Several years ago during a visit to the Palace of Versailles, my guide made the following observation: Louis XIV built it, Louis XV enjoyed it, and Louis XVI paid for it.
Like the luckless Louie, many Americans lost their heads over their homes. The Bush administration fueled these sentiments by instituting an ownership society plan because of the strong belief that homeownership reinforced patriotism. Unfortunately, the dream of home ownership has turned into a national nightmare. America’s high foreclosure rates could possibly decrease homeownership below the 67.5 percent level where it stood when Bush took office in 2001.
President Barack Obama’s $275 billion plan to help homeowners represents a bold approach to stem the bleeding. Alan White, a a Valparaiso University law professor and a leading authority on the foreclosure crisis, strongly defended the Obama plan in testimony before Congress.
“We’ve been using a squirt gun to put out the mortgage fire for the last two years, and this is a howitzer,” he said,
The Obama plan has three main components. The first provides cash incentives ($75 billion) for lenders and home owners to renegotiate mortgages. The second part allows homeowners whose mortgages exceed home value to refinance up to 105 percent of the home value. The third part provides fresh capital of $200 billion for Fannie Mae and Freddie Mac to expand mortgage lending.
The plan, which will start going into effect Wednesday, seeks to help 9 million homeowners by helping them refinance their Fannie Mae or Freddie Mac mortgages or rework loans by lowering interest and principal. The goal is to reduce monthly payments to 31 percent of income.
The aim of the Obama plan is to raise distressed home values by $6,000, cut foreclosures, and prevent neighborhoods from becoming ownerless and derelict.
“The plan includes carrots, such as incentives for lenders to provide long-term affordable loans to borrowers, as well as an important stick — bankruptcy reform,” said Senate Banking Committee Chairman Chris Dodd, D-Conn.
Obama’s housing critics make the following points.
The plan fails to address the complexities of securitization. Specifically, most mortgages have been sliced and bundled into collateralized debt obligation, or CDO, bonds. Thus, there is a financial disconnect between the administrator of the CDO and its bondholders. The administrator is just an agent who legally is obligated to protect the financial interests of the CDO owner. Owners of CDO bonds have strong legal precedent to legally block arbitrary writedowns of mortgages as a violation of their contractual rights.
Fannie Mae and Freddie Mac are financially stressed. Encouraging them to make additional capital investments in substandard lending is irresponsible.
Taxpayers who have paid their mortgages regularly voiced concerns over subsidizing homeowners who falsified records to get mortgages.
We are in a race against time.
Sales of existing homes took an unexpected plunge from December 2008 to January 2009, falling to the lowest level in nearly 12 years. Pessimism about the economy grows. Currently, housing data highlight two ominous trends: dramatic price decreases and high foreclosure rates.
The latest report from the Standard & Poor’s/Case-Shiller U.S. National Home Price Index showed the largest drop in its 21-year history. Its 20-city index plunged 18.5 percent from December 2007 levels. Prices have decreased to levels of the third quarter of 2003.
The sharp drop in prices means 10 million homeowners have mortgages that exceed the values of their homes. This represents 20 percent of all homeowners with mortgages. If house prices fall another 15 percent, negative equity mortgages will rise to 20 million, some 40 percent of all home owners. Negative equity encourages house abandonment since homeowners have no personal liability over foreclosed mortgages. Alternatively, residential areas suffering from high vacancy rates become blighted communities. Moody’s Economy.com researchers estimated that there will be a record 1.9 million foreclosures this year.
Housing is so important in America that we cannot follow the advice of W.C. Fields: “If at first you don’t succeed, try, try again. Then quit. There’s no point in being a damn fool about it.”
Obama disagrees.
He said, “In the end, all of us are paying a price for this home mortgage crisis. And all of us will pay an even steeper price if we allow this crisis to deepen — a crisis which is unraveling homeownership, the middle class, and the American Dream itself.”
Americans share a common belief value that our home is our castle. However, like Louis XVI, Americans need to learn that we cannot build our castles on sand.
Originally published in the Sarasota Herald-Tribune
