Daily Kos Diary: Obama's radical proposals on mortgages

[Pirate Smile]

This Diarist has generally been critical of Obama so I was a bit surprised by the content of the Diary.

Obama's radical proposals on mortgages

by Jerome a Paris
Wed Aug 29, 2007 at 05:26:37 AM PDT

Barack Obama has an article in the Financial Times about some of the lessons that need to drawn from the current financial meltdown, and both the title of his article(Fine unscrupulous lenders) and that of the accompanying analysis article by the FT (Obama unveils radical mortgage plan make it clear that this is not a shy proposal.

Jerome a Paris's diary :: ::

The implosion of the subprime lending industry is more than a temporary blip in our econ­omic progress. It is a cancer that, given today’s integrated financial markets, threatens to spread with devastating impact to housing and to our economy as a whole, unless we act to contain it.

(...)

Nearly everyone – from lenders to investors to borrowers – fooled themselves into thinking that what they were doing was low risk when it in fact involved a lot of risk.

The intro pulls no punches, and is very heartening to me - not because it's good news that a "devastating" financial crisis is likely, but because it is, as far as I can tell, the first acknowledgement by a senior politician anywhere of the gravity of what's unfolding.

If you read my diaries, you may have noted that I personally think that the financial crisis will be massive, and I also note how important it is that Democrats put the blame properly where it belongs, i.e. in the feudalistic, class warfare economic policies of the right, which use massive debt (borne by the poor) to hide the capture of an increasingly large share of the economic pie by the ultra rich.

The first step is to not deny the economic realities, and to speak up against that wall of debt, and it is good to see Obama making that step clearly.

It is also a parable about how an excess of lobbying and influence can defeat common sense rules of the road, placing both consumers and our nation’s economic well-being at risk.

(...)

But we also know that Washington played a role. At a time when non-bank lenders were offering new kinds of mortgage, the federal government should have made sure it was all being done on the level. Instead, our government failed to provide the regulatory scrutiny that could have prevented this crisis.

The theme of fighting the corruption in Washington is one that has been played up already by Obama; what I'll note here is the affirmation of the role of government as regulator - i.e. as the entity setting the rules to ensure the common good via a level playing field (fairness) and enforcing them. We've seen time and again how the Bush administration not only has weakened rules applying to corporations, but has failed to enforce existing ones.

I think we also have to recognise what will happen if we reward the mortgage industry’s lobbying: they will keep using the same kinds of deceptive practices to make a quick buck, no matter what the consequences to home buyers and their communities. Rather than correct what they are doing wrong, these companies will know that if things go badly, they can always lobby Washington to let them off the hook.

(...)

If we are serious about stopping this crisis and preventing much larger turmoil in US housing markets, Washington needs to stop acting like an industry advocate and start acting like a public advocate.

Obama is playing a difficult balancing act: how to prevent the current crisis from hurting many Americans - thus effectively bailing them out from follies they entered into willingly - while making sure that this does not happen again. His solution is to focus the pain on the industry, arguing that too many people have been hoodwinked into mortgages they could not afford.

And that's where his radical solution comes into play:

We need to help struggling borrowers to weather this storm. One way to protect innocent homeowners – at least until this crisis passes – is to establish a fund to help people refinance or sell to avoid foreclosure. We can partially pay for this fund by imposing penalties on lenders that acted irresponsibly or committed fraud.

(...)

The rules currently governing mortgages were written in the 20th century to make borrowing easier to understand for borrowers. We need to update these rules for the 21st century and enact the regulatory and disclosure laws that the mortgage industry has been lobbying against.

That is why I have proposed a Home Score system that would create a simplified, standardised metric for home mortgages – rather like the annual percentage rate (APR), the effective interest rate a borrower ends up paying on a loan – allowing prospective home buyers easily to compare various mortgage products so they can find out whether they can afford to make the payments.

The first step is to make the industry pay as much of the cost of the bail out as possible. As any quick search attests, it is quite easy to find massive exemples of dodgy practices and outright fraud. But going after these on a large scale (if the goal is to fund something large nough to pay for any kind of bailout) is likely to require a lot of political will, something of course unlikely to happen before 2009 - which makes it an ideal opportunity to talk up the idea as much as possible, to put pressure on the mortgage industry and ensure that they more willingly accept tougher regulations for the future in any case.

And that's the second leg of Obama's plan, and one that can only be supported: bring in (or back) tough regulation of the industry. In fact, this is something that is required on a grand scale for the two industries that intersect in the mortgage industry: the financial sector in general (which has gone crazy in the past few years, fuelled by the geedy combination of cheap debt, complete deregulation and the promotion of greed as a positive value by the right and complacent media), and all industries providing consumer goods and services.

This is one of the core functions of government - to protect weak and isolated individuals against the abuses of large commercial players. That's why we have health and safety regulations, technical standards, and other consumer protection rules - not because people are irresponsible and need to be protected form their own stupidity or greed, but because of the inevitable assymetry of information between sellers and buyers (sellers know more about the products they are selling, and thus have a better idea of who's making a good deal), and because uniform rules and standards also provide level playing fields, legal certainty and stability over the long term. Letting the market sort out the good from the bad for mortgage providers has an incredible societal costs - it requires booms and busts in a sector that supports a big chunk of the economy and where most people have to make the biggest investment decision of their life (their house) and thus take the most risk in their life. Letting the naive or abused victims lose everything to weed out the "wrong" providers is simply socially unpalatable and unfair.

And anything, frankly, in today's environment, that puts government action and regulation of corporations in a good light for many people (and voters) is a good thing for any and all Democratic candidates to put forward.

So I hope that Obama's call is repeated and amplified. It's a move in the right direction and it's good politics - for everybody on the left.

http://www.dailykos.com/story/2007/8/29/74538/1770

[Tellurian]

1. The government caused it..

The Fed raised the interest rate 16X consecutively. Tens of thousands of jobs have been downsized or outsourced. This has been a concerted effort by the Republicans to get rid of Middle Class America.

[karynnj]

5. I wouldn't use the claim that the interest rate went up 16 times and jobs were downsized and outsour

as an example of a concerted effort by the Republicans to get rid of the middle class. These and other factors - raising health care costs, consolidation of companies, raising cost of education etc - have led to it being much tougher to achieve what we consider a middle class life style. We need to use that to make the case for initiating programs like healh insurance and this one here rather than be demogogic - especially when it can come back to bite us.

The interest rate was slowly and steadily raised from an atypical low. Look at a historical series for the Prime rate for several decades. The Carter years had incredibly high interest rates and in Bill Clinton's terms, the rate went from 6% to 9% and downsizing and outsourcing were the order of the day. I think we can agree that President Clinton did not want to destroy the middle class. (Note that the 9% is higher than the current rate. Bush I had greatly lower rates in an unsuccessful effort to get out of the recession in time for the election. As the economy improved, Greenspan raised the raised the rates.)

The president (and political parties) had little to do with downsizing. The most likely incentive is that the stock market rewards companies based on very short term analyses. Company after company in the 1980s and 1990s saw their stock go up with every announcement of "downsizing". The executives' compensation in many was at least partially keyed to the stock price. Greed and playing the game as it was likely was far more important than ideological adgenda for "downsizing".

The President had a little more to do with outsourcing. There are tax laws that actually give companies tax breaks for outsourcing/ These need to be eliminated as they push things completely in the wrong direction. Doing that will help, but the big reason for outsourcing is because there is a huge gap in US wages vs foreign wages and in many fields technology has lower other costs associated with using 3rd world employees and have overcome most obstacles that in the past would have made it impossible. Trade agreeements had some impact - but they did not cause outsourcing - it was already happening.

[Tellurian]

7. I use it, because it's my area of expertise.

as for you? You interject your comments in lengthy posts whether you know what you're talking about or not!
I guess you just like reading and rereading your own posts.

[karynnj]

8. Then counter the facts there -

As to expertise - I have no idea what your educational or professional background is, nor do you know mine. I assure you they were such that I have sufficient knowledge in those areas.

In past posts you have claimed that your background is in other areas far afield from economics or business.

[Tellurian]

9. Do tell...

provide proof of your accusations.

[MH1]

12. Wow!

That was totally uncalled for.

Karynnj did not attack you, just presented a solid argument against your conclusion. Why not counter with facts and a better argument, if it's your area of expertise?

I'm curious, what does it do for an internet poster emotionally, to publicly engage in childish personal attacks (i.e. making yourself look like an a**hole to at least some readers), instead of showing your actual knowledge?

[Tellurian]

13. I've asked her to back her statements..

apparently, she cannot because her assertions are unfounded and untrue.

Her arguments referring to my post are unsupported. It's too tiring answering her nebulous overinflated posts because it just encourages more bloviating responses. I'd sooner explain string theory to a dog.

[karynnj]

17. Gee - I didn't realize I had to be on call 24/7

Here is a link to the prime rate.
http://mortgage-x.com/general/indexes/prime.asp

Look at the high Jimmy Carter rates - I see all the way up to 21.5 when he left office in January 1981.
Look at the Clinton years - 6% in July 1992 and unchanged until March 1994. 9.0% on January 4th 2001. Current rate after 16 increase - as you said - 8.25% (less than when Bush came into office.)

Downsizing - my observation watching downsizing announcements in major companies and the market reaction through the 1980s and the 1990s. Various companies like AT&T, its spin off, IBM - all showed this pattern. If you want to dispute that characterization, go ahead - maybe you have proof that it is not so.

Outsourcing jobs out of the country- Are you seriously denying that companies make that decision - not the government - and that the cause is that it's cheaper? It also started before the Bush years.

The difference between all the Democrats on one side and all the Republicans on the other is how they want to help the people hurt by this. That is where the argument is. To suggest that these 3 things were intentionally done by the Republicans to destroy the middle class is a pretty far out statement. At a time when we can create lists pages long of real things that Bush has completely - often maliciously did wrong that are 100% provable even to a skeptic - why say things like this.

My comment on your background was wrong - though as I said in the same post -I do not know your credentials. It was based on this post - which left me with an impression that your interests/expertise were in that area.

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=132&topic_id=2867925&mesg_id=2868451

Needless to say, your comment before that questioned my expertise. You don't need a degree in economics to make the 3 simple statements I did - all would be known to most people who read the business section of a newspaper through the last 3 decades. I DO actually have degrees in both economics and mathematics.

[Tellurian]

23. Lather, Rinse and Repeat..

A waste of time..

refer to Post #13

[karynnj]

25. Like every post you've made on this thread,

you mistake insult for substance. You did go out of your way to twice ask for a response from me. Your attacks are ridiculous. As you contribute so little information about anything, I will lose nothing by putting you on ignore.

[MH1]

26. In this case you did not ask for cites, you jumped straight to insult.

You may want to consider that not everyone who reads this one thread will be familiar with the people posting here. You may have just made a first impression on someone with your response to karynnj here, and it would not be a great impression. But then perhaps you don't care about the reputation of the "Tellurian" identity at DU.

I haven't followed closely any discussions between you and karynnj on other threads but my experience is that her information is usually very good. IOW, I haven't found her posts to be "nebulous", "overinflated", or "bloviating" at all - I usually find them very informative - and refreshingly even-tempered rather than insulting.

In the post in question upthread, her claims seem reasonable enough to me, and I've lived through that period. If you remember it differently than you might just say that.

The funny thing is, she didn't argue your historical claim (interest rates being raised 16 times), just the question of whether your conclusion works well as a political argument. It's not like she accused you of not knowing what you're talking about. This might be one of those situations where "reasonable people of good intent can disagree," right?

[DangerDave921]

19. Why?

And who is going to vote for them once the RW extinguishes the middle class? That is not their goal and never has been. It is self-defeating.

[flpoljunkie]

2. Good for Obama for speaking out about what needs to be done to fix this mess!

[penguin7]

3. Why should renters bail out homeowners?

If tax money is used to bail out homeowners, this would mean the poor(renters) would be bailing out the more wealthy(homeowners). This would create more inequality.

[killbotfactory]

11. Because a lot of the homeowners were swindled?

Here are some examples, just from LA
http://latimesblogs.latimes.com/laland/mortgage_fraud/index.html

[ieoeja]

15. From the OP.

"The implosion of the subprime lending industry is more than a temporary blip in our econ­omic progress. It is a cancer that, given today’s integrated financial markets, threatens to spread with devastating impact to housing and to our economy as a whole, unless we act to contain it."

The United States went through 7 or 8 economic depressions prior to the New Deal. All of those depressions could have been stopped had the gov't used taxpayers money to do it. And that is what we are discussing doing here.

[calteacherguy]

27. I don't agree with that statement. The fundamentals of the economy are sound.

And I'm not interested in payng for someone else's excess and foolishness.

[ieoeja]

30. And look what came out today.

Rents are forecasted to rise 4% next year due to the foreclosure crisis.

These things tend to cascade.

[penguin7]

4. Also the lenders that acted irresponsibly are going bankrupt

I don't see a whole lot of money from this source.

[Tellurian]

6. It's all empty rhetoric..coming from Obama..

I'm sure his proposal keeps the Repukes smiling because his proposal is as empty as the suit he's standing in..

The lenders are owned by Investment Companys.. Litton Loans is owned by Chase, New Century is owned by Century 21...Merril Lynch, Goldman Sachs..JPMorgan..they all own sub-prime loan companys. The sub-prime lenders they don't own are going bankrupt or bought by Investment Groups. The culprits are the government regulators and the Fed. They knew this was coming and did nothing to stop it.

This is the Katrina of the economy.

[rucky]

21. "The culprits are the government regulators and the Fed."

That seems to be what the empty suit is saying as well.

[BeyondGeography]

10. First the government doesn't regulate, then they bail out the scammers

with injections of liquidity into the market and interest rate cuts that are only designed to calm Wall Street. There is absolutely no discipline in the system the way it is presently run. Obama's line about government becoming public advocate rather than industry advocate is exactly right, and he'll be pilloried as a socialist for it by the wingnuts, who are destructive at the end of the day. When government only acts to protect ill-gotten gains, it only lays the seeds for the next boom-bust cycle.

Time to stop playing footsie with the speculators .

[ellacott]

14. Also predatory lenders bear a lot of responsibility

Unfortunately Obama is going to be pilloried regardless of what he says(as is obvious by some in this thread). It's pretty disgusting.

There is predatory lending legislation that being reintroduced by my congressperson. It was killed a few years a go and now it's become apparent that they are huge contributors to this crisis.

[Milo_Bloom]

16. Everyone needs to STOP assigning blame on this.

And face reality. It took a bunch of different idiots to create this mess. (This is cut and paste from another post, but it illustrates the point very well)

Its works this way.

Idiot Lender offered Idiot Consumer 5 year interest only $300,000 1st and a $60,000 2nd on their $360,000 house (which was overvalued to begin with). The Idiot Consumer paid $60,000 in interest for 5 years and during that time the "bubble burst" and the house is now only worth 275,000 and the Idiot Consumer never thought the payments were REALLY going to go up and listened to the Idiot Lender, who also believe that the value of homes was going to keep increasing forever. The Idiot Lenders don't want the house back, because they spent $360,000 on it, got $60,000 back and now will only get an asset worth $275,000... a 25K loss over 5 years ain't good. This is why mortgage companies are going under nearly everyday and the entire industry is crunching, as major lenders are shutting down all their second mortgage and equity programs (Ditech now only offers 80% value on stated income) and Citibank shut down their entire stated income program.


These "predatory lenders" (wrong term, but lets go with it) didn't WANT the house back... what they wanted to do was get the person to refinance in 5 years, effectively creating a 35 year loan. However, the "bubble bursting" ended that possibility and hurt all parties involved.

Everyone is to blame here, not just the lenders or just the consumers.

[ellacott]

18. I agree and I was trying to expand the conversation, others chose to put others down

for not agreeing with their point.

[DangerDave921]

20. Buyers

Good post. I don't know why everyone is so afraid of criticizing greedy home-owners who bought houses they couldn't afford, with a risky mortgage on top of it. It's just plain silly to go with an interest-only loan, or an adjustable, unless you know you have the means to cover it when things go south. And a lot of people (believing the lenders I'm sure) decided to borrow more than they could afford to buy more house than they could afford, and are now stuck in a really tough spot. And now they will ask the taxpayers (including responsible buyers like me) to cover for their risky mistakes. Helping out the needy is one thing; helping out the stupid risk-takers is another matter.

[rucky]

22. Not idiots... well, okay, idiots.

but it wasn't an oversight. it was a wink-wink, nudge-nudge "we'll let you pretend you can afford this, then we'll pretend that your paper is worth something" deal between borrowers, lenders, home-flippers, wholesalers, investors, rating agencies and regulators.

Nice ponzi scheme, eh?

[Milo_Bloom]

24. It wasn't meant to be a scheme...

Think about it.

We had the housing market gaining 10-20% per year. Lets work with the numbers I started with.

300,000 first and 60,000 second on a 360,000 home, 5/1 year interest only loan.

Over the first 5 years, the homeowners pay a total of $60,000, which is only the interest. However, the thought was that even at a 10% growth that house worth 360,000 in year 1, would be worth $540,000 at the end of the loan period. So now they would owe 360,000 on a 540,000 property. Thus, it would be very easy to refinance that loan, as you only need a 66% loan. So lets say you refinance on a 80% basis, you would end up a fixed rate 432,000 loan with 72,000 in cash in your pocket.

If everything went according to PLAN it was a great way to get sub-prime consumers into homes.

However, people who stop and thought knew that the housing market was going to stagnate once the fed was forced to reload the interest rate gun. Thus, that 360,000 home wasn't worth 540,000 at the end of 5 years of interest rate hikes... it was worth LESS.

There was no nudge nudge wink wink, no nefarious scheme to cheat people out of homes.

It was a case of NO ONE considering consequences.

[illinoisprogressive]

28. 1. Tellurian , I would look at your candidate before calling anyone else empty.

your candidate is sorely lacking in any real policies or positions. many are still waiting to find out where she actually stands on anything rather than double speak and ducking answering questions.

2. I saw a report a few months ago from someone in the budget office who is warning candidates on both sides and all the politicians and people here that we are heading very fast into an economic disaster very soon.

[Tellurian]

29. You really should read this site, it's very informative ...

The Hillary Clinton Campaign has a Top Ten List of Reasons To Vote For Hillary:

10. To build a more tolerant, united America, working to achieve big goals again, with a president who’s ready for change and ready to lead from day one.

9. To restore America’s standing in the world and repair our alliances.

8. To combat terrorism, strengthen our military, and care for our veterans.

7. To restore competence and end cronyism in government, with a president who cares about and works for Americans who have been invisible to this administration.

6. To return to fiscal responsibility, move back toward a balanced budget, and safeguard Social Security and Medicare for future generations.

5. To promote 21st century scientific innovation, including stem cell research.

4. To provide world-class education, from universal pre-kindergarten to affordable college for all.

3. To create good jobs for middle-class Americans with the right investments in modern infrastructure and in new clean, energy-efficient technologies that reduce our dependence on foreign oil and combat global warming.

2. To achieve universal, affordable healthcare.

1. To end the war in Iraq.

http://www.hillaryis44.org/


*******************************************************

2. Yes you posted in this thread last June when it was predicted:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x3319476

We're heading for a Depression.. Because 143 lenders have crashed here: http://ml-implode.com/

The lenders sell their paper(loans)on Wall St to the big brokerage houses.. Merrill Lynch, Goldman Sachs, JP Morgan, etc.
The paper is then inserted into Investment portfolios as "tranches" where it is supposed to make money for the investor and increase the overall value of the investment portfolio.

What will happen next is you will see investment portfolios start to flatten out such as Bear/Stern Hedge Funds going belly up because Bush/Republicans conveniently left out any regulation whatsoever on Hedge Funds.

Yet, the government only reduced the discount rate between banks (money banks lend to each other) it has no effect on the mortgage industry except it provides the liquidity necessary for the lender to fund loans. Interest rates are not the problem but you have to remember who owns the sub-prime lenders...