Program just plugs a hole in the dam

Andrew Jakabovics is associate director for the Economic Mobility Program at the Center for American Progress in Washington, D.C.

Question: You have criticized the administration’s plan. What’s wrong with it?

Andrew Jakabovics: This plan is going to target a small tip of the sub-prime iceberg.

Basically, if you qualify for these narrow criteria, the loan servicers have agreed to freeze the interest rate on your adjustable-rate mortgage for up to five years.

So you end up with a very small pool of folks who are going to be helped by this program. When folks don’t meet these absurdly narrow criteria, there’s nowhere for them to go.

These are people who want to do the right thing, but they look at their options and say, “Well, what am I supposed to do? I can’t refinance because my home is worth less than my mortgage, I can’t get the rate freeze because I don’t meet the criteria, and I can’t sell because there are 11 months of unsold homes on the market.”

Only a small portion of borrowers is going to be helped by the program. This problem as a whole is going to affect more than 10 times that amount. I think a lot of people out there, having no good alternatives, are just waiting for the knock on the door to be foreclosed upon.

Question: Why do you think Bush offered this fix?

Answer: The Bush administration views the problem as a coordination problem. It sees that borrowers are struggling and thinks they should be talking to their lenders. Their philosophy is to let the market solve this stuff itself. But this is a cosmetic fix for a much more significant problem.

Question: What would you do instead?

Answer: I think that the government should create an agency to buy out existing mortgages and issue new, fixed-rate loans to borrowers. Lenders would have to take some of the hit -- because we would pay them the current appraised value of the homes, rather than the full value of the mortgage -- but we would repay them with income from the new mortgages through guaranteed corporate bonds.

It would involve government money to cover start-up costs, but that would be paid back in short order with the mortgage payments that are made every month.

There are still going to be folks who will end up as renters when all of this is done, but we’re filling in the gap after the Bush program wears off -- the people who won’t be able to refinance in the private sector. So we’re definitely targeting, to some extent, a more credit-worthy portion of the market.

Question: What you’re proposing would help people who rashly bought homes they couldn’t afford. Wouldn’t that be unfair to people who didn’t buy because they knew they couldn’t afford an adjustable-rate mortgage?

Answer: By stabilizing communities, you’re not just helping the individual homeowners who are having trouble making their mortgage payments, you’re protecting taxpayers at large by eliminating the very, very high social costs that come with widespread foreclosures.

I understand the sentiment of folks saying, “I could have gotten it too and I didn’t, and I don’t understand why I’m not being helped by any of this or why we’re helping these people,” but the truth is, you’re helping everybody by creating greater stability. Since there are large social costs to foreclosure, not putting that undue burden on the taxpayers of the community is ultimately to everyone’s benefit.

Question: Is Bush’s plan enough to stabilize the housing market and prevent it from hurting the economy as a whole?

Answer: It’s very limited in scope -- we’re talking about actual financial aid to less than 10% of the people who are going to be in trouble -- that’s about 150,000 households. That’s not enough to stop any sort of slide in the market. You still haven’t dealt with the fact that there are a lot of folks out there who still won’t be able to refinance or make mortgage payments and can’t sell, which will drive down prices. So the spillover effects are still likely to be large. We’ve plugged one of the holes, but when there’s water coming over the levees it’s unlikely to provide a lot of stability, either to the financial sectors or to homeowners in these communities.

Question: Some advocates of the program argue that legislation would take too long to implement.

Answer: That’s shortsighted. The argument that anything Congress does takes forever need not be true.

If the administration and its allies want to stonewall some of these things, yes, it could take a long time. But there’s already legislation out there to deal with the things we’ve talked about.

-- Sam Byker