ElectionWatch: Clinton's Rate Foreclosure Freeze Could Cause 'Chaos'
The Democratic presidential race is still going strong and both candidates have latched on to the housing market as a key issue. Both want to bail out mortgage holders, but the news media have given little in-depth attention to concerns about either plan. Warnings that Hillary Clintonâs proposals could devastate the economy have gone almost unnoticed.
âOn the nationâs credit crunch, she [Clinton] stood by her proposal to declare a 90-day moratorium on mortgage foreclosures and a five-year interest rate freeze on existing, adjustable-rate mortgages, despite withering criticism from economists â and from Obama â that the plan would wreck the housing market and send new mortgage rates into the stratosphere,â The Washington Post reported February 22.
That âwithering criticismâ could have come from Jerry Bowyer, chief economist of Benchmark Financial Network. âIt would be a trigger event which would set off chaos in every financial market of consequence on planet Earth and would be a disaster for the
Yet when NBCâs Tim Russert interviewed
The Economist magazine termed
In contrast, Sen. Barack Obama (D-Ill.) has said he wants to offer $10 billion in bonds to homeowners and give them a tax credit. While both plans have been mentioned by many news print and broadcast outlets, there has been little explanation of the potential economic consequences.
âThis seems to be the only area where Obama is not as far to the left as Hillary,â said Bowyer. âThe downsides are still there, though: bailing out people for high-risk behavior encourages them to do it again â economists refer to this as âmoral hazard.â Also, of course, this is tax money taken from productive uses in the private sector to buy votes from people who donât like to pay their debts. So, not a very good idea, but nothing like the disruption to capital market transactions under the Hillary plan.â
âEspecially important in
The New York Times reported from the campaign trail in
Dr. Gary Wolfram, a professor of political economy at
Obamaâs plan wasnât quite as bad, âso he would just steal from us,â said Wolfram sarcastically. âI saved and paid my mortgage off. So now I would be taxedâ to pay for people who couldnât afford their houses, he continued. âThatâs fair.â
Bush plan ânot enough,â
Clintonâs and Obamaâs proposals came after the Bush administrationâs own efforts with âProject Lifelineâ and âProject Hope.â Project Lifeline included a voluntary 30-day foreclosure delay for seriously delinquent borrowers â with six lenders who agreed to the terms. Project Hope, upon agreement with the same six lenders, would freeze adjustable rates for five years on âsome subprime loans.â
That voluntary freeze was criticized in the press as not going far enough.
CBSâs Bill Plante also knocked the Bush plans. According to Planteâs February 12 âEarly Showâ report, âThis may not be enough. Last year, 4 percent of even the good mortgages, the prime mortgages, were overdue. Consumer groups say you need more. Consumer groups would rather have these refinanced at lower rates.â
A New York Times editorial also complained about the Bush plan â from the left. The editorial called the plan âflawed it its scope.â
âAnd since it is voluntary, if it doesnât work, there is nothing the administration can do,â continued the Times editorial on February 11.
The Obama plan was also criticized in the Los Angeles Times as âtoo marginal.â The newspaper wrote on February 21, âEconomists question whether Obamaâs $10-billion âforeclosure prevention fundâ would cover the thousands of Americans who already have lost homes and the thousands more who are in danger.â
Then the LA Times quoted economist L. Josh Bivens of the liberal Economic Policy Institute, who called Obamaâs plan âa drop in the bucket.â But at least the paper included Obamaâs criticism of
According to Austan Goolsbee, the lead economic advisor to the Obama presidential campaign, the senator âhas not opposed freezes on rates or freezes on foreclosures âŠ He has, however, emphasized that we should not give blanket freezes to everyone such as to the people who have made this problem worse.â
But Peter Schiff, president of Euro Pacific Capital, said freezes have the opposite problem. In the January 21 International Edition of Newsweek, he said mortgage freezes donât benefit lenders; rather, they âunilaterally shift the financial pain to lenders.â
Schiff was specifically criticizing the Bush administrationâs freeze, but concluded that âdamaging as the plan may be, it is nothing compared with what some presidential candidates and members of Congress are cooking up.â
Prominent economist and columnist Walter Williams agreed.
âPresident Bushâs plan to deal with the subprime crisis is to freeze interest rates on adjustable rate mortgages. Freezing interest rates would stop peopleâs mortgage payments from increasing. That is a gross violation of basic contract rights and would appear to be a Fifth Amendment violation,â Williams wrote in a January 23 column.
âThe long run effect of the Bush plan is to make lending institutions even more selective in choosing borrowers,â Williams wrote. âThen thereâs the question: If government can invalidate the terms of one kind of contractual agreement where the borrowers canât pay, whatâs to say that it wonât invalidate other contractual agreements where the borrowers encounter hardship and what will that do to financial markets?â
Williams was talking about Bushâs plan, which was a voluntary agreement with lenders. A mandatory rate freeze, like
âA mandatory program would have some real constitutional problems,â said Ted Frank, an attorney who directs the
Wolfram added that undermining contracts could have economic consequences. âMarkets donât work real well when you donât have contracts,â Wolfram said. âSanctity of contract is really what came out of the Middle Ages. Thatâs why
That would become an ongoing problem, he said. âOnce you set the precedent, how do I know youâre not going to come along and violate other contracts? If you want to do it that way â thatâs fine. The market will respond, housing prices will go down, people will be foreclosed on â they canât sell their house. And all the people that thought they were going to be better off are going to find out that theyâre worse off.â
âMore Aggressiveâ Plan Could âDestroyâ Lending
The news media did occasionally admit flaws with the
CNBCâs Carl Quintanilla called âthe riskâ of
According to Don Luskin, the chief investment officer for Trend Macrolytics LLC, the freeze wouldnât simply âscare lenders awayâ â it would âdestroy an industry.â
âRight now the mortgage lending business in this country is in the process of shutting down. And you do this to it youâre going to kill them. Theyâll never come back,â said Luskin, âso thatâs going to actually worsen the crisis it is designed to ameliorate.