30 May 2009

Our Mortgaged Future

A.D. Freudenheim, The Editor

An article (“Recovery begins at home”) from last week’s issue of The Economist, about Shaun Donovan, the new Secretary of the Department of Housing and Urban Development (HUD) caught my attention—not for the analysis of Donovan’s early assertion of leadership, but because of the statistics included about the continuing problem of home foreclosures. The Economist reports that “foreclosure filings last month increased by 32% over April 2008; one in every 374 housing units received a filing.” The article also noted that HUD “announced that a $8,000 tax credit for first-time homebuyers could be used as down-payment on a mortgage…” and that “it would provide $2 billion in stimulus funds to stabilise neighbourhoods hit by foreclosure.”

Reading this article reminded me of how adrift we are in the middle of this vast sea of foreclosed homes, and that we cannot seem to find the dry land beyond the horizon. The collapse of our economy has been spurred on in large part by our collective capacity to over-borrow, and our collective desire to over-inflate the value of our homes. While the cracks in the broader economy are more complicated—the housing asset bubble is only one factor—this problem of over-mortgaged homes with over-inflated values is probably the thing most average people are able to focus on. The housing bubble was aided by the robust market in “sub-Prime” mortgages, and part of the problem with these mortgages was their inherent short-termism: banks loved the fees associated with mortgage creation, and the near-term monthly payments, without caring about the long-term impact of the potential failure of the housing market. If the goal was to maximize near-term profits, all of this made sense.

But there was always a logical inconsistency in the sub-Prime mortgage market, waiting for someone to notice it: it is difficult to make money over the long-term with loans you can almost guarantee that no one will be able to afford to pay off. If you know the borrower won’t be able to pay up over the life of the loan, then your short-term profits will ultimately be undermined by the long-term collapse. No amount of mortgage insurance will cover this potential deficit. It’s like building the George Washington bridge out of cardboard: it’s only structurally sound until the first rainfall, and coating it in plastic wrap is not long-term protection from the rain.

News that HUD is offering a credit to first-time homebuyers is great, but helps none of the people who currently have mortgages with unreasonable interest rates or already face foreclosure proceedings. And $2 billion to “stabilize” neighborhoods is all well and good, but it’s hard to know what impact it will have on affected homeowners. These initiatives are part of what the department is calling its “Homeowner Affordability and Stability Plan.” It seems to me that the best way to achieve this would be to encourage mortgage lenders to make loans more affordable, in order to bring stability to the turbulent world of home ownership. All of this led me to ask a different question: is the solution to the failed investment in mortgages ... more investment in mortgages?

Here’s how this investment program might work, as a formal process implemented with government backing, and in lieu of the purchasing of “distressed debt” mortgages by external vultures. Instead of foreclosing on a property, or simply refinancing the mortgage on more favorable terms, banks would refinance while also taking an additional equity stake in these homes. The bank’s investment might be 20-25% of the total value of the mortgage. The mortgage interest rates offered by the banks for these new loans would be fixed within a small range corresponding to the Federally set prime rate; some higher rates would be permitted, but only by one or two percentage points. All mortgages would be fixed rate loans on a 15, 20, or 30 year schedule.

The payoff (so to speak) of this process would be three-fold:

First, it would shift the process of dealing with many of these problem mortgages from a challenge over impending foreclosure back to focus on continued ownership. As with the bursting of many asset bubbles, part of the problem with the collapse of the market is the glut of houses available at reduced prices, which depresses the value of the newly foreclosed assets even further. This is not good for banks looking to recover from the sale of these assets, and it doesn’t help homeowners with legitimate (that is to say, normal) reasons for wanting to sell. Therefore, removing some homes from the market by keeping them owner-occupied would help return some stability to the market.

Second, this refinancing structure would reduce the monthly mortgage payments owed by the homeowners, by refinancing at a rate that owner-occupants can actually afford, on a schedule that makes rational economic sense (which most adjustable rate and sub-Prime mortgages do not, except on a short-term basis). What is the bank’s incentive to refinance this way? That leads to the third point...

By refinancing at a reasonable rate, banks enable homeowners to invest in their properties—keeping their homes and neighborhoods cleaner and more desirable—while the bank still, even at 6 or 7%, makes money. Well-kept homes in cleaner neighborhoods will likely have better resale values over the long-term.

The biggest benefit of this new process will be that it creates a mutual incentive for long-term success, for both the owner-occupant and the bank: the owner's incentive is the opportunity to stay in their house at a monthly payment rate they can afford. The bank will recoup its additional costs over time by taking that addition 20% equity stake, thus giving them 20% of the profit when the home is eventually sold. Since part of the allure of sub-prime mortgages was the higher interest rates being charged, and thus the higher rate of return to those who invested in these mortgages, this equity based approach will also help address the loss of profit that will result from bringing a 14% mortgage interest rate down to 7%.

Why should these homeowners accept this 20% reduction of their equity in their own homes? Well, for one thing, this new bank stake would reduce the amount the borrower owes by the same percentage, in effect reassessing the near-term value of the home. Given the inflated market in which many people purchased their homes, such a readjustment might be welcome. But the long-term rationale is even stronger: a 20% reduction in one’s investment is almost always better than a 100% loss of both equity and one’s actual home. For homeowners, choosing between 80% and 0% should not be so hard—and as banks might be starting to learn for themselves, 100% ownership of many, many houses may not be a good investment for their own shareholders.


25 May 2009

Preventing Obama

A.D. Freudenheim, The Editor

If I was in the message management business (and I am), and I had a client with terrible, horrible news to release to the world or a potentially disastrous idea to float, well heck: the days before a long, holiday weekend might be perfect. Few people are paying attention to the news as it is; even fewer when focused on sunny weather and beach blanket bingo in the days ahead.

However, I do not know whether I would be clever enough (or Machiavellian enough) to coordinate the release of this terrible, horrible news with a speech timed as a counter-point to a speech given by one of my client's biggest critics. Seriously, it's hard to get one’s critics to cooperate! It takes tremendous resources and planning, and a stealthy streak worthy of a come-from-behind presidential candidate.

Therefore, it should be no surprise to anyone reading this that the person who released the terrible, horrible news was President Barack Obama, and the clever (or Machiavellian) maneuver was to share the information alongside a critical speech given by former Vice President Dick Cheney.

And the news that was released?

That President Obama favors a program of "preventive detention," sort of like what repressive, authoritarian, mock-democratic regimes (c.f., China, Egypt, Iran) use to reign in people and perspectives they don't like. Rather than worry about having to try suspects after they have committed a crime, Obama’s proposal would allow for indefinite detention without a trial where evidence is presented that suggests someone was planning a crime. The New York Times ran two articles about this, the first on 21 May (“Obama Is Said to Consider Preventive Detention Plan”), the second on 23 May (“President’s Detention Plan Tests American Legal Tradition”). There are plenty of others, too.

Thankfully, I am not alone when I say—loudly and unambiguously—this is bullshit. I will dispense with reciting chapter and verse on why such a “preventive detention” plan is unconstitutional. Senator Russ Feingold has done this eloquently enough for anyone interested, while underscoring that Congress (or at least one Senator) is watching and intends to stand guard on this issue. Senator Feingold: thank you!

What I will say is: this entire episode represents a huge political and philosophical disappointment. First, the point/counter-point construct of the speeches was both an obvious and unnecessary distraction. As president, Obama has his choice of speaking moments; he can only have agreed to this because he believed that the media’s (and public’s) focus on the “Thrilla Near the Hilla” (as Washington Post columnist Dana Milbank dubbed it) would distract from the substance of the issues and his articulation of an unsatisfactory policy plan. Otherwise, he would have given his policy address when he knew (as with many others) that it, and he, would be the sole focus of attention.

Second, it is disappointing because a politician as smart as Obama, in an environment as politically charged as this one, should know that it is hard to embrace the ideas of one’s opponent without losing credibility—unless you do so (as Bill Clinton did with policy issues like welfare reform and debt reduction) by embracing the political substance, the underlying logic, and even the fallout. President Obama has not done that; he has not suddenly started talking like Dick Cheney and George W. Bush. Indeed, quite the opposite.

Which leads to the third disappointment: the lingering suspicion that President Obama wants to have it both ways. He seems to want to be respected for charting a course that is not that of the Bush/Cheney years—e.g., one that places diplomacy, not force, at the center of our global leadership—while at the same time being given permission to pursue the same nasty, off-the-books habits, tactics, and policies, but in a manner that is more effectively off-book.

The world is a nasty place, and President Obama’s original, campaign-era formulation that faux-righteous might will not protect us remains as true now as it was then. Hidden righteousness, in the form of “preventive detention,” is unlikely to protect us, either. It only degrades our democracy, our society, and the quality of both our government and our moral judgment. On this issue, President Obama should be stopped.

UPDATE: In his 31 May column for the New York Times, Frank Rich dissects Dick Cheney's speech and the way it was reported in the news - and, very helpfully, points to an article by Jonathan S. Landay and Warren P. Strobel, writing for McClatchy, that points out 10 "inconvenient truths" that Cheney overlooked. That article is worth reading.

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09 May 2009

Regressive New York?

A.D. Freudenheim, The Editor

Vermont, Massachusetts, Connecticut, Maine, and even Iowa all now permit “opposite marriage,” while “liberal” New York (and California, too) lag behind. An excellent article in tomorrow’s New York Times notes that as a new bill makes its way through the legislature, some New York politicians seemingly remain closed-minded. For example, Jeremy Peter’s article has a great story about a State Senator, as in this snippet:

Proponents of same-sex marriage who visited Mr. Onorato in his office in Long Island City acknowledge they have not made much progress.

“He said right off the bat that marriage is between a man and a woman, and that this is a religious issue,” said Jeremiah Frei-Pearson, 31, a child advocacy lawyer who went to the senator’s office two weeks ago accompanied by a gay man and a straight official from one of the state’s most powerful labor unions.

“I explained to him that I go to church every week and that religion teaches us not to discriminate,” Mr. Frei-Pearson said, “and that ultimately your faith should be kept separate from this decision-making process.”

He said he also tried to appeal to Mr. Onorato by explaining that he was engaged to a black woman, and that an interracial relationship like his (Mr. Frei-Pearson is white) would have been frowned upon years ago, just as many gay relationships are today.

“None of that seemed to resonate,” Mr. Frei-Pearson said.

To which I can only say: wow! Great reporting, great quotes … backwards politician!

The many perspectives (and resistance) to gay marriage in New York might be a reflection of a quality of our state that is, in an odd way, less at issue in places like Vermont, Maine, and Iowa: diversity. The same can be said of California, a similarly large and divided state. Logically, one might expect homogenous societies to enforce orthodoxy and resist (seemingly) heterodox notions like acceptance of gay marriage, let alone gays themselves—while diverse communities should be the opposite. The logic, though, may overlook the much more complicated set of connections between people’s sense security and (emotional) safety. In a funny way, places like New York may be more challenging political and social environments precisely because they toss many, many different people and perspectives together.

Not buying it? Me either, necessarily, because it starts to sound like another excuse. The truth is that this is a classic case of groundless discrimination, for which too many bad excuses have already been offered.

With the new bill in the state legislature, New York’s politicians have an opportunity to show that such discrimination has no place in a society like ours. Whether you live downstate in New York City, or upstate in Buffalo, our state needs people who want to live here, make their lives and livelihoods here, pay taxes here, raise families here, and contribute to our society—regardless of whether they love someone of the same sex. Preventing gay marriage discourages people from making their homes here, and that’s no good for anyone.

Citizens of New York: contact your State Assembly member and State Senator and make your voice heard.

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