Thursday, October 21, 2010

Solving the Housing Mess

There actually is a solution to the foreclosure mess which would go a long way to solving the underlying mortgage mess, increase consumer spending, cut tens of billions from the deficit and in all probability be the ultimate October Surprise that retains Democratic control of Congress and probably would reelect the President in 2012. It could be done with the combined power and authority of the Executive Branch in conjunction with the Federal Reserve.

It is the automatic refinancing of all outstanding mortgages to the currently available interest rates. The Fed has pushed down interest rates as low as they can – to almost zero between banks and to 4.25% for 30 year loans as of today. That should be resulting in a vast wave of refinancing – people bringing their 6%, 7% or 8% loans down to 4.25% -- unleashing a large effective increase in consumer spending. But the banks will not refinance because they require adequate collateral – house has to be well above water – and great credit history and employment prospects – which has become increasing rate in this economy. Those requirements would make perfect sense if we were talking about new customers coming in for new loans. But the bank is already on the hook for that borrower’s negative equity and ability to pay.
Decreasing the interest rates actually decreases the likelihood of default because the homeowner has a lower monthly “nut” to come up with.

At this point through the various existing loan guarantees and the government bail outs of Fannie Mae and Fredie Mac, the Treasury is already backstopping a vast number of these loans already. I wonder if part a driver of the foreclosure is that the banks need to foreclose to collect on the Federal guarantees. The Federal Reserve is practically giving the banks money by providing it at zero percent interest, so requiring some of those savings to trickle down to the consumers is perfectly fair.

Extending this lower interest rate to all homeowners overcomes the gut level moral objections to the helping those in trouble – “why should the deadbeats who can’t pay their mortgages and the people who bought houses beyond their means be bailed out?” But with this program, the evil “They” are only be helped to the exact same extent as the hardworking homeowners who have struggled to make every mortgage payment on time.

Doing this automatic mortgage interest rate reset would actually be a great help to the Federal Budget. The Mortgage Home Interest Deduction is by far the largest itemized deduction on personal income taxes. The Urban Institute calculates it as $131 billion in forgone revenue a year. So if home interest was suddenly 40% less overall, the Treasury would take in additional $40 billion per year.

The foreclosure document crisis could be used as the carrot and stick to get the banks to reduce these interest charges. Refinancing everyone would produce a set of good clean documents, that hopefully the financial institutions could keep track of going forward. The President could also use his Pardon Power to free those who agree to these terms from the threat of civil or criminal prosecution. Finally for those who don’t agree, in addition to the threat of criminal prosecution, they could be cut off from future sale of their mortgages to Fannie and Freddie, which puts them effectively out of the mortgage business. And if that isn’t enough, the Fed can shut their access to the zero percent money window.

All of this can be done without Congressional action. It simply requires the act of will on the part of the Administration and to a lesser extent the Bernanke and the Federal Reserve (which is looking for new ways to help the economy now that interest rates can’t decline any further.)

Although, of course, the jolt it would give the economy and the help on the deficit are the most important things. But consider the political impact – after a day of high level meetings with Bernanke and various agency heads and perhaps bank heads – Obama announces this program from the Oval Office in a prime time address. And with those words, every homeowner would know that this President had significantly reduced their mortgage payments. (Someone owing $400K with a 7.25% mortgage would save a thousand dollars a month). Let the Republicans rail against it and call it an Election stunt. This would be the change that we could believe in.

What Obama Could Have Learned From the Godfather

(Published in Politico)

Barack Obama said during the 2008 campaign that his favorite movie was “The Godfather.” But the president apparently views “The Godfather” as a crime or family drama — not as the most important work on the use of power by an Italian since Machiavelli’s “The Prince.”
Lessons from Don Corleone would have helped Obama avoid many of the mistakes in his first year and a half in office.

Remember that the don has done you this favor.

As a powerful man, the don does many people many favors. But they know that something will be expected of them in return. When that moment comes, they had better be willing to return the favor. This favor bank is a great source of the don’s power.

Obama has been all quid, with no pro quo. With Sen. Joe Lieberman (I-Conn.) down on his luck — no job in the McCain administration and the Democratic Caucus skeptical of his liberal credentials — Obama intervened. Because of that, Lieberman got the committee chairmanship he so desperately wanted. But, somehow, attached to that favor were no strings — for example, no condition that he could vote as he wanted on bills but would support the caucus on breaking filibusters.

Sometimes you need to leave a horse head in the bed.

The don knows that when the situation has reached an impasse, it’s time for the unexpected move that shows you can hurt your opponents in personal ways that they cannot expect, let alone imagine: a calculated overreaction that shows your opponents their actions have consequences.

Take, for example, the blocking of hundreds of administration appointments by Republicans. At one point, Alabama Sen. Richard Shelby announced he was blocking all pending appointments to secure a few million dollars in Defense Department pork for his state.

That would have been the moment to strike: Call up Majority Leader Harry Reid and ask to recess for a day. Then recess-appoint all pending appointments. And give a Rose Garden address saying that our problems are too important for this kind of malarkey.

Of course, for good measure during recess, Obama could have appointed all those who would never have been confirmed by the Senate — and given Shelby a “Sicilian message” by appointing someone from the Southern Poverty Law Center as U.S. attorney for Alabama.

Go to the mattresses.

When a gangland war gets serious, the don has to “go to the mattresses.” That means he assembles all his forces, which stay ready 24 hours a day by sleeping in secret apartments.

Clearly, when the Republicans began filibustering everything, it was time to go to the mattresses — that is, keep the Senate in session continuously and make the Republicans filibuster “Mr. Smith Goes to Washington” style. That would have shown the country where the obstruction really lay.

Whenever the possibility of real physical discomfort or even inconvenience has arisen, the Republicans have backed down.

Never tell anyone outside the family what you are thinking.

Note to Rahm Emanuel: This includes “on background” and “high administration official” leaks.

When Michael says that he will save the family by killing Virgil “The Turk” Sollozzo and police Capt. McCluskey, Sonny laughs and says it’s not easy like the Army — “You blow their brains out all over your Ivy League suit.”

In the don’s world, Ivy Leaguers are a rarity, to say the least. Only a few of the men he depends on have been to college. But they do have knowledge useful to the don.

The administration should realize that true diversity of viewpoints does not come from hiring a rainbow coalition of appointees who all attended Harvard. A few people who attended a state college, or who had struggled a bit post-graduation, might have provided valuable insights.
At first glance, the Obama administration appears to be the least educationally diverse administration ever. At least the Bush administration hired people who attended both Harvard and Yale.

The Don knows how to return a favor.

When consigliere Tom Hagen asks the movie producer to put Johnny Fontane in the movie, he assures him that the don knows how to return a favor.

After the unions spent $100 million to elect him, the least Obama could have done was push through the Employee Free Choice Act. And since making unions larger adds strength to the Democratic Party, it would have been doing a favor that made the granter even more powerful. The don would appreciate that.

It’s business, not personal.

It doesn’t matter how much fun you and McCain had together at the debates or on the campaign trail or how many times you invite Rep. John Boehner (R-Ohio) over to watch the Super Bowl.

They will fight you tooth and nail on everything — no matter what.

You can regain all that is lost by wiping out your enemies in one massive, lethal attack.

In one day, Michael Corleone is able to completely restore his family’s fortunes by wiping out all their enemies. Everything the family had done that made them look weak and inept had lulled their enemies into complacency, so the family’s surprise and triumph were complete.

Well, Barack, we’re waiting ...