Great Risk Shift,” said Democratic leaders have been frustrated by several factors since taking the majority of the House and Senate after the 2006 elections: comparatively thin majorities, especially in the Senate; their insistence on adhering to pay-as-you-go budget rules that often require tax increases to support any substantial new spending; and the fact that relief bills such as the housing measure are limited in scope and largely throw money at a problem, instead of solving it.
“If the major issue for middle-class Americans is the loss of overall value in their homes, helping people refinance and stay in their houses won’t fundamentally alter those concerns,” Hacker said. “You probably need to do more and create a new financial structure around housing because it’s so important to middle-class security, say by shoring up unemployment insurance and helping states deal with the effects of downturns.”
But with conservative skeptics ready to brand ambitious, big-government solutions as “bailouts” or to tie them to scandals — including recent allegations that some lawmakers were granted favorable mortgage terms — Democratic leaders took a cautious route to produce a plan they figured most in Congress can live with.
Inherent in their calculations was the reality that few substantive measures were likely to move in the final months leading up to the presidential election. Even one of the bill’s prime sponsors,
“We are not telling you it is going to solve all the problems,” Dodd said during Senate floor debate on the bill. “If it does nothing more than to restore some confidence the American people ought to have in their Congress, that in itself will be an achievement.”
Dodd and his House counterpart, Financial Services Chairman
To avoid the appearance of a bailout for either lenders or borrowers, the pair agreed to require lenders to agree to reduce the principal amount owed on delinquent loans and stipulated that borrowers who sold their homes after refinancing would have to share any profits above the value of the mortgage with the government. And they made the plan voluntary for lenders and borrowers to avoid the impression that the government is too closely directing the course of the economy.
Democrats united behind the plan, but Dodd and Frank continued to whittle down its cost to win the approval of crucial Republicans, such as
“I’ve long said that we should do what we can to help struggling homeowners, short of asking the taxpayer to foot the bill,” Shelby said early last month.
Although Congress put careful thought into how to assemble a politically palatable bill, the effort represents little more than a leap of faith in its assumptions because it’s difficult to gauge how much the package would improve matters. Dodd says that with an estimated 8,400 Americans going into foreclosure daily, the measure would help individuals avoid losing their homes and provide a government-supported backstop for the battered real estate market.
The Congressional Budget Office (CBO) estimates that as many as 500,000 borrowers out of the estimated 2.2 million facing foreclosure would qualify to have their loans refinanced. But even if the measure is enacted into law, and even if some individual home owners start to benefit right away, it may take years to see any broadly measurable effects.
For one thing, it will take time for the FHA to hire a federal workforce to help manage the approval process for refinanced loans. For another, while many lenders and borrowers are expected to be eager to participate, fine-print restrictions in the program could substantially weed out many eligible borrowers. In cases in which the homeowner has a home equity loan or some other second mortgage on the house, the bill’s terms might lead those secondary lenders to refuse to cooperate in a refinancing.
And lenders would have to voluntarily take substantial losses, while borrowers would have to share the bulk of any future profits on the new mortgage. Those restrictions are expected to also reduce the number of participants.
There also are no assurances that some homeowners won’t default again on their refinanced loans. In fact, the CBO estimates that a third of the refinanced loans eventually will go into arrears.
David C. John, a senior fellow at the conservative Heritage Foundation, says the risk is substantial because the relief package proposes to give borrowers a new loan equal to 90 percent of the property’s newly assessed value. In essence, that amounts to a “gift” equal to 10 percent of the current value of the house without having to put any of their own savings at risk. John says similar “gift equity” housing initiatives in other programs demonstrate that loans structured in this way have a default rate two to three times that of loans for which the borrower has made a cash down payment.
And beyond the fear that some owners will simply walk away is the broader concern that home prices may continue to decline for some time, and that could again make those houses worth less than the amount owed on them.
“You can refinance a mortgage and be underwater,” John said. “To a large extent, this is not something Congress can do much about. These are major economic disruptions, and they can’t be micromanaged.”
One overarching concern is that it’s difficult today to forecast how large the problem may become.
The biggest contributor to foreclosure isn’t the drop in prices, it’s the rising cost of adjustable-rate mortgages. Such loans usually begin with below-market interest rates that result in relatively small monthly payments. But as time goes on, the terms of the loan “reset,” meaning that the interest rate adjusts — usually higher — to get closer to what is charged in the marketplace. Higher rates result in rising mortgage payments and sometimes an unsustainable strain on family budgets.
This process of resetting has been going on for some time, and will continue well into 2009 and 2010 for some classes of loans that were made during the run-up in housing prices and are regarded as problematic.
The housing bill would prevent a recurrence of this problem by refinancing loans at a fixed rate and by requiring ordinary underwriting terms, including evidence of the borrower’s ability to sustain monthly payments.
Still, there may be thousands of homeowners who will default on adjustable-rate mortgages that have reset in the first half of this year and who in all likelihood will lose their properties before the measure is signed into law. That’s because lenders typically launch proceedings against delinquent loan holders after payments are 90 days past due, and repossess homes several months after that. The bill would assist borrowers who were already delinquent, or those who might fall into that status. Helping those who were already in foreclosure would be harder.
But even if relatively few people are actually helped in an economic sense before Election Day, the relief package is fraught with symbolism because it demonstrates to voters that Congress is becoming sensitive to the fears of many Americans and is willing to launch a government-led recovery effort. Congress could claim the added benefit of spurring a recovery should the housing market rebound in 2009.
“I think this ties in very much to the widespread concern that Washington can’t get anything done, that everyone argues with each other and that no one produces a result,” said the University of Akron’s Brooks. “The housing crisis kind of blindsided everyone like a tornado, and now there’s an expectation government should step in.”
Although the relief package would most immediately benefit borrowers who are currently in dire straits, the financial institutions that generated many of the problem loans and those investors who bought securities tied to the mortgages, its potential long-term effects are more far-reaching. Congress is betting that a legislative fix will begin to put a floor under home prices in many troubled neighborhoods and perhaps forestall the impulse of states and localities to raise taxes on other properties to offset reduced revenue collections.
In this way, the housing package represents a sort of legislative shout-out to heavily courted middle-class voters, who find themselves squeezed by rising energy prices, eroding health and pension coverage, stagnant income growth and the threat of job losses stemming from corporate cutbacks and globalization. These economically stressed individuals view the family home as the last big asset they have left, and a source of potential wealth for their retirement and their children.
For those reasons, backers of housing relief believe the legislation will deliver some small, symbolic measure of hope to a group whose mood could heavily influence voter turnout and the outcome of the elections.
“To a large extent, there’s an element here of members of Congress feeling that they have to do something, rather than necessarily doing something that’s essential,” said the Heritage Foundation’s John.
The lawmakers will, if nothing else, buy themselves some time.
Some are surprised that the Democratic Congress didn’t do more. The University of California’s Hacker says Democratic leaders have shown little passion or vision in responding to the sputtering economy, especially after they pledged to implement a new generation of populist-themed policies.
“Where is the Democratic Newt Gingrich — someone who combines the policy savvy with a firm sense of where the party is supposed to go?” Hacker asked. “The Democrats may not need it to succeed electorally this year, but if they want to change the direction the country is going in, they’ll need a strategy that goes beyond Election Day.”
To Dodd’s way of thinking, however, this was a major accomplishment given the current political landscape.
“This is not a bill I would have written on my money, nor would Sen. Shelby,” Dodd told his colleagues. “We all have our ideas on how we would frame these matters. But we are elected to a body that includes 99 other members, and you have to sit down with each other and work to achieve anything.”
That could change next year if presumed Democratic presidential nominee Sen.
“Like 1980, there is a deep desire for change that’s driven by the sense that no one is really in control,” said John K. White, a professor of politics at Catholic University of America. “As this economic crisis expands, the public may show patience with someone who’s perceived as trying everything, especially if the opposition has nothing to offer. But if
FOR FURTHER READING: Housing bill (