You Don’t Need A Weatherman…
…to tell which which way the wind blows. Not when even Marty Feldstein marches in with a more aggressive mortgage forgiveness plan than we’ve seen out of either Congress or the administration.
I don’t love the plan as offered, to the extent that an 800 word op-ed. offers much in the way of a fine-grained proposal. Feldstein, Ronald Reagan’s head of the Council of Economic Advisors, calls for forgiving out-of-the-money mortgages down to 110% of the homes’ value — a threshold that would touch 11 million out of the 15 million homes in the United States. Lenders would absorb half the loss and the government would cover the other half, at a cost Feldstein asserts would be less than $350 billion.
I don’t have much to say about that part of the plan. Why 110%? Is there any data that suggests that’s the number to encourage underwater mortgagees to stick with the loan?
Or…how much of the current foreclosure crisis is driven by unemployment, and hence at this moment is unlikely to be touched by a payment reduction that still leaves the house underwater?
No clue, here (and no expertise to justify a guess), but these are empirical questions that could be answered…and in any event Feldstein — now at Harvard — is at least trying to come to grips with that insane number of 15 million houses that embody enormous financial loss.
The part of the this proposal that I think is almost certainly a bad deal is the price homeowners would pay to get their mortgage reduction: Feldstein would transform these loans from non-recourse status — in which the lender can claim the collateral, the house, but no other assets if the borrower defaults — into an instrument that puts all the borrowers assets are at risk. To me, taking financially vulnerable people in the midst of a bad economy and placing them at still greater economic risk seems to me both cruel and stupid.
Much better, in my view, are the proposals that place the government — the taxpayer, you and me, baby — into financial partnership with both the borrower and lender. In these approaches, the borrower who gets mortgage relief has to share with the lender (and/or the Feds) any gain made from an ultimate sale of the property. Everybody’s incentives align, and the borrower is not one layoff away from utter ruin, as he or she would be in the Feldstein scheme.
But what really stood out for me is not that Feldstein has come up with the least middle-class-friendly version of mortgage relief out there — that’s how he rolls — but that even such an old Reagan hand has driven to the core of the matter:
…As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession.
Yup, Dorothy, we’re not in Kansas anymore — or perhaps, pace Thomas Frank, even in Kansas they’ve starting to grasp the most brutish of brute fact.
Yes, it sucks that the taxpayer must bail out over-extended borrowers and the reckless (criminal) financial institutions that placed those loans. But life does blow sometimes — as most actual grown-ups understand. Increasingly, those able to recognize the difference between ought and is accept that it’s better to deal with that fact than to watch the entire fiscal structure of our economy swirl down the toilet of
whinging infant Congressional Republican orthodoxy.
Feldstein concludes by restating that same message. Better the nation take its medicine than seek to extract the pleasure of righteousness amidst the rubble:
I cannot agree with those who say we should just let house prices continue to fall until they stop by themselves. Although some forest fires are allowed to burn out naturally, no one lets those fires continue to burn when they threaten residential neighborhoods. The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater. We all have a stake in preventing that.
That’s DFH talk, of course. Without quite saying it out loud Feldstein here offers the suggestion that society has both values and obligations that trump the every-man-a-wolf-to-his-fellow-man cult of the individual that passes for contemporary GOP “thought” on the social compact.
When you’ve lost Marty…
Image: John Constable, The Hay Wain, 1821