Another Reckless Gamble by John McCain
Rich Rodgers
By Rich Rodgers of Portland, Oregon. For 11 years, Rich was a policy advisor to a Portland city commissioner on housing policy, school funding, environmental restoration, and public safety. Prior to that, he studied the effects of regional growth management on housing prices, and worked in the Oregon Senate as a research assistant. At Yale University, his history thesis focused on the lack of community involvement in decisions to construct major public infrastructure in historic African-American neighborhoods in Atlanta. He now works in the private sector. Previously, he contributed "This Land is Your Land: A better way to spend $1 trillion".
In Tueday's debate, John McCain proposed spending $300 billion of our money to help only the most irresponsible players in this current financial mess.
In Tuesday’s debate, John McCain proposed spending up to $300 billion to have the government buy up the mortgages of people who are behind in their payments. His idea is to write off the difference between what people owe on their mortgages and what their house is worth, and then refinance the mortgage at a fixed interest rate.
The Obama camp was quick to point out that this isn’t an original idea -- section 110 of the Paulson plan already authorizes the Treasury to buy up troubled assets, and take steps to minimize foreclosures, including modifying the interest and/or principal on the loans.
What’s unique about the McCain plan is just how wasteful it is with taxpayer money, and how unfair. By paying face value for these bad mortgages, and then eating the losses, the taxpayer would be left holding the bag, letting off the hook both lenders and borrowers who made risky bets. The most responsible investors and lenders would pay the price for the mistakes of the least responsible.
Roughly a third of American households rent. About a quarter of households own their home debt free. So, about half of American households have some kind of mortgage debt. Of these, only 6-7% currently are delinquent on their payments, most of them subprime borrowers. John McCain would take $300 billion and direct all of it to the banks that made these riskiest of loans, in order to buy down the principal to the current value of the house. Meanwhile, close to 50% of all homes purchased in the last three years are worth less than the mortgages associated with them, but unless you’re behind on your payment, John McCain isn’t proposing to help you.
I very much believe that the best way out of this crisis is to focus direct aid on American households, while having the Treasury lend into the commercial paper market to keep credit flowing to non-financial businesses. But the benefits need to be broad, fair, and above all, a responsible use of taxpayer dollars. This means harsh terms for the banks that imperiled our economy by making such risky bets -- forcing them to sell their healthy mortgage assets along with the bad ones, at pennies on the dollar. Far from extracting a pound of flesh from these banks, John McCain’s plan would apparently hold them harmless.
On September 22nd, I offered up a modest proposal to write off the mortgage debt of every household in the country, with additional benefits for renters and homeowners who already own their home outright. A key difference was the means by which the government would acquire the mortgages. Rather than pay face value, the government should pay fire sale prices.
Using the case of Washington Mutual as an example, I believe the Treasury could have purchased WaMu’s $310 billion mortgage portfolio for about $2 billion in cash. By accumulating the mortgage assets of failing institutions, the government could have assembled a very large percentage of outstanding mortgages for a fraction of their face value.
My opinion was and still is that the magnitude of the bad positions staked out in the estimated $62 trillion credit derivatives market is sufficient to dwarf the $700 billion+ bailout plan. I believe that real recovery will come from letting bad financial firms fail, wiping the mortgage debts clean, cramming down a regulatory fix to the insane derivatives problems, and ‘rebooting’ the economy with American households in a position of strength, not weakness. If American households are in a strong financial position, to paraphrase William Jennings Bryan, the financial system will reappear as if by magic, albeit with some different players.
I think this would only work -- economically and politically -- if the benefits are widespread and as fair as possible. Renters and people who owe no debt on their homes would be rightly outraged to subsidize those who made the riskiest bets, as John McCain would have it. Instead, along with mortgage forgiveness for all mortgages, healthy and failing, the tax code and fiscal policy could be used to promote fairness -- for example, a higher federal tax rate moving forward for beneficiaries of a mortgage write off, and tax breaks and assistance for people who don’t directly benefit, spread over many years.
There are an estimated $11 trillion in outstanding mortgages in the U.S. Fannie Mae and Freddie Mac already own a large percentage of them, and failing banks like WaMu, Wachovia, and Countrywide have or had large chunks, as well. Global equities markets have lost over $5 trillion in the last week. There are no cheap solutions to this problem. And many of the expensive solutions aren’t really solutions.
There is a real danger that the $700 billion bailout plan will be swallowed up by these churning financial markets, without fixing our problems. John McCain’s proposal is one sure way to blow $300 billion of that $700 billion with little to show for it -- other than the thanks of the banks that made these irresponsible loans in the first place.
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Oct 10, '08
Well, let's face it - there's going to be some subsidy. Also, given that Congress didn't let bankruptcy judges rewrite residential mortgages in Chapter 13 to "cram down" the debt to the real value of the house, they're not going to pass a plan that just puts the taxpayer on the hook for the difference instead.
No, mortgage relief is a good plan in general, but the outlines have to be more reasonable. Keeping someone in an overvalued house (at current rates) may make sense for up to 110% (or so) of the current value. So, if a homeowner could afford a mortgage on 100% of the current (not original) value of the house, it would be reasonable for the government to allow for the renegotiation of the mortgage to a 30 year fixed at 5-7% interest for 110% (max) of the value, depending on income.
If you're more than 10% upside down on the house or can't afford a mortgage on even the current value, there's not much point in keeping you in the house. The government could cover the payment on the 10% excess for a period of time, in exchange for a lien on the house upon sale (based on a percentage of value). The securitized investors would probably get at least 80% of their value out of their investments, the homeowner stays in the house, and the govt eventually gets their money back. Everyone loses a little, but no one's ox gets totally gored.
What I don't get are these total bail out plans where no one loses except our children, who will have to pay off these astronomical government debts.
Oct 10, '08
Rich makes a critical point:
Unfortunately, due to the sheer magnitude of the problem, the chances are we haven't yet seen the worst of this economic crisis, and won't until 2009-10. As a result, should Obama win, the Republicans will no doubt try to blame him for making the crisis worse.
That effort will be harder than the Republicans initially anticipated. They were hoping the collapse could be delayed until 2009 (and I thought they might be right), but because the crash is occurring in 2008, it will be harder to shift blame away from the trickle-down, deregulatory policies that got us here. But that won't stop them from trying, which is why we must do everything we can to make it clear to the American people what led to this financial disaster.
10:36 a.m.
Oct 10, '08
I thought McCain says he's against any sort of spending spree. But hasn't he advocated for a post-mission- accomplished-police-action costing $10,000,000,000 per month while simultaneously calling for spending $300,000,000,000 to buy up mortgages even though loaning money directly to the distressed mortgage debtors would cost far, far less? So much for being against a spending spree -- or honesty (so-called straight talk). My friends, we can't afford John McCain!
Oct 10, '08
Hi Rich,
Thank you for a thoughtful contribution. I'm trying to wrap my head around your proposal for a debt jubilee for mortgagors and I conclude that this is unworkable for the reason that it is both inequitable to renters and those who own real estate in fee simple, and that there is no lobbyist organization for the mortgagor class. This is important because the shape of the bail-outs we're seeing so far has essentially been driven by the elites who control the federal government and control the Treasury and FRB pursestrings. This would be Hank Paulson and the rest of his bankster buddies. So, unless and until the borrowers, as a class, can organize and influence the federal government, your proposal is essentially a non-starter. I do want to say that I'm sympathetic with your goal, however.
<hr/>On a slightly different tack, you suggest "cramming down a regulatory fix to the insane derivatives problems...".
I heartily agree with you on this. In today's news there is mention of the 2 PM ET auction close on Lehman credit default swaps with the greatest likelihood being that Lehman's CDS counterparties will be force to disgorge $270 Billion to cover their bets. Oops. Bloomberg has some coverage.
Currently the DJIA is trading -475 on the day. This could be very much worse by the end of trading. This should be a very busy weekend for the Hank-y Panky Crowd.
Oct 10, '08
Lee Coleman said: "I thought McCain says he's against any sort of spending spree."
That was last year. Now McCain has decided to unleash his inner Huey Long and let us know he's really a populist, unlike that elite Wall Street stiff named Barack Obama. I'm relishing the irony and absurdity of this role reversal for the political parties. It's yet another indication at just how corrupt and alienated from the middle class both parties have become that they can pose almost as shamelessly as Heidi Fleiss's hookers and get away with it.
11:09 a.m.
Oct 10, '08
I not suffering under the delusion that a proposal like mine is likely to be implemented soon. I agree that the interests of the financial firms are being placed above those of the actual people who live and work in our country. More than anything I'm trying to articulate a solution that is easy to understand and on the same magnitude as the problem and any likely fixes.
I think the lobby interest that you describe would help matters tremendously, but I don't see that springing into existence with a clear goal.
The CDS nightmare is so massive and unknowable that I fear it could wreck our financial system for a long time. The main problem as I see it is that non-financial firms and people who need credit are paying the price for the insane and reckless behavior of the financial actors. It feels like they're trying to patch together the exploded balloon before all the air gets out.
I would try to segregate the non-financial firms from the financial actors. Keep the credit flowing to non-financial firms, let the financial firms fail, scrape together every asset you can from the failures, and distribute the benefit on a per household basis.
Let's say you accumulated $5 trillion in mortgage assets--which shouldn't cost that much, less than ten cents on the dollar if you are willing to let the banks fail (which neither Congress nor the White House is willing to do). You could give every household a share in this national mortgage pool. The shares could be converted to a deposit to an escrow account for immediate help, or mature in five year steps so they become more valuable the longer you hold them. That way, renters and homeowners with no debt get their benefit, too.
Letting the banks fail and assuming their assets is actually a way out of the FDIC problems, too.
If, as I suspect, this is going to get deeper and uglier in the coming months, it makes sense to me to continually point to an alternative vision that places the interests of people above institutions.
Oct 10, '08
I am not as educated and knowledgeable as Rich Rogers (but, hey, we both were born "Rich:). But let me propose a simplistic solution for those homeowners who are currently paying for their homes but face a big increase due changing terms - balloon paymnets and such.
Many years ago when I was working in Germany, one of my co-workers told me how his mortgage terms (sort of an ARM)were changing due to a steep increase in interest rates. He told me that while his interest rate was increasing, his mortgage payment remained the same. What gave was the increase in the term of the mortgage. This apparently was written into German law.
So why can't this be a part of a negotatiated settlement as an alternative to foreclosures? As long as a homeowner can pay the interest, taxes, insurance and some of the principal, extend the mortgage to, lets say, 40 years. Seems simple to me and no one loses in the short run. Of course a complete meltdown in the economy and a massive rise in unemployment would work against this plan, but then I would say we are all screwed.
With the current drop in Fed Funds rate, interest rates should also be able to be reduced for many homwowners.
Oct 10, '08
So, some simple questions amidst all the talk of subsidies, "rescues", and so on:
Who gets to tell John and Jane Q. Public that using credit cards and home-equity loans for instant gratification is perhaps not the wisest sort of household fiscal policy?
Who gets to tell them that the modest houses many of us grew up in were actually adequate, and that suburban McMansions are a problem not only because of sprawl, but simply because of the enormous debt that buyers wind up assuming?
Oct 10, '08
Speaking of reckless gambles, when I first saw that "Thank You Darlene Hooley" ad, I thought it was a joke--"thanking" her for voting twice to throw away 850 billion dollars on the failed bailout. Silly me...
Oct 10, '08
Sarah Palin- an unvetted reckless gamble
Breaking news: Legislative Panel finds she abused power of her office under Alaska Ethics Statute- http://www.msnbc.msn.com/id/27105917/
7:24 p.m.
Oct 10, '08
Rich Rodgers,
I am willing to be corrected, but it is my understanding that one of the sources of the illiquidity of Paulson's "illiquid assets" is exactly that the "good" mortgages are bundled with currently or permanently "bad" ones, as well as with various forms of derivatives, in ways that the simple mortgages cannot easily be separated out from the other stuff. If the assets actually backed in a simple way by real property, the mortgages, could be separated out easily, there would still be a market for them so that the whole system would not be seized up.
Indeed that is part of the point about the part of the bail-out supported by Peter DeFazio, in one version at least, in revising the accounting rules, because "assets" (financial instruments composed of several types of debt) that contain elements with some real value but an undetermined and at present undeterminable amount, but greater than zero, are accounted at zero because no one will buy them or lend against them because how much greater than zero isn't known.
Because of that understanding, my first concern about the bailout is that the gov't will overpay for these bundles of mixed good, dodgy and worthless assets at something well above "fire-sale" prices, and that the government will not bargain hard about this because of conflicts of interest and clubbishness among the financiers on the outside of the government revolving door and those on the inside.
However, I don't think it is true that the government will be buying the mortgages at "face value." Mostly they won't be buying mortgages in any straightforward way at all. And if they are buying mortgages that are "distressed" i.e. at risk to varying degrees of going into default, they won't be paying face value for them either.
So, if the government does bargain hard and pay "fire-sale" or anyway the next step up from that, it seems quite possible that they will end up with mortgages held by people who can't pay their current terms but could pay something not unfair in relation to their incomes and the actual value of the properties -- i.e. something similar to what would result if the government foreclosed on them and then sold to someone else, to what the someone else would be paying. Under those circumstances it does not seem to me unfair to other people to let current mortgagees (aren't mortgagors the lenders) renegotiate such mortgages so that they can stay in their homes. On the contrary, it seems to me to be a nasty and short-sighted (see below) type of punitiveness not to do so.
Obama was saying in the debate that something like 2/3 of those with subprime mortgages at risk of foreclosure were in that situation due to predatory practices and could have had sustainable mortgages except for being deceived by the party negotiating and then selling off the mortgage. I have no idea where he gets that figure or how true or exaggerated it may be.
One reason to support renegotiating government-held mortgages to real property values at rates and payment terms affordable to current holders when possible is because of the negative effects of foreclosures on people who bought houses (and maybe things like retail business properties or rental properties) nearby on conventional terms they could afford in the first place. Part of the problem is a negative cycle on property values (in the sense of prices) that foreclosure creates via vacated and unmaintained housing stock, or simply flooding a market with properties for sale that would not be, if the mortgagees weren't forced out.
It does not seem sensible to me to punish people for having made bad deals by holding them to those deals when doing so will a) create a different kind of housing and poverty crisis for those dispossessed while that the government (taxpayers) will end up paying for in other ways, while b) also punishing their neighbors and communities for the "sin" of having the lack of foresight or clairvoyance to know that people around them were making bad deals that would play havoc on their own property values.
Maybe there would need to be some analysis of unfairness to owners of paid-off houses, those with currently sustainable mortgages or equity lines of credit, and renters, and some effort to mitigate that -- say through tax credits for good practice, or some way of responding temporarily to loss of value due to everything that's going on even if it doesn't throw people into foreclosure, until the housing markets recover and become transparent again.
Oct 10, '08
Obama invoked FDR today with the quote, “All we have to fear is fear itself.” If Obama is the new FDR, does American really need a FDR style ‘New Deal’? FDR’s socialist reforms held us in a depression until we were pulled out by WWII. What we really need is more ‘Reaganomics’.
Reagan pulled us out of a deep recession and stagflation, with conservative supply side economics. Republicans understand this, a democratic ‘New Deal’ will not.
7:56 p.m.
Oct 10, '08
The McCain proposal is to use the $300 billion to fund the difference between the face value of the mortgages and the new value after renegotiation, keeping the banks whole. This aspect has been covered thoroughly in the press, and I haven't seen any clarification or revision from the McCain campaign.
McCain only proposes addressing mortgages that are currently delinquent, not the much larger pool where the mortgage is bigger than the value of the house.
We agree that foreclosures and vacant houses are bad for neighborhoods and families. We are going to see many more struggling families than just those currently delinquent. Many families will go down fighting--they will make enormous sacrifices to avoid being late in their payments. Just because you're current doesn't mean you're not suffering, which is why across-the-board assistance for everyone makes sense.
The problems of extracting pieces of the mortgages from the mortgage backed securities are real, and will affect any solution. So are the problems of equity. In an above comment I offer a suggestion for aggressively acquiring as many mortgage assets as possible, then issuing shares of the resultant publicly owned pool to all households. In essence, the assets that still have value would be removed from the rubble of failing financial institutions and put into direct public ownership, with each household owning a share.
The approach is essentially the same, except the more nuanced 'national public mortgage corporation' method works no matter what percentage of outstanding mortgages the government were able to acquire. Say it's $7 trillion, which would translate to shares valued at about $70,000 per household minus any discount.
With the right incentives to hold the shares for those in position to do so, the demands for cash would be manageable. Those who needed the cash now could redeem their share and have the cash deposited in an escrow account to help them stay current on their mortgage. I don't think you'd want to let people cash them out for any purpose for some period of time. A supplement to social security and medicare assistance would make sense to me.
8:46 p.m.
Oct 10, '08
My apologies for not reading closely enough. This is very interesting.
9:09 p.m.
Oct 10, '08
As Jim Oleske notes, the Lehman credit default swaps are the subject of some attention:
http://www.nytimes.com/2008/10/11/business/11credit.html?ref=business
$400-$600 billion for Lehman alone.
Oct 10, '08
Bill R -
Read the report.
"Compliance with the code of ethics is not optional. It is an individual responsibility imposed by law, and any effort to benefit a personal interest through official action is a violation of that trust. ... The term 'benefit' is very broadly defined, and includes anything that is to the person's advantage or personal self-interest."
"[Branchflower] said, Palin's firing of Monegan was "a proper and lawful exercise" of the governor's authority."
Further, when you read the report Branchflower's "abuse", in essence, says that the Governor is breaking the law because she did not stop her husband arguing with officials that the trooper in question should be dismissed.
I am sure we can both agree that, Palin did not use her office to settle family affairs as her critics (MSNBC) have claimed, because nothing was settled - Trooper Wooten is still a trooper and that Monegan's employment or non-employment isn't a personally advantage or disadvantage to the Palin family.
Politicians and Govt officials who do use their power for financial gain (Dodd, Frank, Gorelick, Raines, etc) are laughing their heads off tonight.
What a farce. Time to move on...
Oct 10, '08
Bill - here's the report
http://msnbcmedia.msn.com/i/msnbc/Components/Interactives/Politics/Election2008/branchflower_report_to_the_legislative_council.pdf
Oct 10, '08
YO johnnie, you're right, it's a farce, time to move on to Obama's secret Islamic connections and his ties to vote fraudsters and terrorists.
Hint: McCain's been trying to change the subject from the country's sorry state after nearly 30 years of the GOP preaching about how government is the enemy while transferring power and wealth to the elite. You can see how well this is working for McCain.
Oct 10, '08
YO johnnie, you're right, it's a farce, time to move on to Obama's secret Islamic connections and his ties to vote fraudsters and terrorists.
Hint: McCain's been trying to change the subject from the country's sorry state after nearly 30 years of the GOP preaching about how government is the enemy while transferring power and wealth to the elite. You can see how well this is working for McCain.
Oct 11, '08