Longtime friend, Mark Steitz, an irrepressible Washington wit, described the potential threat posed by Osama bin Laden's new arsenal:
If bin Laden were smart, he'd disband his terrorist cells, and instead buy ad time on radio and TV stations. The ads could be simple: 'Remember Americans, Your mortgage is a non recourse loan. You can walk away.' Now that would be explosive.
As always, Steitz has a point. First American CoreLogic, a real estate data company, estimated that 7.6 million American homeowners were "under water" at the beginning of October, with another 2.1 million headed there. For one in four homes with mortgages, the amount owed on the mortgage is greater than the value of the house. And it's getting worse. Over the last two months, housing prices have continued to plunge. Some experts estimate as many as 19 million homeowners could be under water by 2010. That would be about half of all homes with mortgages.
Most mortgages on personal residences are non-recourse loans, secured only by the value of the house. The lender has no recourse to any other assets of the borrower. This leads to an awkward economic truth. If homeowners were "rational economic actors," as free market fundamentalists assume they are, they would turn in their keys to the banks and walk away. They've already lost their down payment. Many are struggling to pay a loan worth a lot more than the property they own. They'd be better off cutting their losses and renting a new home. If they have savings, they can wait for prices to settle and buy in at the lower price.
But if a large portion of 10 million homeowners did the economically rational thing tomorrow, they would blow up the financial system, with banks still laden with mortgage-backed securities that haven't been written down to their foreclosure value. And mass foreclosures would drive housing prices down even farther, with particularly devastating effects in the epicenters of the housing collapse, California, Nevada, Florida, and Arizona. That would deepen an already harsh recession, and shake once more the foundations of the banking system the Federal Reserve has committed over $8 trillion trying to shore up.
This is, incidentally, why mortgage relief is so difficult. Writing off excessive mortgages so 19 million homeowners can get an affordable mortgage at say 90% of current value could cost literally trillions of dollars. With housing prices continuing to plummet, not helping them means the financial system is being buttressed on top of a time bomb.
Washington is beginning to direct its attention to home prices and foreclosures. The Federal Reserve has lowered interest rates to zero, while pushing mortgage rates lower. The Treasury is talking about having Fannie Mae and Freddie Mac purchase mortgages at 4.5% interest rates. The FDIC's Sheila Blair, a lonely hero in the Bush administration, wants to spend $24 billion to help some 1.5 million homeowners avoid foreclosure. Rep. Barney Frank has insisted that mortgage relief be central to the expenditure of the last half of the $700 billion given the Treasury Secretary for the bailout of bankers. President elect Barack Obama has called for a 90 day moratorium on home foreclosures, while more comprehensive plans are put into effect.
Steitz, of course, was kidding about bin Laden, but his wit raises another question. Defense Secretary Robert Gates, who will be retained by Obama, has announced plans to add "well north of " 20,000 US troops to Afghanistan, and to sustain over 50,000 troops there indefinitely, while the US commits billions to build a nation in that land of fierce ethnic and tribal rivalries, and centuries long resistance to occupiers. "This is a long fight, 'Gates said. "I do believe there will be a requirement for sustained commitment here for some protracted period of time."
Afghanistan, of course, is the central front in the war on terror. But perhaps we'd be wiser to leave bin Laden in his cave, abandon the entire wrong-headed misnomer of a "war on terror," and give up attempting to build a new democracy in a country on the other side of the world. Make aggressive global policing, intelligence sharing, and a crackdown on financial flows the core of our reaction to bin Laden, and focus our resources and attention on the crisis here at home, which remains truly terrifying to anyone who looks at it closely.