Large parts of the country are “underwater”: Many Americans cannot pay their mortgages, must give up their houses — and are berated by conservatives because of it. But Obama can’t permit himself to be intimidated. The homeowners need a debt cut; otherwise, the economy will stall.
It was a pivotal point in the genesis of the rightist tea party movement. In February 2009 TV moderator Rick Santelli got excited on the trading floor of the Chicago Mercantile Exchange. “Do we really want to subsidize the losers’ mortgages?” he asked angrily. Santelli’s tirade became a YouTube hit. He spoke the mind of many conservatives who perceived Obama’s tentative plans to shore up the real estate market as a socialist plot against the American way of life.
Santelli’s words echo even today. The intimidated government still doesn’t find the courage to address the real estate crisis decisively. Obama did announce reforms on Monday [Oct. 24], but they, too, fall short. The country needs a rescue cruiser to maneuver through the sea of debt. It is only getting a rubber dinghy.
Large parts of the U.S. are “underwater.” That means that a house is worth less than the loan with which it is encumbered. One-fourth of all U.S. homeowners are overextended in this manner; in the one-time boom states of Florida, Arizona and Nevada, it is 50 percent or more. Many give up and stop making installment payments. The banks order eviction, housing prices fall further, and even more Americans are pushed underwater.
It is a vicious cycle, and the entire economy is suffering because of it. The burden of debt is slowing the consumption of the middle class, on which the U.S. economy depends. The real estate mess is America’s most important impediment to growth.
The answer of the government is: HARP — that is, the Home Affordable Refinance Program. The initiative should give homeowners the possibility of exchanging their old mortgage for a new one with lower interest — and even if the house is underwater. However, HARP is a failure. The government’s goal was to help 4 million to 5 million debtors. Yet, not even 1 million Americans used the program, and the real estate market is still aground. Now Obama promises to relax the criteria for participation in HARP. In the process a radical approach would be necessary: a debt cut to accommodate the price decline of real estate. Because the homeowners are America’s Greeks.
The fear that an abatement for the middle class would trigger a new wave of bank failures is exaggerated. The government real estate financiers Fannie Mae and Freddie Mac guarantee more than half of all U.S. mortgages. They would have to pick up the failures. That would burden the federal budget, but not at the same level, because the government already has to take responsibility for the losses of both institutes by evictions, which are being delayed by policies up to now.
Politically, a debt cut would be easy to force through. Obama could direct Fannie and Freddie to do it without a giving Congress a say. The impulse for growth would be enormous: Due to lower monthly installments, millions of families would have more money available for consumption. At the same time, they would become more mobile because they could sell their homes without a loss and accept jobs in other cities or states.
Yes, critics such as Santelli would bluster with rage. However, it is only shocking that the government is letting itself be intimidated by the blusterers on the far right. Three years after the bank bailout it is time for the country to help the citizens. America must contain the flood of debt that is drowning growth.