Among the critical problems that were pushed aside by the “fiscal cliff” negotiations between President Obama and Congressional Republicans, none are more pressing – or more intertwined– than the criminally high rate of unemployment still plaguing the country and the massive debt overhang faced by underwater homeowners.
While President Obama, the House Republicans and billionaire-financed conservative pundits, economists and “think” tanks shriek about unsustainable debt and deficits, official unemployment languishes at 7.8% percent, while millions of Americans are struggling with underwater mortgages and many are facing foreclosure. We confront this perverse set of priorities despite the fact that, as Robert Pollin has repeatedly pointed out, U.S. government interest payments on public debt as a share of federal outlays is at an extremely low level of 7.7%, about half the level as when Ronald Reagan was President.
The failure by the Obama administration and the Congress to confront the housing mortgage crisis is extremely damaging to people, communities and to our prospects for economic recovery. The basic facts are stark : more than 4 million homeowners have lost their homes since the financial crisis began; as many as 3.5 million Americans are in the foreclosure process or soon will be; at least 13.5 million homeowners are “underwater,” that is, they owe more on their homes than their homes are currently worth. All told, the amount of underwater mortgage debt could total as much as $1.2 trillion and total losses could be as much as $7 trillion.
The collateral damage of this mortgage debt overhang is substantial. According to the Center for Responsible Lending, almost $2 trillion in property values will be lost by residents who live in close proximity to foreclosures. These spillover costs are affecting all Americans, but are especially hitting communities of color: minority neighborhoods will suffer about half of these losses while making up far less than half the nation’s population. In any case, the typical family living near foreclosures has lost 7% of its home value as a result of foreclosures. Economists are increasingly convinced that these types of losses are having a highly damaging effect on our economy, and serve as a serious blockage to getting out of the recession.
What should be done about this mortgage crisis? The Obama administration has been moving extremely tentatively, and its policies have helped very few homeowners. Timid policy, fear of upsetting the bankers and obstructionism from the head of the Federal Housing Financing Agency Ed DeMarco have all combined to leave underwater homeowners drowning.
But there is a plan out there that could go a long way toward helping. Senator Jeff Merkley of Oregon has developed a plan called the Rebuilding Home Ownership plan, based on the depression era Home Owners Loan Corporation (HOLC), that would help owners who are underwater, but current on their mortgages, get out from underneath their suffocating debt. To accomplish this, the U.S. government would set up a Rebuilding American Homeownership Trust (RAH) that would buy mortgages that meet basic standards. Homeowners would have three options: a 15-year 4% mortgage, a 30-year 5% mortgage and a third option that would allow 5% of the mortgage be interest-free for five years. For homeowners that are very far underwater, the banks would have to write down part of the loan.
The trust would be solvent by being able to borrow federal funds at a rate 2% lower than the interest rate it would offer homeowners.
Now this is not a perfect plan. It would do nothing for the 5.6 million homeowners who are currently delinquent. And its interest rates are still very high.
It could be improved, for example, if the Federal Reserve were to buy the bonds of the Trust and lower the interest rate the Trust paid to the Fed even further. Then the Trust could pass these savings on to the homeowners. But clearly it is a start and shows the way to the key solution to the debt overhang problem: much of the debt must simply be forgiven as Robert Pollin says on this Econ4 video.
All of this also shows that Jon Stewart was absolutely right four years ago just as the crisis was breaking in the fall of 2008. Congress had just passed the $700 billion bailout. And, as Stewart explained on October 16, 2008: “Why not take that 700 billion dollars and give it directly to people? Why are we giving it to the banks that created this issue?…Why not just go out there with a bag — maybe a fat man in a red suit and a beard — and just hand people this money for them…they didn’t do anything wrong.”
With the hindsight of four years, it seems clear that we probably wouldn’t still be in this mess if we had followed Stewart’s sage advice.