Hillary on housing: Clinton's foreclosure bailout plan

Sen. Hillary Clinton (pictured) made a political speech today about the foreclosure crisis, and as a political effort, it may prove fairly successful for her. But, thankfully, this is not a politics blog, so my analysis can largely ignore politics and stick to housing and economics.

Of the three presidential candidates, Clinton's fix is the most aggressive -- the biggest bailout, if you will. That makes it the most offensive to those who believe the solution to artificially inflated housing prices is, yes, a period of declining housing prices. Instead, she says the government should get ready to start buying mortgages: "... I believe the Federal Housing Administration should also stand ready to be a temporary buyer -- to purchase, restructure, and resell underwater mortgages."

She also proposes a freeze on foreclosures and a $30-billion fund so that cities and states can start buying foreclosed and "distressed" properties for possible resale or rent (Imagine the bungling, the fraud, and the favoritism, if the city of Los Angeles -- which can't even keep track of foreclosed houses -- gets a pile of federal money to start buying them).

The headline-grabber was the suggestion that the president assemble a group of economic geniuses -- an "emergency working group on foreclosure." She suggested, evidently with a straight face, that the group would be led by "nonpartisan" economic leaders like former Treasury Secretary Robert Rubin.

Now, Bob Rubin is a smart guy and all that, but he served in a Democratic administration, which his not a bad thing, but is not "nonpartisan."  Further, he works for a company, Citigroup, that, as Fortune recently reported, "has written down more than $24 billion in losses due in large part of greed, cynicism, and bad judgment." Citi has been so wounded by the mortgage mess that Rubin had to jump on a plane and fly halfway around the world to ask the government of the United Arab Emirates for money. This is a nonpartisan figure capable of objectively analyzing the mortgage crisis? This is like putting Snoop Dogg on an anti-drug panel.

Clinton manages to acknowledge that reckless borrowers bear some responsibility for the housing mess, but can't bring herself to call it what it is: the inevitable unwinding of a bubble of unsustainably high prices and disastrous lending against those prices.

She also can't bring herself to blame her good friends on Wall Street -- see Rubin, Robert -- for their role in the mess. This is not an oversight. Instead she tries to score a few points by calling attention to the Bear Stearns bailout, without actually criticizing it. Populism Lite.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: AP

Comments

[puckhead]

l.a.guy,

I agree with you. The biggest obstacle in the financial markets right know is that there is no mechanism to value all these mortgage back securities sitting on everyone’s balance sheets. Once housing prices settles and delinquent rates level off, you can then value these securities. Once banks know the risks, then can deal with the risks. But right now, they’re all operating in a dark tunnel and everyone is gun shy about lending money. The gov’t can deal with this situation two ways. They can do the laissez- faire approach and let the banks hoard money, choke off capital and choke investment into the economy and let a few banks go under and drive the country into a depression. Or the govt’t can do everything in their power to establish a market for mortgage back securities so that banks can get a handle on their risk, take the write-downs and get back to the business of lending money. No economy in the modern world can grow without access to capital. As much as the bloggers here seem to hate banks, they are needed to grow this economy. Minus the access to capital and you’ll have the economy of a third world country.

[Liz Wetzel]

you didnt post my earlier comment so obviously youre a republican just disparaging Hillary. STOP BLAMING HILLARY ON THE MESS THAT THE REPUBLICANS MADE.

[waitingforgodot]

Newsflash: Obama's plan will involve a bailout as well. Don't deceive yourself. I'm saying this as a lifelong Democrat.

Time to start writing letters. Yes, I got off my complacent rear end.

[Enlightenment]

Clinton shut the heck up, you don't know jack, same for all of you other two-faced candidates that are blowing hot air of fake promises to win votes.

It doesn't matter what presidential candidates propose because they won't be in office until 10 months from now, and the economy could be in a completely difference situation by that time.

The government should NOT bail out the housing mess! I am flipping tired of our governement throwing away my hard earned tax dollars to save greedy idiots!

I want the governement to make very strict laws to prevent this from happening in the future, and I want the governement to track down and punish everyone that committed fraud during this housing mess, otherwise quit trying to fix a problem that you should have prevented years ago!

[treetime]

Lost in Germany,

Listen up---the subprime mess is a fraction of the real problem that banks, Wall Street are contending with...bailing out the subprime mess causes the following: it devalues the dollar or raises our taxes enormously which puts a strain on the economy, people are still going to lose their jobs regardless if there is a "bailout" or not. If you put a stop on foreclosures you are preventing new buyers from entering the market. There are several homes in my area that are short sale listed right now, let them be foreclosed on if necessary and there will be buyers next time around, the price will be different as it should be. We can't sustain ourselves in an artificial price scheme. That could potentially devastate the real estate market five years from now.

The lending industry needs some simple regulation--some usury laws come to mind. It doesn't need any complex regulation. The loans weren't complicated.

[amir]

To the Democrats who think that Obama will do differently... keep dreaming...

[Dave]

What a joke. I hate the republicans but I will have no problem voting for McCain if she is the Democrat's candiate.

By the way Hillary, I cannot pay off the Porsche I should not have bought, will you bail me out?

[Michael Snyder]

The only comment Peter didn't post of mine was my one line opinion of Hillary Clinton. So I'll spare you that line, but this is proof of the "red backed hammer and sickle behind her head. This woman is a two faced socialist who would gladly transform the United States into a third world debtor nation to propagate her own agenda. Her swipe at Sen. Obama before the Texas primary was right out of the Dianne Feinstein play book and every bit as sleazy. I;m SO glad she headed east with her carpet bags full of stolen crockery. But in true Clinton fashion, this will provide some ink and a distraction from her own dysfunctional campaign.

[Dave]

Hey Lost,

No, I don't think that would be best. You should be responsible for your own investments in which sometimes you gain and sometimes you lose.

The reckless people involved in this (both the banks and the "homeowners") who deserve to lose money for their irresponsiblity, should lose money.

Perhaps next time, they will be more wise with their spending. Nobody forced them to buy an over priced home (often times at 100% financing) which led to higher and higher home prices. They chose to do so.
If they made a profit well then good for them. If they lost money, well then, deal with it.

It's not the end of the world. These people can sell their home, rent a new one and regroup. The government should allow the market to correct itself.

[Michael Snyder]

Lost in Deutschland
Once again...with feeling... This crisis was not caused at the consumer level and it will not and can not be corrected by actions at the consumer level. Calling this phenom a "bubble" is close; look at it like beating eggs. It looks like more & it's fluffy, but it's all air. The "egg value" remains the same. Lots of tiny bubbles have to burst for the economy to heal, kind of like an economic belch for relief to be felt in the market. The root cause is still the over leveraged positions that encouraged those ninja lending practices in the first place. You'll want to give the old WC a moment before you step in after that one is flushed.

[TrojanDLA]

The word "disgustingly ignorant" doesn't even begin to characterize how out of touch Hillary is with what is truly "wrong" with the economy. Her proposed programs does nothing to address the necessity of a price correction and attempts to make taxpayers relieve banks of their mistakes while punishing taxpayers with HIGHER taxes and oh yeah guess what, more slowed economy because higher taxes does not lead to capital growth. Just ask France or Canada.

Let the recession and correction run its due course, and any money the government intends on spending should be to spur "small business" growth.

[Truth2Pwr]

Hillary has no chance at all of getting elected. Hence her thoughts on a foreclosure plan carry about the same weight as mine. Which is probably a good thing since they reak of the kind of "Big Government" let's-solve-our-problems-by-creating-a-bigger-beauracracy-ism that Republicans love to beat the Democrats over the head with. And rightfully so.

[NoWayinLA]

puckhead: Alas, if only it were that simple.

The first step is figuring out what a particular home is actually worth, and its inherent risk.

The second step is figuring out who actually owns that mortgage. It was sold into a pool, and that pool has been sliced and diced so many times, nobody knows who actually owns what. Maybe nobody actually owns anything?

As if that isn't enough... now you have to figure out who owns the risk. The default obligation got turned into some arcane derivative product, which got sliced and diced even more, and traded multiple times in the shadow market.

This stuff isn't actually difficult to value... it's impossible, and quite likely, by design. It's like a giant shell game the financial wizards invented, and now that the game is up, they're finding out that there never was a pea.

[Josh]

This is why I didn't vote for her in the California primary. I was going to with a week to go, but then I found out about her initial plan to freeze ARMs for up to 5 years. That pushed me over to the Obama camp. Depending on what he proposes I might have to end up voting for McCain since this is my number one issue.

I recommend that Clinton scrapd her current bailout plans to try and keep home prices artificially high and call for increased incentives for first time home-buyers who were priced out of the market. This would help increase demand instead of having the government interfere with private contracts...a much better solution in my mind.

[Mark Too]

To the people saying that they won't vote for the democrats in general, or Hillary in particular, for proposing a $30 Billion bailout for homeowners in mortgages over their heads - the best I can say for you is you are complete morons.

What's your alternative? Vote for a republican? Take a look a what just happened, the Fed bought $30 Billion of Mortgage Backed Securities from Bear Stearns for $29 Billion. JP Morgan takes the first $ 1 Billion loss and the fed picks up the rest. This was done under a republican administration! The bennefit to JP Morgan will be much greater than the billion dollar loss that they will take on the deal. The got the rest of the company for $10 per share. Wall cheered the move. JP Morgans market cap. went up by billions after the news was announced.

Wake up fools! It just happened and no one is screaming about anything. This country is nothing more than on big kleptocracy. The whole deal was done in secret and very few of the details have come out. Where's the outrage? It's our money! It's already happened, fools.

[Lost in Ecuador]

Another question I have which is brought up by NoWayinLA's comment is: What does the road to "rational, affordable levels" look like?

This statement brings up a lot of questions. For starters, what's rational or affordable mean?

Won't the housing prices in large metropolises like Los Angeles always be higher than their national averages? Additionally, areas that may have been affordable to middle class buyers may no longer be so due to factors beyond real estate speculation (e.g., population growth and a limited housing stock)?

And how many people need to have their homes foreclosed and how many banks must fail before housing prices to reach their "rational, affordable levels"?

[Mark Too]

I've asked this question before and will try again!

On the Bear Stearns BAILOUT, who exactly, had the authority to approve this transaction? Was it Bush?, Paulson?, Bernanke? Exactly who is it that has the authority to pay $29 Billion of U.S. taxpayer money for mortgage backed securities that were somehow valued at $30 Billion.

I remember back in around 1980 when Chrysler needed a $250 Million loan guarantee from the federal government and how hard that was for them to get. The Bear Stearns deal was done out of sight over a weekend and there is no public outrage. The stock market rallies and everyone is happy.

Here's a quote from yesterday's homeowner bailout story:

"The Fed has recently taken a series of aggressive steps to assist financial companies staggered by the credit crunch -- including providing a $30-billion short-term loan to JPMorgan Chase & Co. to facilitate its purchase of struggling Bear Stearns Cos."

Why was it characterized as a short term loan? The federal government paid $29 Billion for those MBS's. Was the $30 Billion face value? Or did the Fed get $60 Billion in MBS's at a 50% discount or some such thing? Why don't we know the details? Why isn't the press asking any of these questions?

[sfvrealestate]

Thanks, puckhead and Lost in Deutschland. I, too, hate the banks, but let's get real: if they go under, we all go under. And M. Snyder, luv ya, but we're already a third world debtor nation.

[Raul]

Guys, guys: This lady is the real thing, this lady is the champion of the working class, She has been proposing a bail out since last year, because She just can not stand to see the value of Real State going down and down (her words). Just think about: If prices go down..... Rents will go down.... The working class will feel rich....And you know, it is all about perception, it is all about beliefs, and if everyone believes, that they are Rich, and with a little bit of Religion, and a little bit of Nationalism, we all will be voting Republican.

[tc]

I'm interested in learning more about HRC's foreign policy experience. There's a major story out about some troubles with her version of the Bosnia trip that she has held up as evidence of her pedigree. I'm confused as to why the LA Times isn't covering this issue that Hillary herself repeatedly brought to the voters' attention.

[buz]

Clinton makes me want to vomit. She will say/do whatever it takes to seize more POWER for her inflated ego. The whole situation with Wall Street being bailed out by the FED last week is equally nauseating. We don't need to prolong this illness any longer with half assed remedies and potions cooked up by politicians trying to get elected. Just get it over with. Puke/poop out the bad loans and foreclosures and start over from the beginning. We will all feel better.

[l.a.guy]

"The second step is figuring out who actually owns that mortgage. It was sold into a pool, and that pool has been sliced and diced so many times, nobody knows who actually owns what. Maybe nobody actually owns anything?"

I'd be curious how big of an issue that is. These were still investment banks and they must have some requirement to adequately document the mortgages that are backing the securities if for no other reason it would leave them open to a ton of lawsuits if the mortgages didn't exist. Daunting though it may be, keeping track of thousands of owners wouldn't be too difficult with the appropriate systems. Has anyone read an authoritative report as to how big of an issue this is?

"On the Bear Stearns BAILOUT, who exactly, had the authority to approve this transaction? Was it Bush?, Paulson?, Bernanke? Exactly who is it that has the authority to pay $29 Billion of U.S. taxpayer money for mortgage backed securities that were somehow valued at $30 Billion."

Well for starters the Bear-Sterns board has to approve it. According to the NY Times they're about to sale 39.5% of their stock to JP Morgan (evidently under Deleware law a corp can sale up to 40% of the shares in the company without shareholder approval). Presumably Bernanke and company have to approve the 30B guarantee. Now that Morgan announced a 500% increase in the purchase price it will be interesting to see if the Fed is still willing to guarantee the 30B. Some people think Morgan will have to eat more of the loss in order to get the Fed on board.

As for the Fed guarantee, my reading is that it's a 30B non-recourse loan for which JP Morgan is pledging 30B of Bear-Sterns most toxic assets. I don't think Morgan can just declare them all bad and send the Fed a condolences card that says "well we tried" and then forget about it. I assume they have to make an effort to pay it back, so it remains to be seen how much of that 30B is a gift.

[tew]

Well described Peter.

She's beholden to the banking interests as a New York Democrat, but needs to pump out the populist rhetoric to please the left she also needs.

The only path for her is to pander, deflect, and muddle a way to get taxpayer money to please both her banker funders and her lazy voters.

[tew]

Michael Snyder writes that Hillary Clinton "would gladly transform the United States into a third world debtor nation to propagate her own agenda."

Um, I am far from a Hillary supporter - there's no way I'll vote for her - but please recognize the irony that Bush *has* in fact already helped do what you say she *would* do. Have you seen the currency? The national debt? The overall world standing? The weakness in military recruiting? The money spent to support an misguided agenda in Iraq?

Anyway, this is a housing blog. Her proposals are terrible overall policy and unfair and the street level.

[Michael Donato]

The Real Estate Market is just like most markets, let it be and it will balance its self out over time. We add the word crisis to everything these days in order to get someone else to fix the problem. It's a sad thing to watch people suffer from loosing there homes, but had they not squandered there equity to begin with most would still be able to make there mortgage notes. If anything is to be done, those dishonest loan officers and real estate agents, the ones who lined there pockets with commissions, the ones we turned to help guide us through buying and refinancing processes should have there licenses taken away. What happened to that good old fiduciary duty?

We act like no one seen this coming!