Economics

Debate shows GOP still underwater on housing crisis

Imagine holding a presidential debate in Manhattan in October of 2001 — and having zero questions about terrorism. Or a debate in post-Katrina New Orleans and ignoring the surrounding devastation. No way, right?  Yet Republicans candidates just squared off in a two-hour debate in Las Vegas — a city where home prices have dropped a national high of 59 percent during the past five years — with almost no time spent discussing America’s housing depression.

One audience member did ask a question, but he was probably left wanting more. Rick Santorum immediately derailed the conversation into TARP. Mitt Romney nudged things back on track but said little more than about the need to “let markets work” by, presumably, quickening the pace of foreclosures. Oh, and by boosting economic growth — which is fine unless you think the moribund housing market is itself hurting growth. And Michele Bachmann, “talking to moms,” merely said the issue has “got to be solved.”

Recall the scope of the problem. U.S. home prices are down a third from their 2006 peak. According to CoreLogic, 10.9 million, or 22.5 percent, of all residential properties are in negative equity. And another 2.4 million have less than five percent equity. More than 4 million mortgages are at least 90 days delinquent or in some stage of foreclosure, with another 3.4 million mortgages likely on their way during the next year, according to Christopher Mayer, a professor at Columbia Business School.

So what to do? Occupy Wall Street would probably cut everybody a check and call a “do over.” Economists, however, do have some ideas that might help, while letting nobody completely off the hook.

1. Former Reagan economic adviser Martin Feldstein suggests a $350 billion mortgage principal writedown with taxpayers and banks splitting the cost and all affected mortgages converted into full recourse loans.

2. The University of Chicago’s Luigi Zingales would reduce underwater mortgages by the amount home prices have fallen in the area, with homeowners and banks splitting future price appreciation.

3. Columbia’s Mayer would allow every — more or less — current homeowner with a GSE mortgage to refinance to a new mortgage with a 4.2 percent rate or less. Mayer estimates mortgage payments would fall by about $70 billion for 25 million borrowers, or nearly $3,000 in average savings.

Now, maybe Romney was right last night. All we need is for banks to speed up foreclosures so prices can quickly find their lows and reduce buyer uncertainty. But one of his economic advisers, Glenn Hubbard, has pushed a mega refi plan with his Columbia colleague Mayer. Indeed, Romney had kind words generally for a refi plan in an interview before the debate: “I think the idea of helping people refinance homes to stay in them is one that’s worth further consideration. But I’m not signing on until I found out who’s doing to pay and who’s going to get bailed out.”

Housing remains a huge drag on the economy. Perhaps none of the plans mentioned above would help in the least bit. But GOPers would do well to start thinking hard about the issue because they can be sure voters are.

6 thoughts on “Debate shows GOP still underwater on housing crisis

  1. Writing down principal? Reimbursing someone for a bad investment? Are you kidding me? Rewarding those who took money out through refinancing in the boom times, while the overwhelming majority lived within their means? Do we pay off Chris Tuckers $1.6 million mortgage?

    I think allowing refinancing on existing (current) balances is a good policy. The other stuff with encourage more anger and frustration.

    I am surprised that this kind of policy is being pushed. Should I stop paying my mortgage now so I can be eligible? What about car loans? My television is worth less than when I bought it last year – bail me out!

    • Karen,
      First of all, if you stop making your mortgage payments, you would NOT be eligible.
      Secondly, homeowners taking money out of their homes was not the only reason for the burst of the housing bubble. Other factors came in to play such as deregulation, the property tax codes, loopholes with those tax codes, and more importantly, greed from Wall Street bank investors. So if you think about it, the blame could be shared evenly; blame the government as well as each individual; you me and every other American who benefited. NO ONE is exempt. You may THINK you’re not involved, but if you consider anything you purchase – purses, food, gas, clothes, water etc – then you too are at fault. The burst of the housing bubble does not just effect home values, but America’s largest markets such as Wall Street, homebuilders, lenders and borrowers and foreign banks as well.
      The reality is that people who took the equity of their homes, helped stimulate the economy even in the good times. (When America wasn’t hurting so much financially.) When people too their equity, they reinvested it and purchased another home, they went on vacation, they purchased a new car, they used it for college tuition…
      If anyone is to blame for all of this, is the idiot who said the homeownership is an investment. Who told us that? Our government, our parents??? Who put that notion in our heads? Perhaps ALL Americans should be renters. Yes? No?
      Lastly, a little commonsense tells us that there never was nor ever will be appreciating value in a vehicle. (Our parents told us that ALL vehicles depreciate the SECOND it is driven off the lot.) The same with anything else…unless you’re an investor in food, water, purses, etc.

  2. Karen’s comment really goes to the heart of the matter but not in the way she thinks. The average person looks at this as bailing out irresponsible homeowners for buying more house than they can afford. However, it fails to take into account the fact that the mortgage originators walked into the closing as the experts in home financing and failed to do their jobs properly. Why they failed to do their jobs properly is a discussion for another day. Did some people knowingly bet on price appreciation to buy a house or borrow against the equity in their house and get burned? Sure. Do we make everyone suffer because a certain (I’m guessing small) percentage of people did that? I’m on the side that says no.

    We (read: the government) are obviously unwilling to make the banks pay for the originators’ malfeasance. However, as long as the Karens of the world think anything else is bailing out the irresponsible, we’re not going to do anything and we’re all going to suffer. Here’s hoping she, and I, don’t end up unemployed and late on our mortgage payments by the end of our lost decade.

    • I agree with your comments as it sums up that ALL Americans are suffering due to the underwater problem. Of course I – like most Americans – need a “bailout” but we have to think responsibly.
      ANyway, good post as it states the reality of America’s problems.

  3. It’s also time that we recognize that negative equity didn’t just appear by itself. This wasn’t a freak weather event. It was a man-made disaster. We ended up with negative equity because of a housing bubble inflated by very deliberate acts by a limited number of financial institutions that profited greatly from bloating the economy with cheap and unsustainable mortgage financing. We witnessed a macro-economic crime and are living with the consequences of it.

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