Just when you thought the term "compassionate conservative" had finally been relegated to the dustbin of history, there goes President Bush, following a tradition of government intervention in the housing market that dates all the way back to the New Deal, promising to the nation that "we will deliver help and hope to American families who need it, we'll help guard against future problems in the housing sector, [and] we'll reaffirm the vital place of homeownership in our nation."
Since it just happens to be the Friday before Labor Day weekend, it's possible that no one will notice this outbreak of activist governance, but for committed housing freaks like How the World Works, there was just too much mortgage-related news to ignore before relaxing into the holiday.
In addition to Bush's speech announcing a series of measures aimed at alleviating the pain of borrowers in over their heads, Federal Reserve Bank chairman Ben Bernanke also gave a (much longer) speech (with footnotes and a bibliography) on the history of housing finance, from the 1890s to the present day.
Along the way, he mentioned that "The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets."
So far, the markets are pleased. Wall Street's finest talk a good game about keeping the government at arm's length -- especially when it comes to regulatory oversight and capital gains taxes -- but when the seas get rough, they are delighted at the sight of lifeboats launching.
Which is why we have to chuckle:
"It is not the responsibility of the Federal Reserve -- nor would it be appropriate -- to protect lenders and investors from the consequences of their financial decisions."
"The government's got a role to play. But it is limited. A federal bailout of lenders would only encourage a recurrence of the problem. It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford."
Fine. Now that we know where Ben and George stand on this issue, let's look a little more closely at exactly how they intend to bail out and protect investors and speculators.
That's right: speculators.The Mortgage Bankers Association released the results of a survey on Friday indicating that in four of the hottest real estate markets in the country, California, Nevada, Arizona and Florida, a significant proportion -- sometimes as much as 30 percent -- of the defaults on prime-quality loans can be traced to properties that aren't occupied by their owners. These would be second homes bought as investment opportunities by speculators looking to flip their properties before interest rates reset.
As economist Dean Baker notes this morning, it is as yet unclear whether any technical distinction is being made between such speculators and the people who really do need help. In fact, one could argue that the opposite is true. One of Bush's proposals will permit borrowers with good credit but who can't afford their current payments to refinance with Federal Housing Authority loans. But aren't the people with bad credit who got sucked into subprime loans the ones that really need help? The people with good credit are likely the dastardly flippers!
Baker also observes that Bush's "plan to temporarily waive the taxation on forgiven debts" could be abused.
The deal here is that if someone owes $400,000 on a home, which is subsequently sold in foreclosure for $350,000, then they have had $50,000 of debt forgiven. Under current tax rules, this $50,000 is treated as taxable income...
It is important to recognize that most moderate income homeowners will face relatively low tax rates, so this tax break will probably not be of much benefit. On the other hand, many of the people now defaulting on their loans were relatively affluent people who were speculating in real estate...
It would be a simple matter to restrict the benefits of this tax break by capping the savings and only allowing the tax break on owner-occupied homes. It is possible that Bush's plan will include such restrictions, but the news reporting did not address this issue.
For a larger dose of pointed criticism of Bush's proposals, I recommend Naked Capitalism's Yves Smith, who dismisses the changes as "cosmetic." But even if there isn't much real meat to chew on, from a political perspective, the moves may serve a calculated purpose in outflanking Democratic candidates who have been making mortgage reform a key campaign plank, such as Barack Obama and Hillary Clinton. Moments after the conclusion of the president's speech, Democratic Sen. Chuck Schumer held a press conference and announced that "the president has decided to call a few plays from the Democratic playbook .... When it comes to the mortgage crisis, the president is starting to sound like a Democrat."
And it is true, although in scope the president's proposals are limited, the impulse behind them dates back to the most profound expression of government intervention in the U.S. economy in the last century. I'm sure most of Wall Street stopped paying attention once Ben Bernanke concluded his analysis of the current economy and launched into an extended consideration of "the historical evolution of the mortgage market." But How the World Works found his remarks quite informative.
The housing sector, like the rest of the economy, was profoundly affected by the Great Depression. When Franklin Roosevelt took office in 1933, almost 10 percent of all homes were in foreclosure, construction employment had fallen by half from its late 1920s peak, and a banking system near collapse was providing little new credit. As in other sectors, New Deal reforms in housing and housing finance aimed to foster economic revival through government programs that either provided financing directly or strengthened the institutional and regulatory structure of private credit markets. The Roosevelt administration pushed this and other programs affecting housing finance much further. In 1934, his administration oversaw the creation of the Federal Housing Administration (FHA).
We now look forward to Bush presenting a plan for strengthening "the institutional and regulatory structure of private credit markets." But we're prepared to wait. The most amusing part of Bush's speech, as recorded by the Congressional Quarterly, was the end. Although it does not appear that Bush answered any questions from the press, one intrepid reporter managed to squeeze a question in.
"Sir, what about the hedge funds and banks that are over exposed on the subprime market? That's a bigger problem? Got a plan?"
No answer is recorded by the Congressional Quarterly.