On Sunday, November 27th the New York Times ran an editorial, "Romney on Foreclosures," critiquing Mitt Romney's strategy to address the foreclosure crisis. The piece is right on target. Romney's plan, which is to essentially do nothing and let struggling homeowners across the board lose their homes, would further sink a housing market that has already reached historic lows. What the editorial does not address is that President Obama's plan, while not as mean-spirited as Romney's, continues to lack the boldness and scale needed to alleviate the crisis.
President Obama, unlike candidate Romney, has the power to help stem the tide of foreclosures and heal our housing market right now. The starting point should be the potential foreclosure settlement with big banks. At question is whether the president accepts as sufficient the small settlement currently on the table, reportedly in the $15-20 billion range, or teams with Attorneys General Eric Schneiderman, Beau Biden, and Martha Coakley to push for something more commensurate with the abuses committed by the banks and the scope of the crisis. As the Times editorial notes, mortgages in America are $700 billion underwater. A settlement as small the one being considered would be a small drop in a very big bucket, signaling another victory for big banks, the 1%, and corporate money in our political system.
It makes good economic sense for President Obama to push for a larger foreclosure settlement. A settlement that halts more foreclosures will stabilize our housing market, lift homes values, and inject new money into our economy. This would help Americans across the board, regardless of whether our mortgages are underwater or we are a homeowner or renter. The housing market makes up 15% of our Gross Domestic Product. It's hard to have a robust recovery when one-sixth of our economy is in its worst shape in generations. As the Commerce Department reported last week, median home sale prices have now fallen to their lowest level of the year. Since the housing bubble burst, over $7 trillion in home equity has been wiped out. Without courageous action by President Obama, more home equity will be lost, further weighing down our sluggish economy.
To prevent foreclosures at a significant scale, principal reduction -- the writing down of mortgages to their actual value -- is a must. Principal reduction should be mandatory, not voluntary, for the big banks, and we should be discussing hundreds of billions in reduced principal, not tens of billions. Reforms focused solely on refinancing or forbearance and have been optional for banks have failed to make significant impact. By requiring the banks to adjust principal on a loan to actual value, we not only prevent foreclosures, but also inject the difference between the amount owed and actual value into the economy. It's another form of stimulus, but one that does not require taxpayer dollars.
Reducing principal on mortgages is not a liberal or conservative idea. Economists from across the political spectrum have increasingly come out in favor of principal reduction as a key strategy for rebooting our housing market. For example, Martin S. Feldstein, professor of economics at Harvard, and chairman of the Council of Economic Advisers under President Ronald Reagan, wrote in the NY Times that "failure to act means that further declines in home prices will continue, preventing the rise in consumer spending needed for recovery. As costly as it will be to permanently write down mortgages, it will be even costlier to do nothing and run the risk of another recession."
Taking a more aggressive approach to addressing the foreclosure crisis doesn't only make good economic sense. It's good politics too. Any candidate running for president must consider the fact that swing states such as Nevada, Florida, Michigan, and Ohio are among the hardest hit by the housing crisis. In Nevada, 62% of borrowers are underwater. In Florida, 46% of borrowers are underwater. Since homeowners have a particularly high voting rate, every candidate should be looking to prove he or she has the guts to go toe to toe with the big banks, demand retribution for American families, and get our housing market back on track. If there was ever a battle that signified the struggle between the 1 percent and the 99 percent, this is it. By pushing for a settlement that reduces hundreds of billions of dollars in principal the president could buoy the same economy that has been a drag on his presidency. If he doesn't, he could end up underwater with the rest of us.
George Goehl is the Executive Director of National People's Campaign, which seeks to protect and strengthen low- and moderate-income communities across the United States.
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