Subprime Swing: Politicians Seek Answers to US Housing Crisis
1/18/2008
Source: By Stephanie Kirchgaessner, The Financial Times

When Sister Barbara Busch began a community outreach programme in 1978 that taught financial literacy, it was aimed at helping families and increasing home ownership among residents in her working-class Cincinnati community. Now, the nun says, that work has been transformed into home “preservation” – the difficult task of trying to keep people in their homes following a sharp spike in foreclosures in the suburbs of the Ohio city.

“We can easily see 40 new families a week [seeking help],” Sister Busch says. Today she is playing host to a public hearing devoted to another symptom of the hard economic times plaguing citizens here: “payday lending”. The predatory cash loans, which are generally marketed as short-term advances on borrowers’ pay cheques, are not unlike subprime loans. Lenders charge exorbitant fees for the funds, which, Sister Busch says, are being used to pay for everything from mortgage bills to medical costs. The loans create their own debt spiral, with some lenders charging interest rates of 391 per cent.

On Wall Street, the mortgage crisis has caused some heads to roll. But the downturn has largely played out as a numbers game, with big banks taking tens of billions of dollars in writedowns and seeking new cash injections to make up for heavy losses they have suffered because of their own role in the housing meltdown.

But the real-life impact of the downturn can be found in states such as Ohio, Michigan, California and Florida, where entire streets in some neighbourhoods have been engulfed by “for sale” signs or face blight as houses are left vacant and boarded up. The economic hardships of residents whose mortgages are foreclosed upon ultimately spills over to neighbours, who see their home values decline, community tax receipts plummet and increases in crime.

These housing woes, along with increasing anxiety about the economy more generally, are beginning to take centre-stage in the 2008 election, relegating to the backburner – for now, at least – concerns about the war in Iraq and national security. As they campaign across the US, candidates from both parties are increasingly encountering questions about the crisis in the US housing market. A CNN exit poll following last week’s primary in New Hampshire found that 97 per cent of Democrats and 80 per cent of Republicans expressed anxiety about the economy.

This week in Nevada, a state where the foreclosure rate is four times the national average, Illinois senator and presidential candidate Barack Obama vowed to tackle the crisis. “This is an outrage,” he said. “It’s an outrage that Washington caved to lobbyists when they knew this could happen and it’s an outrage that they’re doing nothing about it now.”

Two of the states that have been hardest hit by the rapid rise in foreclosures, Ohio and Florida, are so-called “swing” states where neither party has an entrenched majority, and thus could be pivotal in this year’s election. Narrow margins in Florida in 2000, and Ohio in 2004, were crucial to victories by George W. Bush. In a recent poll, Ohio was one state in which the economy ranked particularly high among voters’ concerns, with a third of respondents identifying it as their number-one issue.

Even if voters are not personally affected by the mortgage crisis, says Jennifer Duffy, a senior editor of the Cook Political Report, a political newletter, problems in the housing market nevertheless add to general insecurities about the economy.

That, in turn, could bode well for Democrats, who will benefit from a perception that Republicans and the Bush administration are to blame for the slowing economy. “[The mortgage crisis has] got some very practical problems in that it lowers some home prices, which lowers property taxes, which affects local government and then school budgets,” Ms Duffy says.

But the mortgage crisis is not the clear vote-getter for Democrats that it seems at first glance, because the question of what to do about it is not straightforward politically. “There are a lot of people who say: ‘There are those of us who lived by the rules, you don’t bail out those who didn’t,’?” says Ms Duffy.

Pollsters and analysts say presidential candidates have to toe a careful line on the question of how much the government should assist homeowners that some say made irresponsible decisions. “It cuts both ways. The people who are about to default out of their mortgage, they are very eager to get help. But the rest of the population has a very different view,” says Allan Meltzer, a professor of political economy at Carnegie Mellon. “They will have sympathy for their neighbours but they will also say: ‘Gee, I pay my mortgage, why can’t he or she pay for theirs?’?”

Experts say voters generally oppose taxpayer-funded bail-outs, though they will also want to stop whole neighbourhoods from suffering under the weight of the subprime crisis. At a town hall meeting last week in Merrimack, New Hampshire, Hillary Clinton, the presidential candidate, was quick to point out in response to a question about personal responsibility that she had little sympathy for speculators in the housing market. But she conceded that the crisis could have a “cascading effect” on the economy that had to be stemmed, even if it meant that some who “should have known better” would be given relief. “Where we can intervene more quickly to prevent it [the economy] from falling off a cliff, we should do that,” she said.

Republican candidates Mike Huckabee, Mitt Romney and John McCain have also raised the mortgage crisis in speeches and advertisements.

Beyond the election-year rhetoric, most insiders who have stakes in the foreclosure mess, from bankruptcy lawyers and mortgage servicers to global investment banks, are keeping a close eye on Congress.

Specifically, they are watching the Emergency Home Ownership and Mortgage Equity Protection Act of 2007, a controversial proposal that was created by a compromise between Democrats on the House judiciary committee and Republican Steve Chabot of Ohio, who was the only Republican to vote in favour of the bill when it passed the committee late last year. The proposal, which House Speaker Nancy Pelosi has vowed to take up early this year, would allow homeowners to modify the mortgage of their primary residence in court under bankruptcy. Under current law, judges can only modify mortgages on second homes. Passage of the bill, Mr Chabot and Democratic sponsors say, could save hundreds of thousands of homeowners from foreclosure.

Mr Chabot’s support of the bankruptcy bill, which faces tough opposition from banking lobbyists, underscores the changing political current in Washington. Just three years ago, Mr Chabot was a strong advocate of sweeping bankruptcy legislation that limited protection and was hailed as a victory for business lobbyists and the Bush administration. Now, he is seeking to expand bankruptcy protection.

Some analysts say they believe that even the most conservative Republicans in Congress could support the legislation if it is narrowly targeted and will keep voters from losing their homes – even if it contradicts “free market” principles.

Lobbyists who are familiar with the bill say they believe it will pass the House, but it is unclear whether it will win approval in the Senate. The White House has not said it would fight the proposal, but proponents of the bill said privately that they believed the Bush administration would side with critics who claim it would have unintended consequences.

The Mortgage Bankers Association, which is fighting the proposal, says that if judges are allowed unilaterally to change terms of a mortgage contract lenders will face “new uncertainty” when valuing homes, increasing the interest rate on future mortgages.

However, supporters of the legislation, including the non-partisan Center for Responsible Lending, say the bill represents one of the simplest ways to help families trapped in “exploding” adjustable-rate mortgages in which interest payments increase rapidly.

Mark Lawson, a legal aid attorney in Cincinnati whose office takes in 20 to 30 new foreclosure cases a month, says passage of bankruptcy reform would be a “great thing” for his clients, giving them leverage over mortgage lenders. “Even if they’re not in bankruptcy, [it’s powerful] just for lenders to know it’s out there,” Mr Lawson says, adding that he does not see many mortgage servicers voluntarily re-negotiate the terms of loans to homeowners.

Some observers believe that a voluntary agreement hammered out by the Bush administration late last year, which would freeze interest rates for hundreds of thousands of subprime home loans for five years, will not go far enough to stem the expected tide of foreclosures.

One Democratic congressional aide said lenders and banks agreed to go along with the Bush plan because they feared the Democrats who control Congress would take tough mandatory action in the absence of a White House initiative – action that the aide says is still likely.

Back in Ohio, Pete Witte, president of the civic association of Price Hill, a mostly Catholic neighbourhood on the west side of Cincinnati, is also keeping an eye on Congress and his congressman, Mr Chabot.

Mr Witte says vacancies left in the wake of foreclosures have increased crime, including the theft of copper pipes in homes that have been boarded up. Foreclosed homes, he says, become magnets for drug dealers and drug addicts. “Who is going to pick up these properties? The city can’t track down anyone who will take responsibility,” he says.

The community activist, a Republican, reserves most of his anger for big banks, particularly Deutsche Bank, which serves as a large trustee for foreclosed homes in Ohio. An analysis by the local newspaper, the Cincinnati Enquirer, last November found that Deutsche Bank National Trust “owned” 188 homes in Hamilton County, more than anyone except for the federal government, and was taking on nine or 10 newly foreclosed properties a week. “Deutsche Bank doesn’t show up, the city can’t even find them. They almost act as if they don’t own the property,” Mr Witte says.

But Mr Witte’s anger may be misplaced. Deutsche Bank says it is has no beneficial ownership of the mortgage loans and therefore does not ”own” the homes. As trustees in foreclosure cases, the German bank says, its responsibility is to serve an administrative role and act as a custodian of mortgage documents, which means its name tends to be on public papers filed in court. It is the loan servicers, however, not the trustees, who are meant to supervise foreclosures, the bank says.

The response is unlikely to offer Mr Witte much comfort: “We just keep looking for anything and everything,” he says. “We’d like to see any kind of assistance.”