Hillary's modest proposal (to wreck the housing market) - Political Forum

prrriiide · #1 (**permalink**) 01-17-2008, 05:25 AM

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The current mortgage mess requires a more intelligent approach than the buzzsaw plan floated by Hillary Clinton.

By Jon Birger, senior writer

Hillary Clinton's proposal to freeze interest rates for five years could be disastrous.

(Fortune) -- Hillary Clinton is no dummy. Even her detractors know that. And yet in last night's Democratic presidential debate in Nevada, Clinton floated what is perhaps the dumbest solution to the current mortgage mess I've heard from a top presidential contender.

"I have a plan - a moratorium on foreclosures for 90 days [and] freezing interest rates for five years, which I think we should do immediately," Clinton announced at what was the last Democratic debate before the Nevada Caucus on Jan. 19. A 90-day moratorium on foreclosures would throw a lifeline to some deserving homeowners, though I suspect it would only delay the inevitable for most. That's not my beef.

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.

"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."

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.

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. Edwards, however, seems a longshot to win the White House.

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.

When it comes to a rate freeze, Duncan and the Mortgage Bankers Association aren't exactly disinterested parties, of course. A freeze would directly impact the bottom line of MBA members. However, when I discussed Clinton's plan with a more sympathetic economist - one who'd worked for Bill Clinton - his reaction was much like mine and Duncan's. "This is an ugly correction, but it's a necessary one," says Jared Bernstein, senior economist with the liberal-leaning Economic Policy Institute. "This kind of an idea is a little bit of untying your shoes with a buzz-saw."

I certainly hope she backs off of this plan if she manages to win the nomination...

It took a number of years and mis-steps to get into this mess. Knee-jerk reactions aren't going to fix it. The mortgage crisis requires serious thought, and it doesn't look like she's listened to the right people on this issue.

Shiva_TD · #2 (**permalink**) 01-17-2008, 07:51 AM

I'm having a hard time figuring out why the profits/losses of a corporation like Countrywide present a crisis to the American people.

Mortgage companies typically lose money when they have to foreclose on a property. It is in their best interests to work with the borrower to avoid it if at all possible.

Why should I give a shit of Countrywide made loans to people that couldn't afford to pay them and because of it Countrywide loses money?

Yes, a foreclosure is not a good thing for the individual but they are the idiots that borrowed more than they could afford to pay back. Why should I be concerned with poor business decisions by individuals. I certainly don't feel that I have any obligation to bail them out. That is between them and their lender.

As I see it the only people that are in trouble are those that went in with zero (or close to zero) down on a ARM and they didn't have the income to pay the increase in the interest rate several years down the road. Of course they knew that the 3.5%-5% initial interest rate would increase to 8%-10% in five years and what the monthly payment would be when they took out the loan.

If they put 20% down, even with the downturn in housing prices, they could easily sell the house and avoid foreclosure. Or, if they anticipated increase in monthly payments on the ARM were within their budget then they could pay the increased payment without foreclosure.

I say let the market address the issue. Banks are going to be less likely to loan money to those that cannot afford it and people need to keep their mortgages within their budget.

AzTeK · #3 (**permalink**) 01-17-2008, 08:29 AM

While it's probably no master plan, I, atleast from my understanding of things, cannot share the "negative" aspects the writer of the article shows up.

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For everyone else though, such a freeze would be disastrous. Interest rates on new mortgages would skyrocket - perhaps past 8 percent

I don't see how that is a bad thing. Mortgages on homes have long been treated as a no-brainer and taken too lightly in the US, which it certainly should not be. It's a big deal if you think about what you'r actually doing. Higher interest rates would work well to stop this from happening in the near future. Also, the author says that more expensive mortgages would reduce buying power - well, tens of thousands of peoples Houses being foreclosed will not?

Also, I think most people affected by the sub-prime crisis got such a hell of a shock that I seriously doubt "bailing them out" would make the deterrent effect go away.

VoiceofReason · #4 (**permalink**) 01-17-2008, 09:25 AM

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Originally Posted by prrriiide

I certainly hope she backs off of this plan if she manages to win the nomination...

It took a number of years and mis-steps to get into this mess. Knee-jerk reactions aren't going to fix it. The mortgage crisis requires serious thought, and it doesn't look like she's listened to the right people on this issue.

We got into this mess because the liberals screamed and threatened mortgage companies and banks with sanctions if they did not open up their lending to less creditworthy customers. They did and now we see the effects and the liberals now call them "preditory". There should be no bail out, creditworthy customers should refinance, bad loans are bad loans and the lenders and borrowers are responsible. My wife and I live in a modest house we can afford, have paid our mortgage for 20 years and will own our home in about 10 more. We took out an ARM back when rates were 14%, we refinanced when rates hit 5.25%. We didn't take th equity out, we didn't buy more house than we can affored. Why should we have to pay for the bad judgment of others?

I heard one report yesterday that in 70% of mortgages in trouble the borrowers lied about their incomes to get a bigger house. Oh well, let them suffer the consequences, why should I?

francois60 · #5 (**permalink**) 01-17-2008, 10:47 PM

Don't worry about Clinton. She's lying. She knows better. The Clintons were too good economically to really believe the crap she's saying. She'll say anything to get into office, but she'll govern more like Milton Friedman would than many Republicans.

prrriiide · #6 (**permalink**) 01-18-2008, 09:04 AM

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Originally Posted by Shiva_TD

Why should I give a shit of Countrywide made loans to people that couldn't afford to pay them and because of it Countrywide loses money?

Because Countrywide didn't print the money they loan. It came from investors, typically in the shape of mutual funds and 401k funds. When CW can't get the loans paid back, investors lose money. If you have a 401k, some of that money is invested in the housing market, and that's why you should give a shit.

The other reason to give a shit is that a lot of these ARMs and HELOCs were made by people pulling equity out of their house so they could buy all kinds of cool stuff and visit all kinds of neat places. That's a stupid way to use equity, but people did it anyway because they thought the low-interest titty would never run dry. Now their Med cruise is costing them their home. The spending on extras that took place because of the cheap money available is going to slow to t trickle, and that will put negative pressure on the economy as a whole.

Manufacturing is already in a recession according to many economists.

VoiceofReason · #7 (**permalink**) 01-18-2008, 09:51 AM

Quote:

Originally Posted by prrriiide

Because Countrywide didn't print the money they loan. It came from investors, typically in the shape of mutual funds and 401k funds. When CW can't get the loans paid back, investors lose money. If you have a 401k, some of that money is invested in the housing market, and that's why you should give a shit.

I give more of one when they take money out of my paycheck to give to the people who took out loans they could not afford or otherwise gambled on the price rising enough so they could sell it for a profit.

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The spending on extras that took place because of the cheap money available is going to slow to t trickle, and that will put negative pressure on the economy as a whole.

Which was not sustainable in the first place and better to go through the tough time now rather than later when it will be worse.

Caltex · #8 (**permalink**) 01-18-2008, 09:51 AM

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Originally Posted by francois60

Don't worry about Clinton. She's lying. She knows better. The Clintons were too good economically to really believe the crap she's saying. She'll say anything to get into office, but she'll govern more like Milton Friedman would than many Republicans.

BILL CLINTON and his advisor's did a fair job with handling the economy. Hilary's claims that she had part in that is ridiculous. She's trying to run on her husbands record for President. She does not have the same advisor's and is not Bill Clinton. She will not run the economy the same way he did, as she isn't him, nor was she ever a partner with him in being President.

Caltex · #9 (**permalink**) 01-18-2008, 09:55 AM

Quote:

Originally Posted by prrriiide

Because Countrywide didn't print the money they loan. It came from investors, typically in the shape of mutual funds and 401k funds. When CW can't get the loans paid back, investors lose money. If you have a 401k, some of that money is invested in the housing market, and that's why you should give a shit.

The other reason to give a shit is that a lot of these ARMs and HELOCs were made by people pulling equity out of their house so they could buy all kinds of cool stuff and visit all kinds of neat places. That's a stupid way to use equity, but people did it anyway because they thought the low-interest titty would never run dry. Now their Med cruise is costing them their home. The spending on extras that took place because of the cheap money available is going to slow to t trickle, and that will put negative pressure on the economy as a whole.

Manufacturing is already in a recession according to many economists.

Such is the nature of all investments, there is some risk attached. The only risk free (or at least nearly risk free) investment is in an FDIC secured bank account up to the insurance limit.

People bought houses they had no business buying, banks made loans they had no business making, and both should suffer the consequences of their actions. Bailing them out is telling them "Oh, you aren't responsible for your actions". Forcing the rest of the nation to either suffer from inflation, and pay tax dollars in order to bail them out is wrong.

LessGovMrPrez · #10 (**permalink**) 01-18-2008, 10:25 AM

Way to go Hillary!!! Lets cut all profits from the hosuing sector by putting a halt on th entire sector for 3 months!

Is this the kind of experience she always talks about herself having over the last 35 years?

No wonder why she went into politics, her business ideas and solutions are worthless.

But actually now that I think about it, is her idea here any different then her "taking" of profits from other indusries? If you look at her consistant record of saying she wants to take profits from companies, this fits right in there.

I cant believe this is a Presidential candidate, is ther nobody else worthy of the calling?