In 1992, Bill Clinton won the Presidency on the slogan, "It's the Economy, Stupid." In 2008, it looks like Hillary Clinton is trying to steal a page out of her husband's playbook. All three candidates have castigated the mortgage industry for pushing "subprime" loans on homeowners and their too-easy lending practices, and Hillary is proud to proclaim that she has taken the lead on this issue.
Hillary Clinton has received laudatory praise from her fans on this site and in the MSM for her economic stimulus plan, part of which includes various measures to purportedly help homeowners affected by subprime lending practices. She's made a "rate freeze" part of her stump speech - pandering to voters who are concerned about increases in their mortgage rates.
However, the reviews are in: her plan would essentially destroy the economy and hurt thousands of homeowners in the process. What's worse is that Hillary has shown a consistent aversion to honestly discussing the costs of her plan on American homeowners.
On December 5, 2007, Hillary announced her subprime plan.
Senator Hillary Clinton spelled out the details of her subprime bailout plan Wednesday, calling for a 90-day moratorium on foreclosures and a five-year freeze on the interest rates of adjustable rate mortgages (ARMs)
The rate freeze proposal would halt interest on ARMs from resetting above their low, introductory rates. Those resets can turn barely affordable mortgages into hopelessly unaffordable ones for many home owners.
"The average reset will increase the monthly payment by 30 percent to 40 percent," she said. A freeze would afford hard-pressed borrowers relief until the ARMs could be converted into fixed rate loans.
Clinton unveils subprime plan Dec. 5, 2007
Interestingly, her plan mirrored the Bush Administration's plan - also announced on Dec. 5 - in many respects, so her so-called plan was merely an endorsement of the status quo.
The Bush Administration has reached a deal with mortgage industry executives that will provide some relief to homeowners whose adjustable rate mortgage payments are set to increase. President Bush is expected to announce the deal Thursday at the White House.
Under the terms of the agreement, mortgage companies will hold the interest rates on adjustable rate sub-prime mortgages steady for five years. In theory, this will allow homeowners more time to gather the resources to make the increased payments, refinance the loan to a fixed rate, or sell the property in order to avoid foreclosure. The agreement will apply to homeowners whose loans were issued during the window from Jan. 1, 2005, to July 30, 2007, and whose interest rates are scheduled to increase between the beginning of 2008 and July of 2010.
Bush Mortgage Freeze Deal
CNN described Hillary's plan as "bear[ing] similarities to other proposals, including one expected to be offered by the Bush administration soon."
CNN Dec. 5, 2007
Hillary claimed that the Bush plan didn't go far enough in freezing rates:
"The Bush plan is designed to help as few homeowners as possible. Lenders will decide on a case-by-case basis whether a homeowner gets the rate freeze or whether she should pay the 30 to 40 percent monthly increase. These are the same lenders who made the case-by-case decisions that sum to the prospect of 2 million foreclosures.
The President knows that a case-by-case approach cannot work. The case-by-case approach has resulted in only 1% of subprime loans being modified this year, and 1.8 million foreclosure notices being sent out. As recently as a few weeks ago the Treasury Secretary himself said that the case-by-case approach was inadequate. There are other crippling shortcomings. The Bush plan excludes homeowners whose mortgages reset prior to January 2008. This may sound reasonable, but it is intentionally designed to leave out the roughly 400,000 families whose mortgages are resetting this quarter. Under the Bush plan, these families will continue to experience rate resets every six months.
"America needs a plan that matches the scale of the crisis, and President Bush has failed to deliver it. But that is what happens when you are more interested in protecting corporate interests than struggling families.
"I have announced a comprehensive plan that will actually end the foreclosure crisis. My plan imposes an immediate moratorium on foreclosures; an automatic, across-the-board rate freeze; and the requirement that servicers and lenders provide status reports on how many mortgages they are converting from designed-to-fail to designed-to-work. The foreclosure moratorium ensures that families will not lose their homes while servicers put the systems in place to implement the rate freeze as well as the large-scale modification of loans. And the automatic, across-the-board rate freeze will ensure that hundreds of thousands of families, rather than just a few, will be spared the foreclosure process.
Hillary's Response to Bush's Subprime Plan
Well, the reviews have come in: Fortune Magazine Senior Writer Jon Birger says that Hilary's comprehensive rate freeze is "the dumbest solution" to mortgage crisis that will "wreck the housing market."
http://money.cnn.com/...
Where Clinton goes awry is her proposal to freeze mortgage rates for five years, which is essentially a much broader version of a deal President Bush recently hammered out with lenders to assist some subprime borrowers. If Clinton's only goal were to bail out homeowners facing steep rate resets on adjustable mortgages, her plan would work just fine.
For everyone else though, such a freeze would be disastrous. Interest rates on new mortgages would skyrocket - perhaps past 8 percent, as the mutual funds, pension funds and other investors who typically provide capital to the mortgage market shift their money into other investments where the government isn't impairing returns. With higher mortgage rates eroding buying power, the downward pressure on home prices would only increase. Lower home prices would lead to even more defaults, as more folks who'd lost the equity in their homes choose to walk away from their mortgages.
In other words, in helping one class of homeowners, she is screwing over the rest of us that own homes or that would like to buy a new home in the future. Hillary herself admits that 40% of this nation's wealth is locked into home equity - her plan would do more to undermine national wealth than any tax increase.
60% OF THE WEALTH FOR MOST AMERICANS IS NOT IN THE STOCK MARKET. IT'S IN THEIR HOME EQUITY.
Interview with Maria Bartiromo
Further, her mortgage freeze plan would slow the recovery of the housing market.
"It certainly would not speed the recovery of the housing market," says Doug Duncan, chief economist of the Mortgage Bankers Association. "The problem now is that investors are already worried about what the risks are, and (a rate freeze) would only widen risk premiums more."
The Mortgage Bankers Association are not alone in this assessmnet. The Institutional Risk Analyst said of the more modest Bush proposal:
bank shareholders and loan investors will take a bath, credit available for housing will disappear, and at least one in three sub-prime borrowers will eventually default anyway." Quoting one of its readers commenting on the plan by Treasury Secretary Henry Paulson (pictured), the IRA continues, "The Paulson proposal will paralyze the U.S. housing market for years. Who in their right mind will lend money for home ownership ever again if the contract can become null and void the second the hoi polloi start screaming to their elected officials? ... If this continues, the U.S. is going to be just like Japan in the '90s."
LA Times
Also Mark Kiesel, senior manager at PIMCO, the world's largest bond fund, said:
"This reeks of moral hazard," Kiesel said. "This is pure politics as we enter an election year, and it's not going to help the problem. It's going to prolong the bubble."
Morgage Rescue is Short-Sighted
Finally, Birger argues that Hillary's plan would have the perverse effect of rewarding the speculators and flippers, at the expense of ordinary homeowners:
Then there's the long-term impact such a bailout would have on behavior. While Clinton's plan would no doubt save some legitimate victims who were duped into taking out bad loans, she'd also be saving the flippers and speculators who knew the risks of low teaser rate mortgages but figured (wrongly) that they could always sell their house for a profit if the reset mortgage rate proved unaffordable. Bailing out these folks now would only encourage them to take even bigger risks down the line.
How does HIllary respond to these concerns? Here is her answer to Maria Bartiromo:
BARTIROMO: Let's go through some of your proposals, specifically the five-year freeze. Isn't the devil in the details when it comes to this? Even Paulson's plan that we talked about yesterday -- we had him on the show Monday. What's to stop someone from gaming the system, someone from saying, look, I did all the right things, I was responsible, I took on a mortgage that I can actually afford and now the person who did all the wrong things by getting in over their head is actually getting their rate frozen. I'll miss a few payments, make my financial picture look weaker and I get a frozen rate. How do you stop that?
SENATOR CLINTON: Three things. First what I include would not be specultors but owner-occupied homes.
This is a non-responsive answer. Speculators and flippers can live in the homes that they occupy. An "owner-occupied" requirement is not only not difficult to meet (mortgage lenders generally require that owners occupy their homes to get lower rates; owners have figured out ways to game that system), but the point is that some people bought more house than they can afford, assuming that the market would continue to appreciate. They were speculating, regardless of where they live.
Her answer continued...
Secondly, someone who goes into this workout, it's obviously going to have implications for their credit rating. It's not going to be a free pass. It's just going to save their home and the neighborhood and the community that they're a part of because as you look at the map, you can see the clusters of these subprime loans that were given and then the cascading effect that would be so damaging.
It's unclear what she means by "implications for their credit rating" or "its not going to be a free pass." She's being deliberately vague about the cost to participants in her rate-freeze plan, but those costs are the "devil in the details." The lower you force a homeowner's credit score in exchange for a rate freeze, the more you limit their options coming out of the workout, because their credit, instead of being rehabilitated, is marked as risky. This is part of the problem that homeowners already face now - they are forced into declaring bankrutpcy to keep their home and ruining their credit, or giving up their home.
Her campaign later indicated that the Hillary plan won't force homeowners to go through bankruptcy to obtain the rate freeze - which would appear to contradict what she told Bartiromo a month earlier:
Messrs. Obama and Edwards support a bill currently in the Senate to amend bankruptcy law to allow judges to alter the terms of a mortgage. Advisers say such a move would give troubled homeowners more leverage in getting lenders to alter loan terms before filing for bankruptcy.
Clinton advisers say that while the senator isn't opposed to such a move, she believes other measures should be taken to help distressed homeowners before they get to the point of a bankruptcy hearing. "You don't want courts sorting out two million people," says Lawrence Benn, Mrs. Clinton's deputy economic director, referring to rough estimates of the number of home-foreclosure notices that have been sent nationwide. "There needs to be something in an earlier stage than bankruptcy."
Housing Crisis Looms Over Campaigns
This is the perfect example of Hillary refusing to discuss the costs of her plans. The "implications for credit rating" that Clinton refers to is deliberately vague. She's selling the dream of continued homeownership as if it were free, which is ironically the type of predatory lending practice she is criticizing the subprime mortgage lenders for.
Continued...
Thirdly, there may be some people who, in your words, would be considered to game the system. But the overall problem is so big that I don't think we can be focused on the few that might benefit unjustifiably from the many who were lured into these subprime mortgages.
Interview with Bartiromo Dec. 6, 2007
Here, Hillary basically admits that she is not concerned about homeowners "gaming the system" "unjustifiably." To me, this demonstrates her intellectual dishonesty on the issue: she knows that by talking about the mortgage crisis, and proposing a feel-good rate freeze that goes beyond what Bush has already achieved, she can get votes.
As a homeowner, and one who is looking to upgrade to accomodate a growing family, I have trouble supporting policies that degrade my home equity and make it harder for me to stay in the real-estate market.
Note that Hillary is not alone on her proposal. John Edwards has tried to one-up her with his own plan:
To be fair, John Edwards, has endorsed an even broader rate freeze - one lasting seven years - and he also wants to give homeowners the right to halt foreclosures if lenders haven't made a "good faith" effort (whatever that means) to rework the loan.
Fortune
What candidate has given the best answer to this problem? I was pleased to learn it was none other than Barack Obama.
Barack Obama, meanwhile, wants to require better disclosure by lenders (of low teaser rates, for example) and, like Clinton and Edwards, proposes a government fund to help borrowers transition from unaffordable adjustable mortgages to lower-rate fixed ones.
This is what Nigel Swaby of the Salt Lake City Real Estate Blog has to say:
The Democratic contenders, Clinton, Edwards and Obama have come up with their own plans to deal with housing. Clinton and Edwards favor rate freezes, buying time for struggling homeowners to get out of high mortgage payments. All of these tactics for dealing with the crisis are like giving away fish. Only Obama is willing to go after the problem - fraud.
Obama Has Most Sensible Housing Plan
And here is Obama's campaign describing the differences to the Wall Street Journal:
But the plans from Democrats contain some differences, which could become accentuated in Nevada, and later, in big states such as California. Both Mrs. Clinton and John Edwards have said that if the mortgage industry doesn't voluntarily agree to enlarge and lengthen the terms of a plan backed by Treasury Secretary Henry Paulson and agree to a foreclosure moratorium, they would force the lenders to do so through legislation.
Barack Obama opposes making laws to force such moves. An Obama adviser says that a mandatory moratorium and rate freeze -- which could force lenders to hold loan interest rates below market levels -- could deter them from re-entering the market and would delay the return of liquidity.
There could also be legal issues, the adviser says. "There would certainly be some serious constitutional issues to consider from the government trying to directly change the terms of millions of mortgage contracts after the fact," the adviser says. Mr. Obama thinks the industry should make these changes voluntarily.
Housing Crisis Looms Over Campaigns
Finally, Obama has a plan that the others don't mention:
Mr. Obama has a proposal that others don't: Giving the majority of homeowners who don't itemize deductions on their federal tax returns a separate home-interest deduction to ease the burden on troubled mortgage holders. "Virtually no one facing foreclosure is an itemizer," says Obama economic adviser Austan Goolsbee. The move would be equivalent to reducing the interest rate on a typical mortgage by 0.75 percentage point and would cost the Treasury $5 billion to $8 billion a year, according to Mr. Obama's campaign
Look, the merits of a rate-freeze may be debatable. What cannot be questioned is the point that Obama raised yesterday, in what the papers are calling his new act. If you recall, he is now riffing on the tendencies of politicians like Hillary to not "tell it straight." For example, when asked about her greatest weakness, she said it was her "frustration" at not making change happen faster. She also claimed to have felt relief when the 2001 Bankruptcy Bill that she voted for didn't become law.
Her Subprime Housing Plan is yet another example of her tendency to play the politician with voters, to not tell it to them straight. For those of us who watched the debate on Tuesday, I think we all remember the cute exchange that happened, starting with Brian Williams:
WILLIAMS: Two bits of housekeeping at this point. I’ve been asked to remind our candidates that we have a system of lights that they can plainly see.
WILLIAMS: The yellow one starts flashing…
(LAUGHTER)
The yellow one starts flashing when they’re starting to run out of time…
(LAUGHTER)
… and the red one starts flashing when they are out of time. And another reminder that only seven feet separates us from the candidates.
Jan. 15 Debate Transcript
What you may not recall is the question that preceded it:
MORALES: And this one is for Senator Clinton, and you spoke already about foreclosure rates. So on that subject — this was coming from Christian Denny from Henderson, Nevada: “Senator Clinton, recently, while visiting Las Vegas, you mentioned your plan to freeze interest rates to help prevent foreclosures. Are you aware of any long-term effects on the housing market and our economy that this may cause?”
Unsurprisingly, Hillary did not answer the question asked. Instead, she simply describes her plan and what she touts as its benefits.
CLINTON: Well, Natalie, I think that the question really goes to the heart of what we’re trying to do here. We have short-term, medium-term and long-term goals when it comes to our economy.
You know, the Federal Reserve is cutting interest rates in order to spur the economy.
CLINTON: But because of a lot of the way these mortgages were structured, the interest rates are going to keep going up. And a lot of people who can pay what they’re paying now will not be able to pay what they’re expected to pay next month or the month after that.
So freezing the interest rates is not only a way of being able to stabilize the housing market, but it also is in line with what the Fed is doing on monetary policy.
In other words, you can’t be cutting interest rates in one part of the economy and letting them go through the roof in the other part and expect to be able to stimulate the kind of economic growth that we need to have right now.
I have other pieces of my economic action plan....
Read the rest of your answer yourself. At no point does Hillary explain that her plan has risks, or will help some homeowners, but possibly hurt others.
I accept that there is a modicum of pandering that all politicians must do, especially in primary season. However, I draw the line at pandering bad policies. That's the kind of thinking that got us into Iraq - good politics, bad policy. I reject that type of politics, and so does Barack Obama, which is why he has my support.