Hillary Clinton's Plan for Homeowners
In a bid to convince voters the time has come to move far more aggressively to stem the damage to the economy from the housing crisis—and that she's the candidate best able to do so—Senator Hillary Clinton (D-N.Y.) offered a passel of proposals aimed at easing the strains on homeowners and communities.
In a speech in Philadelphia on Mar. 24, Clinton pointedly contrasted the large efforts and sums of money that have so far gone into rescuing Wall Street with moves the government has made to help out homeowners facing foreclosure.
"Over the past week, we've seen unprecedented action to maintain confidence in our credit markets and head off a crisis for Wall Street banks," Clinton said. "It's now time for equally aggressive action to help families avoid foreclosure and keep communities across this country from spiraling into recession."
Clinton offered a series of measures intended to show just what she'd do to bring an end to the crisis were she in the White House. The package is in keeping with her campaign's focus on core issues of importance to the stretched working- and middle-class voters, the group with whom she is doing best. As general anxiety over the economy is ratcheting up sharply, says Daniel Clifton, a Washington (D.C.) policy analyst with investment firm Strategas Research, "she's trying to show leadership, and convince voters that her positions speak more directly to their housing problems."
The real point may be to contrast with what many see as the too-cautious approach of the current Administration, not to mention highlighting what Clinton's campaign argues is the aggressive leadership role she is taking in proposing new measures to ameliorate the housing crisis. So far, the Bush Administration has stayed away from backing any measures that would require putting significant taxpayer funds into the housing market or lead the government to play a more active role in setting a floor under housing prices.
Clinton's opponent for the Democratic nomination, Senator Barack Obama (D-Ill.), has backed congressional bills that would help stabilize housing prices by providing federal guarantees for mortgages that are renegotiated to better reflect current housing prices, but has not argued for a government role in buying up mortgages that are larger than the value of the underlying home.
Even though her proposals would involve tens of billions in government spending, Clinton moved to head off anticipated charges that such measures would constitute a bailout. "To those who object to our government helping middle-class and low-income families devastated by the housing crisis, I say this: We've given Bear Stearns a $30 billion lifeline, we've given their creditors, their lenders, their customers, and those associated with them the same lifeline," she said. "How can you tell a family about to lose their home that there's nothing we can do to help them?"
An Increased Role for the FHA
Clinton threw her support behind legislation now before Congress that would expand the Federal Housing Administration's (FHA) ability to guarantee mortgages that have been restructured. Under the proposals sponsored by Representative Barney Frank (D-Mass.) and Senator Christopher Dodd (D-Conn.), the government would provide up to $400 billion in guarantees for new mortgages if lenders agree to write down the principal amounts to the current value of the home and auction the mortgages off to new investors.
With home prices plunging across the country, she pointed out, nearly 9 million families now owe more on their mortgages than their homes are worth. That's 10.3% of all homeowners—the highest share since the Great Depression. "What was once their biggest financial asset is now a financial liability," she said. Clinton added that if prices fall another 15%, one-third of all mortgages would be similarly underwater.
Clinton argued that providing such FHA guarantees to backstop what would essentially be a private-sector auction would provide the best way of getting the frozen mortgage market unstuck and keeping people in their homes. But she also left open the possibility that the FHA may need to play a more active role in purchasing, restructuring, and reselling such underwater mortgages if providing guarantees to private-sector efforts proves not to be enough.
Clinton also argued that the government might eventually have to step in to directly buy up and refinance homes. While such moves would be temporary, she argued they may be necessary given the severity of the crisis now roiling the markets: "Just as it has in the past, this kind of temporary measure by the government could give our economy the boost it needs, and families the help they certainly need."
Such a system, she argued, could be designed to be self-financing over time. As with the Frank and Dodd proposals, the government would charge risk-adjusted fees to compensate for its expanded role. It would retain an equity kicker in the refinanced property so that it would pocket some of the gain when the price of a refinanced house were eventually to rise. As a result, she argues, there would be no cost to taxpayers over the long run.
Proposals for Fast Action
Rather than wait the several months it could take for the current legislation to work its way through Congress, however, Clinton called for the creation of a high-level panel consisting of former Federal Reserve Board chairmen Alan Greenspan and Paul Volcker and former Treasury Secretary Robert Rubin. With Washington consumed by the debate over whether the government may need to step in to buy up such troubled mortgages—or whether it can simply facilitate an auction between current mortgage holders and potential new buyers, as the Frank and Dodd bills suggest—Clinton called on the three well-respected economists to determine the best solution within the next three weeks.
Of course, were such a panel to convene, the assumption is the trio—each of whom supports a different candidate of the three remaining in the race—would be able to agree on the right course. But that may not even be the point, given the unlikelihood they will meet anytime soon. The proposal is designed to show voters just how Clinton would take the lead on the economy.
Clinton also reiterated her call for Congress to pass a second, housing-focused stimulus package that would include $30 billion in funding to help cities and states struggling with large numbers of foreclosures. The money could be used to buy up foreclosed or abandoned housing, or to improve neighborhoods troubled by blight as homeowners have been forced out.
Clinton said she will introduce legislation to provide legal protection for mortgage servicers who agree to renegotiate mortgages with struggling homeowners. Many such servicers—who typically collect payments and otherwise manage the paperwork for the investment banks, private equity firms, and other investors who actually own the mortgages—fear that if they agree to knock down the mortgage payments or the overall value of the loan, they could be sued by investors unhappy with the declining profits on those loans.
While reworking such mortgages may ultimately be more profitable for investors than foreclosure, the legal complications surrounding them have prevented deals from being negotiated. By clarifying the legal situation, Clinton hopes to speed the workout process.
A Point of Differentiation
Will Clinton's proposals move the needle—either in the debate over how to resolve the housing crisis or in boosting her chances to become the Democratic nominee? "The proposals certainly continue her strategy of driving home the impression that she's thought a lot about these policies, and trying to contrast herself with Obama," says Tom Gallagher, the senior managing director and head of policy research for investment strategists ISI Group.
But for now, Gallagher doesn't see enough Republican support in the Senate or the White House to move more aggressively for taxpayer-backed relief for homeowners. As for any boost the beefed-up emphasis on the economy could give Clinton's electoral chances, he says: "I don't think housing policy is going to determine who becomes the Democratic nominee. Not gaining a revote in Michigan and Florida is infinitely more significant."