Midseason Replacement

Earnest Pettie, comedy writer

Neither McCain nor Obama was at the Forefront of the Housing Crisis

I don’t generally use this blog as a forum for talking about current events or politics in a serious way, but every now and then I do like to post a reality check. I can’t help but sneer when I hear John McCain and Obama talk about “sounding the alarm” about our mortgage problems in 2006. 2006? That was when the submortgage debacle hit the news in a big way, but it was by no means the beginning of our problems with excessive consumer spending, predatory lending, or unrealistic home values and ridiculous mortgages.

I recall, vividly, reading articles questioning whether we were in a housing bubble in the early 2000s. Here’s a Businessweek editorial from roughly a week before the September 11 massacres would make every other problem seem minimal.

Call it the double bubble. A housing bubble may be developing–right behind the Nasdaq bubble. Although overall stock prices are down 12% and the Nasdaq is off 25% since the start of 2001, average house prices are rising at an annual rate of 8%. In fact, falling equities have led many well-heeled investors to shift money into residential real estate. Robert J. Shiller, author of Irrational Exuberance, which predicted the Nasdaq crash a year before it happened, now warns that a psychological frenzy not unlike tech mania is gripping housing. It appears that the Federal Reserve’s dramatic rate-cutting campaign to revive the economy may be overheating housing.

That was seven years ago, and we all know what continued happening after that. House values continued to rise, and mortgages became easier to obtain and riskier to keep, especially for the people who could afford them the least. But let’s assume that that was too early to identify the risks associated with our housing bubble. In 2003, people like Dean Baker were continuing to sound real warning bells.

The Clinton boom was built on three unsustainable bubbles. One of them, the stock bubble, has already burst. The other two bubbles—the dollar bubble and the housing bubble—are still with us. The dollar bubble is starting to deflate, and the housing bubble is perhaps just now reaching its peak. These bubbles created the basis for the 2001 recession and the economy’s continuing period of stagnation….

This situation is frightening for two reasons. First, as a short-run matter, if housing prices fall sharply in some of the areas where the effects of the bubble are largest (for example the Boston, New York, Washington, and San Francisco areas), new home buyers (and those who recently refinanced their mortgages and took money out) could find they have negative equity in their homes. If someone borrows $270,000 to buy a $300,000 home, and the price falls by one-third, this leaves them owing $70,000 more than the home is worth. When this happens, there is a huge incentive to just let the mortgage holder foreclose on the home. If this were to happen on a large scale, the survival of many banks and financial institutions would be at risk.

So prior to our last Presidential election, the writing continued to remain present on the wall; we just chose to wallpaper over it with rapidly devaluing dollars. The New York Times’s Paul Krugman took Dean Baker’ baton and ran with it, continually addressing the idea of a housing bubble for the next several years. So, I’d like to know why it’s prescience that McCain and Obama began addressing the issue in 2006, after it had become front page and not just editorial page news. Neither McCain nor Obama can suggest that they were leaders on the issue. All they can fight over is who was able to more quickly hop onto the bandwagon.

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One comment on “Neither McCain nor Obama was at the Forefront of the Housing Crisis

  1. Clayton
    October 6, 2008

    I see your blog is mostly about your work in the entertainment industry, but this particular post is about the housing crisis and I thought you might be interested in A Solution That Works (www.asolutionthatworks.com), from Dan Gilbert, chairman of Quicken Loans. I work at Quicken Loans and I’m helping Dan spread the word. If you think this is is a good idea, we’d really appreciate it if you’d share this with your readers.

    Here are a few main points of Dan’s plan:

    • Focus on specific types of loans, each of which must be owner occupied: (i) ARMS with no caps (ii) Option Arms (iii) interest only loans.
    • Require servicers of these loans to reset the borrower’s rate to 6.375% fixed with a 30 year term/amortization. But the borrower only pays 4.875%; thus, government pays/subsidizes the difference between 6.375% and 4.875%.
    • Over the ensuing 6 years, gradually raise the rate the borrower pays and lower the amount of the government subsidy until year 6, when the borrower pays a rate of 6.375% for the remaining term of the loan.
    • The lender/servicer has a one-time chance to write off any negative equity and receive two times the normal write-off
    • All prepayment penalties on these loans are voided
    • Homeowners get the benefit of lower payment for the first 5 years, and then a low fixed rate for the next 25. They get to keep their homes. Their homes values (and neighborhoods) stabilize.
    • Lenders are in a much better position than if they had to forecloses on these borrowers, and the stability this brings to the housing market helps them with their REO’s
    • Taxpayers receive benefit because this costs an estimated $50B spread over 5 years– a fraction (1/14th) of the cost of the $700B plan

    Thanks and we hope you think A Solution That Works is great idea (as we obviously do!)

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This entry was posted on October 5, 2008 by in Uncategorized and tagged , , , , , , , .

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