THE BLOG

Turning The Tide

02/19/2009 12:02 pm ET | Updated May 25, 2011

by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, Ryan Powers,and Brad Johnson

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Speaking Wednesday in Mesa, AZ -- a giant Phoenix suburb that is a "poster child for foreclosure" -- President Obama announced a plan to "help as many as nine million American homeowners refinance their mortgages or avert foreclosure. He asserted his plan would shore up housing prices, stabilize neighborhoods and slow a downward spiral that was 'unraveling homeownership, the middle class and the American Dream itself.'" In addition to an investment of $200 billion for "strengthening confidence in Fannie Mae and Freddie Mac," the Homeowner Affordability and Stability Plan will "pour more than $75 billion into arresting one of the root causes of the nation's economic spiral" by helping homeowners obtain more affordable mortgage terms. This housing plan is the final leg of what Obama has "called a 'three-legged stool' aimed at fixing the nation's crumbling economy": restoring the health of the job, credit, and housing markets. The $789 billion economic recovery plan signed into law on Tuesday is expected to "create or save three and a half million jobs over the next two years." Treasury Secretary Timothy Geithner "unveiled a restructured plan to aid the ailing financial system" last week with more accountability and "limits on bankers' bonuses." Only a combined government effort on all three fronts "has a chance" of turning the tide for the shrinking economy.

STAGES OF FAILURE: Center for American Progress analysts Andrew Jakabovics and David Abramowitz say that the recognition that "stopping foreclosures is good for all homeowners and the economy overall" is "long overdue." They explain that the Bush administration went through "various stages of failure" instead of taking action on the staggering rise in home foreclosures that began in 2006. "First came denial" in 2007: "Bush administration policymakers insisted that the problem was small and the economy largely immune from troubles affecting the subprime loan sector." With foreclosures rising in early 2008, Bush officials decided to "blame the victim" and wait for the magic of the market to kick in: "The Bush administration's message was mainly that the culprits were unscrupulous borrowers who needed to be punished for their moral failures by withholding of any help." Then, as "foreclosures surged" and credit markets collapsed in 2008, "laissez-faire policies morphed into power grabs and bailouts for buddies." Throughout, "vastly more attention was paid to the woes of the banking system" than to homeowners, considered "either the bad guys, or at most irrelevant to fixing the problem." Further, Bush's Treasury Secretary, Henry Paulson, ignored explicit direction from Congress to claim he didn't have the authority to address bad home loans; "essentially none of the available hundreds of billions of dollars worth of TARP funding went to stop foreclosures." Paulson even rebuffed the chair of the Federal Deposit Insurance Corporation, Sheila Bair, when she requested $24.4 billion in Nov. 2008 "to create and implement an effective system of foreclosure-preventing modifications." As recently as Jan. 10, Paulson was still "reluctant to move ahead with a foreclosure plan," claiming it would not give "maximum bang for the buck."

LIGHT YEARS AHEAD: The Obama administration's housing plan, Jakabovics told Mother Jones magazine's Nick Bauman, is "light years ahead of anything we saw coming out of the Bush administration." The plan has three major components. The first, dubbed "Refinancing for Responsible Homeowners," will allow "homeowners with Fannie Mae and Freddie Mac mortgages who owe between 80 and 105 percent of what their homes are worth to refinance those mortgages" -- helping about 4 to 5 million people to keep their homes. The second part is the $75 billion "Homeowner Stability Initiative," which is more complex, Bauman writes, "encouraging banks to work with homeowners to modify existing mortgages, which is different from refinancing." If a bank takes financial incentives and "absorbs whatever loss it took to get the borrowers to a 38 percent debt-to-income ratio" in monthly payments, the government will help reduce payments down to 31 percent. Although technically a voluntary program, this public-private partnership to help 3 to 4 million homeowners will be compulsory for any bank tapping the $700 billion Troubled Asset Relief Program, and will become "accepted as standard industry practice," write Jakabovics and Abramowitz. The third component intends to strengthen "confidence in Fannie Mae and Freddie Mac" by spending $200 billion on the "toxic assets" of securities based on subprime and other high-default-rate mortgages. "The Obama administration will try to do this by having the Treasury Department buy up the dreaded mortgage-backed-securities from Fannie Mae and Freddie Mac," using money authorized in July 2008 for this purpose but unused by the Bush administration. The government is "hoping to somewhat reinflate the market for those financial products" and keep money flowing for new long-term, fixed-rate mortgages for average homebuyers.

MORE WORK AHEAD: "This plan will not save every home," Obama cautioned yesterday, "but it will give millions of families resigned to financial ruin a chance to rebuild." As homeowners and local governments struggle to survive the collapse of the Bush-era housing bubble, many economists and housing experts believe more government action will be needed to right our struggling economy. "This is a major step forward to addressing the foreclosure crisis," said John Taylor, president of the National Community Reinvestment Coalition. "But the plan may not be aggressive enough." There are "between 10 million and 15 million homeowners" who are "underwater," with mortgages costing more than the present value of their property. "We can protect homeowners by simply giving them the right to stay in their home as renters following foreclosure," recommends economist Dean Baker. An "own-to-rent" program is "a simple, costless and bureaucracy-free solution, but it screws the banks." While most of the plan can be implemented through executive branch authority alone, "there is one facet that needs Congressional approval," The Wonk Room's Pat Garafolo explains: "Changing a bankruptcy law to allow judges to 'cram down' mortgage payments for troubled homeowners." Weeks ago, Congressional Republicans justified opposition to the economic recovery plan, saying it was "leaving the housing crisis out of the equation," which Sen. John Ensign (R-NV) called "the underlying cancer." Conservatives "now have an opportunity to help advance a comprehensive solution to the very problem they claimed was being ignored." It remains to be seen whether they will rediscover bipartisanship in order to help millions of Americans save their homes.