Mortgages

Eastwood Meets the West Wing

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I am a New Yorker. I am a Giants fan. They made my day last Sunday. Sorry, Gisele.

Like over 100 million of you, I saw the Chrysler commercial and, for the record, Clint Eastwood made my day.

Now, in the interest of full disclosure—my college flame was the granddaughter of a famous Chrysler design engineer—so I confess that I have a warm spot in my heart for those guys, but that said, how can you not appreciate the concept of “This is not a country that can be knocked out with one punch?”

Isn’t that what we Americans are all about?

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So I think it’s high time for us to decide whether better days or bitter days are ahead. I, for one, cast my vote for better days.

Unfortunately, there are those “nabobs of negativism” who would promote the “end of days” when it comes to our economy and the Obama Administration’s efforts to continue to pull us out of the fiscal bonfire that has consumed this nation for the past five years.

Steps that are proposed to ease the financial pain of the American people seem to follow a well-defined path. The President makes an eloquent speech announcing an initiative in general terms.  Even without specifics, the idea is debunked by critics usually on the right, but occasionally on the left as well.  The details are released, or a piece of legislation is introduced and it is pronounced dead on arrival.

At first blush, this would seem to be the case with the mortgage refinancing plan that Obama unveiled during the course of his State of the Union message. It was criticized before it was seen, and when the enabling legislation was introduced, most commentators simply assumed it would go nowhere. But if you read between the lines, you will discover something very different—and that difference exposes a most interesting philosophical dichotomy rarely found in the workaday, soundbite world in which we live.

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The proposed new program is well thought out. There is to be no reduction in the principal amount of the mortgage, but FHA-guaranteed refinancing at today’s amazingly low rates would be permitted for anyone who wanted it, so long as they had a minimum credit score of 580, and an existing mortgage with a principal amount within the FHA’s limits ($271,050-$729,750). Borrowers would also have to be current on their mortgage payments for at least the last six months, and have not more than one delinquency in the six months prior to that. The program is estimated to cost between $5 billion and $10 billion, paid for with new fees on those financial firms that have more than $50 billion in assets. As far as it goes, this is a terrific plan, balancing many competing interests and spreading the costs around pretty effectively.

Conservative opposition to this plan has been predictable and not particularly vociferous, in light of the fact that the formerly liberal, now newly minted voice of the right has advocated that we let the foreclosure mess “run its course.” What’s different is the liberal reaction, from a whole host of different sources that seem to advocate a program that would reduce the principal amount of mortgages, as opposed to one that only makes payment-reducing refinancing easier. Their argument is simple—right now there are approximately 11 million homes in the United States that are worth less than the principal amount of the mortgages that encumber them. About one in every eight homes that has a mortgage is either delinquent or in foreclosure. At best, the Obama program would assist, at least to some degree, less than 4 million homeowners, and by definition none would be delinquent or in foreclosure. The unprecedented magnitude of these issues has led some observers to opine that the United States is in “a permanent foreclosure crisis,” one that can only be solved by forgiveness of debt in equally unprecedented magnitude.

Taking a step back and thinking about it, it becomes clear that those who push for actual debt forgiveness, which would involve the government taking by fiat an asset of a private lender—at best constitutionally dubious—must necessarily believe that housing prices will not return to their pre-2008 levels for a very long time, if at all.

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So the philosophical question presents itself very naturally: What kind of America do those who advocate debt forgiveness envision? Unless you believe that all those new housing projects in the Gingrich moon colonies will vastly increase supply in the coming years, you must believe that our collective future is rather bleak—meaning at least that there will not be enough money or enough buyers to bring housing prices back to 2007 levels.

I believe that the foreclosure crisis is just that—a crisis about which something extraordinary must be done in the very short run; but I do not believe that it is permanent. That said, there are certainly some situations that will require lowering mortgage amounts, such as those involving lender abuse (the subject of the suit settled just last night by the 50 state attorneys general which allocated about $26 billion from the big banks, most of which will be used to reduce mortgage principal for about 1 million underwater homeowners and provide cash settlements of about $2,000 to 750,000 people who were foreclosed upon).

There are other solutions available that do not require an across-the-board suspension of the due process clause. I have often advocated for the SAM, or the shared appreciation mortgage, which gives to beleaguered borrowers exactly what they need (time, not money)—reduced payments but not reduced principal.

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Ultimately, the federal government is there to act in precisely the sort of situation in which 11 million homeowners find themselves in 2012. The right solution to the foreclosure crisis will be one that reflects the nature of the problem and the country; that is, one that reduces rate, not principal—except where appropriate—and recognizes that punishment is less important than solidarity. It will acknowledge that everyone contributed to this problem—banks, brokers, borrowers, and of course, the federal government itself. However, it will not sacrifice constitutional principle in the heat of this particularly searing moment in American history.

The Obama plan is not a solution, but it is a step in the right direction. We need to cooperate and collaborate with each other to solve the mortgage crisis and minimize the personal tragedy it engenders. And we need to find solutions that recognize that real estate prices will rebound, as will America in general. However difficult it is to muster it at this moment, optimism is something that has always characterized this country, and will continue to serve it well in the foreseeable future—and is something exuded by President Obama, as it was by Presidents Kennedy, Reagan, Clinton and other American icons…

You’re absolutely right, Clint. It is halftime and we can and will make the finish line.  That’s something we Giants fans understand all too well.

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Image: Mr Lujan!, via Flickr.com

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