Back to Work - Bill Clinton [48]
The rest of this chapter presents a set of proposals to increase bank lending and corporate investment, to create more jobs that pay well, and to make sure we have enough people trained to fill them. Several of these proposals are included in the president’s American Jobs Act, which contains other good ideas as well. Right now, the United States needs all the good ideas we can get. If you disagree with any of these proposals, or if you’ve got a better idea, I invite you to share your ideas on social media platforms using the hashtag #backtowork.
NOW, BACK TO BUSINESS. What can we do to unlock the money?
1. End the mortgage mess as quickly as possible. Even though banks have off-loaded most of their mortgages to Fannie Mae and Freddie Mac, they still hold some nonperforming ones, under $200 billion worth, for which they have to keep cash in reserve. They’ve still got plenty of unencumbered cash reserves, but they remain reluctant to lend, because the continuing mortgage failures are glutting the market with empty houses, keeping the housing market depressed, and holding down the entire economy. Seventy-five percent of household debt, still high at more than 110 percent of disposable income, is mortgage debt, with more than 25 percent of American homes now worth less than their mortgages.
The debt overhang of financial crashes is the main reason they normally take five years or more to get over, rather than the one-year or shorter recovery period for the typical recession. Large lingering debt is a big reason the stimulus program kept us from falling into a full depression but couldn’t lift us into a full recovery.
A rapid, comprehensive effort to resolve the ongoing mortgage crisis would have four benefits. It would clean up bank balance sheets, freeing them up to lend; reduce the severe economic stress on millions of consumers, allowing more of their incomes to be spent for normal consumption; turn empty houses now depressing the market into properly maintained rental properties; and create a lot of jobs in preparing already foreclosed-on houses to be rented out.
To do that, we need a program that is simple and more accessible than the administration’s current modification program, HAMP. It has helped a lot of people, almost one million, but not enough. The initiative to encourage mortgage write-downs to the value of the home has helped far fewer. Ideally, the program would have these components:
a) Every delinquent homeowner whose mortgage is worth more than the house should have the mortgage principal written down or its term extended at a low interest rate, if doing so would enable the homeowner to make the smaller payments. If over the life of the mortgage or at an earlier sale the value of the home goes up again and it is sold at a profit, the owner should share the profit with the lender. Ocwen Loan Servicing, based in Atlanta, is already offering shared appreciation plans.
b) The borrowers who can’t make even the reduced payments should be given the option of swapping their deed for a multiyear lease, with modest rental payments sufficient to cover taxes, insurance, and maintenance, and the option to buy the home back at market value when the lease expires, or earlier, if the borrower’s financial circumstances permit. Congress has been debating this option since 2008. It should be done now. And it won’t add to the budget deficit.
Harvard University economist Kenneth Rogoff has suggested a variation on this approach. Rather than have the homeowner become a renter, Rogoff recommends letting the bank convert a portion of the mortgage into an equity investment, thus reducing the homeowner’s monthly payments to an affordable level without reducing the obligation of the homeowner to pay off the debt by reconverting the bank’s ownership interest back into mortgage payments when circumstances improve. As governor of Arkansas, I proposed and the Arkansas legislature passed a mechanism similar to Rogoff’s for state-chartered bank loans to troubled farmers. The