By Martin Bosworth
For those who don’t know, last week President Bush and Treasury Secretary Henry Paulson unveiled a “mortgage rescue plan” (NOT a bailout, they desperately stressed) that would enable qualifying homeowners to qualify for a five-year freeze of their mortgage at the current rate, preventing the rate from resetting into a payment they can’t afford. The detailed version of the plan is here, and you can read my overview article discussing the plan as well.
The general consensus of the plan is that (to use a scientific term) it sucks. Homeowners who aren’t behind the 8-ball are angry at what they perceive as the government subsidizing irresponsible behavior of people who were “living beyond their means.” Wall Street is furious at the idea of investors in mortgage-backed securities not recouping the full value of their investment. And consumer advocates are disappointed that the plan doesn’t cover people who have already fallen behind in their payments and are facing foreclosure.
There’s a lot going on here, so I’m addressing this in three sections: First, do we need a bailout? Second, will Bush’s plan actually work? And third, who benefits from Bush’s plan?
Part One: Do We Need A Bailout?
My colleague and friend Joe blogged eloquently in opposition to the bailout plan over at CenterBlue.org, saying that “Every real estate closing Iâ€™ve been to has the closing officer state the terms of the loan clearly to borrowers so that they know exactly what theyâ€™re signing. They always have the chance to get up and walk away, but they donâ€™t…People have to learn to live within their means and accept responsibility for their own choices, and having the ‘nanny state’ swoop in and rescue people from really dumb real estate purchases flies in the face of that.”
Now, I agree with this statement in part. There are a lot of people who thought that they could “flip” homes for a quick profit, and so signed off on loans with no money down and huge adjustable-rate mortgages on the horizon, hoping they could sell the home before the rate changed. Anyone who knew about the consequences of shady business like this and did it anyway deserves what they got.
But not everyone did. There’s a reason why predatory lending has become a phrase in the common parlance–unscrupulous lenders and brokers took advantage of a hot housing market and buyers’ financial ignorance to steer them into loans with excessive fees attached, or even away from “prime” market-level loans they could qualify for into more expensive “subprime” loans. The Center for Responsible Lending’s “Seven Signs Of Predatory Lending” is a good overview of what kind of nasty “gotchas” were attached to these loans. These practices are disproportionately targeted at Black and Hispanic borrowers, who (not coincidentally) were the same groups to benefit from the easy availability of credit that triggered the housing boom in the first place.
The mortgage industry in the last few years has become very much like the auto industry or any other retail industry–the salesman does everything in their power to play on people’s fears, desires, and insecurities to get them to sign on the dotted line, even if it is to their detriment in the long term. As Joe astutely notes, our consumer culture and desire to be seen as affluent pushed many people to ignore their common sense and buy into dangerous loans that would only leave them poorer–but this is also a function of the almost total eradication of the middle class’s ability to build wealth in the last thirty years. For many, buying a home is the only path to generating enough capital to pay for the kids’ college education, or funding a decent retirement, or simply having an investment one can pull money from in tough times. And the mortgage industry knows this–thus the deceptive and vile tactics that push people into bad loans.
The best way to combat these tactics is with clear, comprehensive disclosures of the terms and conditions of every loan and abolition of punitive or unnecessary fees, points, and costs attached to a loan–but even mild voluntary guidelines like what the Fed has proposed are violently opposed by the mortgage and finance industries. As long as the people who predicated this financial crisis refuse to take even the slightest step to police themselves and behave ethically and responsibly, then yes, a bailout may be necessary. People shouldn’t be punished simply for trying to fulfill the American Dream of home ownership.
Part Two: Will Bush’s Bailout Plan Work?
In a word, no. The plan as crafted is entirely voluntary in terms of industry cooperation, meaning that any lender that participates can set the terms of the plan as they see fit or choose not to participate at all. Despite Paulson’s repeated invocation that as many as 1.8 million adjustable-rate mortgages may reset in the future, the plan stands to help (at most) 360,000 people. The narrow cast of the bill only supports homeowners who are currently paying on time and may face a rate increase in the future–anyone who’s already behind is out of luck. As Harvard Law professor Elizabeth Warren said in her criticism of the bill, “Much as I would like to see some sort of ‘fix’ happen to the mortgage market, I find it ironic that the borrowers it would help most are those who are not already in default, i.e., the ones who have the least urgent need for relief. The lenders really need to address the problems of those whose rates have already re-set, and who may have already missed a payment or two. These folks are still headed for foreclosure.”
The plan has already touched off a wave of angry resentment from responsible buyers who interpret the plan as rewarding bad behavior. So why even do it? Why propose a plan that offers almost nothing in terms of concrete solutions, and as Kevin Drum notes, practically everyone hates?
Part Three: Who Really Benefits From The Bush Bailout?
The answer is in the typical Bush calculus of raw political greed and crass self-interest. The voluntary freeze plan is designed to give the lending industry an out in order to forestall proposed legislation that would grant homeowners more protection in bankruptcy, preventing them from losing their homes and enabling them to continue to pay their mortgages. This move is bitterly opposed by the financial industry, and it’s a typical stance they take–rather than accept hardcore laws from Congress, they propose softer, voluntary modifications to their practices in order to forestall legislation.
Not only that, this plan will support just enough people to keep the economy from tilting into recession until Bush is out of office, assuming it’s fully adopted. This is another case of “moving the goalposts” in order to delay a bad outcome, and leave the consequences sitting squarely in the lap of the next President–most likely a Democrat. Bush can say he “did something” about the very crisis he and Alan Greenspan set off, while not actually doing anything about it at all, and leaving the mess to be cleaned up by those who will come after.
A bailout of some kind was inevitable–our economy has predicated too much of itself on the American obssession with home ownership, especially since we’ve gutted our manufacturing sector and turned ourselves into a debtor country. But not only does this plan do almost nothing in terms of actual substance, it will fan the flames of resentment against people who genuinely need help, and harden the hearts of homeowners who are too well-off to qualify, but too poor to do much of anything else.
In other words, like I said at the beginning, it sucks. A commenter on the Post article sums up my feelings about this debacle accurately:
The moral of the story, is that houses make good places to live, but they should not be the entire focus of our national economic policy. Let’s stop tinkering with housing, and start tinkering with ways to rebuild our industrial base.