McCain, the mortgage crisis, and voters with economic concerns
Dante Chinni
Posted: 03.28.2008 / 7:56 AM PDT
This week Sen. John McCain drew a sharp distinction between himself and the two remaining Democratic presidential candidates. He warned of the federal government doing too much in America’s mortgage crisis and said a McCain administration would adopt a more hands-off approach.
“[I]t is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers,” Senator McCain told a group of Hispanic businessmen in Santa Ana, Calif., Tuesday.
It’s not exactly breaking news when a Republican opposes government involvement, of course. But considering the amount of economic pain some voters are feeling, the Arizona senator’s comments do represent something of a line in the sand in the campaign.
McCain is distinguishing himself on what is now the No. 1 issue to voters: the economy. In contrast, both Sens. Barack Obama and Hillary Rodham Clinton have proposed big plans for handling the mortgage crunch.
People in two Patchwork community types, “Service Worker Centers” and “Emptying Nests,” are likely to pay special attention to the candidates’ economic proposals because in these areas many live on below-average or fixed incomes.
On the whole, those we contacted in Lincoln City, Ore., (Service Worker Centers) and Clermont, Fla., (Emptying Nests) agreed with McCain’s diagnosis of the problem, but did not agree as much with his prescription.
“[I] agree with him that banks, lenders and mortgage holders were to blame for much of the problem,” Lincoln City Mayor Lori Hollingsworth wrote in an e-mail. “I don’t agree that real people need to suffer because of the mistakes and greed of those intuitions.”
In Lincoln City, where out-of-towners have been coming to build vacation homes, the housing crash isn’t all bad news, says Patchwork blogger Barton Howe. “Yes, there is concern that the long-term erosion of home sales out here could be bad,” he says, “but I think there’s … a sense that maybe this is a sort of market-correction that might bring some sanity back to our neighborhoods.”
Others talked about the need for more regulation.
In Clermont, however, where the crunch has hit harder, the feelings run deeper.
“The housing/bank crisis is certainly the focal point of conversations around here. Virtually no one has been left untouched; the ripple effect keeps widening,” wrote Kendal Anderson, pastor at Clermont’s The Crossing Church. “[M]ost people would agree with him [McCain] that banks, lenders and some home-buyers over-reached themselves and got a bit greedy, but we still need some kind of help as soon as possible, as many who had no connection with creating the crisis are now also being significantly impacted financially by the slowdown.”
And the hard times mean Clermont’s voters are seeing the crisis differently.
“Many might have the lurking sense that a major disaster is looming regardless of whose fault it is,” wrote a correspondent in the city’s business community. “And bailouts may be just what is needed to avoid a spreading and deeper disaster in the financial markets and general economy related to the housing bubble burst.”
That doesn’t mean these community types will vote only on the economy. And the economic situation and/or McCain’s positions could change in the meantime. But the senator’s more limited approach may not help him with the 34 million people who live in these kinds of communities.
March 28th, 2008 at 4:30 pm PDT
Well, if the government will limit its dips into my pocket, I can handle my own affairs. However, if they do what it appears they’re panting to do, then my family would wind up in a fix, too. One quarter of my mortgage payment is property tax. How’s that?
There’s a big difference between honest homeowners who have experienced job loss, illness, or other difficulties and those greedy characters who have got themselves into McMansions they can’t afford. As far as I can see, those people put nothing down, paid a bit into a negatively amortized loan, and got to live pretty high till the loans reset. For those, I have no sympathy. For the lenders who put these loans together, I recommend jail, not a bail-out.
It’s called living within your means, and it works. For the lenders, it’s called honest dealing, and it works. It’s not trendy, heaven knows, but it’s a more relaxing way to live.
Am I angry about this housing situation? Oh, you bet I am. My home is worth about 70 percent of what I paid for it less than two years ago. We are stuck here till the housing market rebound, which it won’t do till after if finds the bottom. Big government handouts will do nothing but impoverish taxpayers without teaching anybody anything except that they can get away with everything and Uncle Sugar with make it all better.
March 28th, 2008 at 4:53 pm PDT
This reminds me of the deregulation of savings and loans under the Reagan administration. A lot of people got hurt there too. When will we learn that it is sensible to regulate financial companies because their irresponsibilities have great reprocutions in society at large. They have benefitted by this country’s history of aiding big business; they can stand a little regulation and oversight. Someone has to be there to tell mortgage companies “No, you can’t do that”. The temptation is too great and they are confident that when things go wrong the government will bail them out. Notice that Bush made it difficult for individuals to file for bankruptcy, but made it easier for corporation to do so. You get what you voted for.
March 28th, 2008 at 6:39 pm PDT
I think we need to avoid a self-reinforcing downward cycle in the housing/mortgage/financial sector. Sen. McCain’s approach sounds very Hooverish. That’s Herbert, not J.Edgar.
March 29th, 2008 at 12:00 am PDT
Hmmm….My husband and myself make a six-figure income. We bought a nice house in a working class neighborhood, drive old cars and don’t have any credit card debt. In short, we did everything right. I don’t have any animosity towards the people who’ve made financial mistakes. It was extraordinarily easy to do so, especially with so many people living on the edge right now and all those offers that sound so good. I think it would be very healing for the country to come to the aid of mortgate holders that are on the brink. I think it would help alot since consumers truly are the drivers of our economy, more so than companies like Bear Sterns.
March 29th, 2008 at 6:37 am PDT
“I agree with him that banks, lenders and mortgage holders were to blame for much of the problem,..”. Hogwash.
The demand for sub prime mortgages came from the derivatives market, the supply from the ratings agencies that were able to make AAA paper out of junk mortgages. This ratings fraud was understandable to only those making large profits on the process. Follow the money, find the fraud.
March 29th, 2008 at 8:22 am PDT
Mohijho has a good point. There are already laws against theft by fraud, and those should be invoked. I see there are calls for big regulation, as there are always calls for jarring changes when things go wrong. Not saying the new regs would be wrong–just haven’t worked that out yet. I never “got” the derivatives market. It looked like air to me. Not air. A house of cards? Yes, that’s the image.
But you do have to get back to the lenders who gave mortgages to people with no job, no credit, bad credit, and so on. They had to know this would not work out for the good. No one has suggested that the mortgage brokers (or real estate agents, who used to have to verify that a buyer had a mortgage agreement in place) give back the hefty commissions they got from these loans.
One thing that worries me about the proposed regs is that the distinction between thrift institutions and banks will be wiped out. I do not want anybody messing with my credit union. My credit union does not make stupid loans because the money loaned comes from us, the depositors, not from some sheik or the Chinese government.
March 29th, 2008 at 8:24 am PDT
And honestly, don’t you wonder how much of a hand George Soros might have had in this? Isn’t this–destabilizing a country by destabilizing its currency–right up his alley? The timing is just too delicious.
March 30th, 2008 at 12:55 am PDT
It is time people start living within their means. If government truly wants to teach people how to manage their money they should lead by example and NOT spend money that is not in the system. The sacrifice of our country’s future by tax, borrow and spend government needs to stop now. This self inflicted “crisis” would be a good place to start.
March 30th, 2008 at 1:00 am PDT
Hah if americans could handle their own affairs we wouldn’t be in this mess, Americans have no savings, and huge debts, they have been living beyond their means for years, well guess what the bill is coming due
March 30th, 2008 at 1:04 am PDT
America is going down a path where the result is clear, another large depression, Publicly held debt is rising, government trusts like Medicare and Social security are going to be running out of money soon, forcing even higher deficits, tax revenues are not enough to cover our debts and households are in debt thanks to overspending and living on credit
March 30th, 2008 at 7:48 am PDT
The subprime phase of the mortgage crisis is almost over, but the snowball has only begun to roll. The next phase of the mortgage crisis begins now and accelerates in 2009 when a large number of prime ARMs and alt-A ARMs have rate resets. That phase could be even worse since the number of those loans is more than four times the number of subprime ARMs that existed in 2006. A large portion of those ARMs cannot be refinanced since property values are down too much and mortgage qualifications have dramatically stiffened, and there will be job losses in the upcoming recession. If short term interest rate indices (mainly the one year LIBOR rate, now 2.6%) are higher than 3% in 2009 there will be a major recession because borrowers forced to keep their ARMs will have big rate increases and must cut back on non-mortgage spending. (With indices at 3%, rates will reset from their 4-5% range to 5.25% to 5.75% since margins are 2.25-2.75%). Index rates higher than 3% will make matters worse proportionately. The recernt collapse of alt-A mortgage securities values that took down Bear Stearns tells us that the outcome will not be favorable.
The government response to the subprime disaster was too slow and too meager to stop the resets and loan defaults. The recent big drop in short term interest rates is too late for the subprime ARMs which are limited to 2% downward adjustment every six months whereas the loan rates have already reset into a range of 9% to 13%, up from from the 4.5% to 7% teaser rates. To avoid an even worse disaster stemming from prime ARMs we must hope that short rates stay very low for the next few years and property values recover a little so most of the prime ARMs can be refinanced or carried. In any case, with adjusted prime ARMs expect either a recession or an economic disaster, depending on rates. As with the subprime crisis government will not react quickly enough if the prime ARMs start to default in large numbers.
A little publicized fact is that the confidence of investors in mortgage securities collapsed soon after the “Interagency Group” consisting of the Federal Reserve Board and all the federal bank regulators issued new mortgage “guidance” to lenders in December 2006 that says that ARMs should be qualified at the fully-indexed rate with the fully-amortizing payment regardless of the note rate or interest-only features. They also discouraged all types of “low doc” loan processing such as “stated income,” “no ratio” and “no doc.”. Lenders have adopted those policies and now many fewer borrowers qualify for ARMs, so they’ll need to take the higher fixed rates, if they qualify, and many fewer qualify for any rate (about 25% of all existing mortgages were issued with low doc processing). We have an economic crisis inadvertently engineered by overly creative Wall Street mortgage designers combined with a wild interest rate cycle and sudden restrictions on lending. Don’t blame the middlemen brokers; they just sold the loans the borrowers and lenders wanted.
As we have already seen, the Fed, bank regulators and Congress will use trillions of your tax money to save the investment bankers and investors in the name of economic stability, but they’ll continue to let the individual citizens go down the tubes in the name of “individual responsibility” and they’ll pass even more restrictive mortgage regulation to seal the deal in the name of “consumer protection” (sorry, too late).
March 31st, 2008 at 5:13 am PDT
Instead of bailouts we need to prosecute the people that committed the fraud and lock them up. Rewarding bad behavior through bailouts and punishing responsible behavior will only ensure more bad behavior.
By the way, McCain’s major campaign contributors are financial institutions. “Read my lips, no bailout”….been there done that.
March 31st, 2008 at 7:15 am PDT
Basic intelligence should apply here. A person only making 48,000 per year should not buy a house that costs 800,000, and these are the people who are in trouble. They were foolish to realize that they were living way beyond their means.
If I go to Atlantic City, or Las Vegas, will the government bail me out too, since I gambled and lost?
Too many Americans have become used to not saving, and to buying what they can’t afford on credit - an unthinkable thing to many Europeans. Maybe this is a way to slap some sense into us as a whole. As an example, I am a successful surgeon, and seriously thought about buying an iPhone because of the cost. I also see people at work who only make 30,000 per year who also have them. If you don’t see the disconnect here, then maybe you are one of the people who are, or will get into financial trouble.
March 31st, 2008 at 8:45 am PDT
Whom are we “bailing out”? People who don’t actually OWN the homes they’re living in and have NO EQUITY in those homes? We’re bailing them out? How? By convincing him to stay in the home he can’t afford and will never own? With property values continuing to fall, it does not benefit a borrower to help keep him in a house he can’t afford and will never own anyway. He could rent a comparable dwelling for one third the price and get back on his feet. This so called bailout is a sneaky way for the governemt to get taxpayers to pay for investors mistakes. Wake up, America!
March 31st, 2008 at 9:51 am PDT
A bailout is truly disgusting. These people get on television and TELL US what they are going to do. “We’re getting ready to regulate the investment banks and hedge funds because we need to lend them lots of your money they may not be able to pay back and so more regulation is only fair, right?”
What a scam! The fraud of it is that nobody said they could lend these non-member bank players any money at all. The Federal Reserve just gave away $29 billion of our tax money to guarantee the bad debt of Bear Sterns. JP Morgan gets the good stuff for pennies and the Fed takes all the risks backed by our tax money. Just to give you an idea, the ENTIRE federal budget for education was $56 billion for FY 2007. JP Morgan and Bear Sterns - two banks filled with extremely rich people got a one time bailout that equals half of the national budget for education covering millions and millions of children and adults.
And this isn’t over. It’s just starting. They are going to tell us on television that “the American public demands that we do something about this.” Or Hillary Clinton saying, “Are you telling me that we are going to look at a family losing their home and tell them there’s nothing we can do about this?”
The joke is that these people are all in the pockets of the big banks and investment banks. Any bailout isn’t going to help any homeowner. A bailout is going to go straight into the pockets of the bankers. All the bailout proposals keep talking about buying up EXISTING bad mortgages and refinancing them on “more affordable terms.” That’s a lie. The point of buying up these bad mortgages isn’t to help the borrowers. The borrowers are walking away and defaulting. They aren’t going to pay anyway. The purpose of buying those mortgages is to help the banks because they are losing HUGE amounts of money and also because a lot of people holding those bad mortgages all over the world are thinking about suing for fraud because these investment banks and bond rating agencies that bundled this trash were lied to.
Tell me, when the US government spends hundreds of billions of dollars buying up bad mortgages (maybe a trillion), and the banks are relieved of this “burden”, do you think that the banks will use all of this freed up lending capacity to make low doc, low down payment mortgage loans? Ridiculous. They will wait ten or fifteen years before trying that scam again. It’s just like the Fed reducing the federal funds rate. It’s not to help American borrowers, it’s to help the banks. The Fed cuts the overnight rate by 3% and the banks raise HELOC and credit card rates, or at best drop them 0.5%. It’s the spread that’s helping the banks. So you have rampant inflation (I just saw a six pack of ordinary beer at the supermarket for $9.50) at the same time as tight credit. The bailout won’t be any different… except…
Except that you can’t introduce hundreds of billions of dollars, or a trillion dollars into the system without HYPERINFLATION because that money has to come from somewhere. All of the bad debts are money that was used when your neighbors of modest income showed up with two new Escalades, a Rolex and “grillz.” Where do you think that money came from? The thing that stops it from being inflationary is that they are supposed to have to pay that money back. If you print new money out of thin air to paper over those bad debts, the price of everything will rise very rapidly.
These evil people are toying with things that could collapse the dollar, induce wild price inflation, cause a real uncontrollable spike in interest rates and also subject generations of Americans to huge debts that they and their children and grand children must pay on solely to benefit banks and bond investors.
This is pure evil. If the big bailout comes, the most promising thing any American can do is seek citizenship in a country that’s more responsibly run like Canada or Switzerland. At least in those countries when they spend a lot of the public money, it is on health care and infrastructure and making sure there aren’t millions of people starving and homeless in their streets (like there are here). The idea of such a large sum of public money going to the financial system where those folks at Bear Sterns got to keep their $30 million bonuses they were paid in December/January — it’s all just so disgusting that it makes the ordinary sort of corruption we’ve endured in this country for decades seems like “the good old days.”
March 31st, 2008 at 12:53 pm PDT
Just a minor clarification. Dan credits President Reagan with deregulating the Savings and Loan industry. It was President Carter who deregulated S&Ls and increased deposit insurance from $40K to $100K.
April 3rd, 2008 at 8:48 pm PDT
“McCain is distinguishing himself on what is now the No. 1 issue to voters: the economy. In contrast, both Sens. Barack Obama and Hillary Rodham Clinton have proposed big plans for handling the mortgage crunch.”
Glad to know they have big plans.
Nice article.
April 14th, 2008 at 10:21 am PDT
Clearly, this is a problem on both sides. It’s not fair for taxpayers to have to pay for those in trouble. On the other hand, those in trouble didn’t know what they were getting themselves into. Can someone really be responsible for getting into situations they didn’t know had so much danger involved.
Neither side of this situation is in the wrong.
And their both right.
We need to approach this situation from a new angle. And solve this problem without choosing sides. Therefore, I propose a change in education. More economics courses should be available across the country with a greater emphasis in fiscal responsibility. High schools and colleges have the ability to solve this problem by helping the uninformed be informed. This will ensure that if people do become in debt, it’s not because they were ignorant.
GOVERNMENT SHOULD LET THE MARKET FIX ITS OWN PROBLEM BUT SET UP A FUTURE FOR SUCCESS. Let’s face it: financial responsibility is one of the key surviving tools in american society. You literally can’t survive without some knowledge of finance and how to work your money.
PEACE
April 20th, 2008 at 12:40 pm PDT
I reject the notion that the people in the sub-prime ARM crisis are there out of ignorance. They are those whose ability or willingness to pay their debts had already been proven to be non-existent. The lenders knew the risks. The borrowers knew the risks. They already knew that when they failed to make their car payments a repo guy came and took away their ride. They also knew, from experience or from their friends, that repossessing a house and evicting the “homeowners” takes months or a year–time during which no payments of any kind need be paid.
As for making it harder to declare bankruptcy, I’m all for it. My mother sold her house after Dad passed on. She carried the note, as she and Dad had done for every house they had sold in the past. In the past, things went smoothly. But this time, EVERY MONTH, the “homeowner” filed for–and evidently was granted–bankruptcy. Eventually the house was sold on the courthouse steps and Mom got some money, but not the honest value of the house. And it put Mom through three years of unnecessary poverty and stress.
Until Americans re-learn the difference between needs and wants, this is the kind of country we are: irresponsible, greedy, dishonest.
Maybe a good, solid meltdown will help us relearn the lessons our grandparents and great-grandparents learned in the 1930s.
Hoover’s big mistake was not that he did nothing. His big mistake was in raising taxes, which only caused the economy to shrink further.