By Steven Pearlstein
Friday, December 7, 2007
I don't know about you, but I got a real big kick yesterday listening to Wall Street sharpies and their free-market allies warning about how the mortgage plan brokered by the Bush Treasury would undermine confidence in U.S. financial markets.
Maybe they should have thought of that before they fought tooth-and-nail in recent years against rules designed to prevent predatory lending, or impose a modicum of oversight over hedge funds and derivatives markets, or hold investment banks legally liable for shoddy underwriting practices.
If Wall Street wants to find the culprit who undermined confidence in U.S. financial markets, all it has to do is look in the mirror.
The irony, of course, is that the biggest beneficiaries of the president's plan aren't the homeowners -- it's the investors who've got the most money at stake here. Why else do you think Bush or the Treasury or the Federal Reserve are getting involved? These are not institutions that have a long history of putting the interests of working class families ahead of those of financial markets.
No, the reason they have gotten involved is because it just might take the political wind out of the sails of the Democrats who want to do more. Perhaps more importantly, they are desperate to forestall a wider credit-market meltdown that would hurt everyone -- but particularly Wall Street banks and investors.
Another irony here has to do with private securities litigation -- those "junk" lawsuits filed on behalf of shareholders or bondholders that, according to Wall Street and its corporate allies, have just about ruined American capitalism and undermined the supremacy of U.S. capital markets. But no sooner was the president finished with his statement than some of these same critics were out there threatening to file one of those "junk" lawsuits against any trustee or mortgage service company that follows the new voluntary guidance.
Can you spell hypocrisy?
Another criticism of the president's plan is that it is unfair to all those other decent, hard-working Americans who took care not to get in over their heads and won't get any relief from their mortgage obligations. This sudden interest in fairness from people who staunchly defend offshore tax shelters and lower tax rates for hedge fund managers rings a bit hollow, don't you think? And in the hierarchy of injustices in the world, giving a bit of a break to people about to lose their homes would hardly be near the top.
Moreover, even if portions of this program are unfair, that doesn't mean it is bad public policy -- particularly if the alternative is to allow a wave of mortgage foreclosures that degrade entire neighborhoods and cause housing prices to plummet.
It may be a measure of even-handedness that the Bush program was equally criticized for doing too little as too much.
On this issue, Democratic politicians and consumer advocates might have a bit more credibility if they stopped talking as if every homeowner who can't keep up with the mortgage payments was the unwitting victim of an unscrupulous and predatory lender. Some, yes, but hardly all.
The plan is right in one respect: There's little to be accomplished by keeping people in their homes if they can't afford the payments under a fixed-rate mortgage, or under an adjustable loan that hasn't reset. It will be up to mortgage services to decide, on a case by case basis, if the bondholders are better off reducing monthly payments or moving to foreclosure. Short of an outright government bailout -- a bad idea -- it's better to get it over with sooner than later.
At the same time, people shouldn't kid themselves about the scope or impact of the rescue plan. Fewer than half a million householders -- the numbers are still rather vague -- are likely to qualify for the hiatus on the interest rate resets. And even for them, the problem will resurface in five years if their income or home values haven't risen to the point where they can refinance.
While yesterday's agreement was, strictly speaking, a private-sector affair, there are some things the government needs to do.
Later this month, the Federal Reserve is expected to announce new regulations to prevent a recurrence of the subprime fiasco -- rules that could and should have been put in place a decade ago. We'll know whether the Fed has learned its lesson if the package includes a ban on prepayment penalties, a requirement of income documentation and an obligation to insure that income is sufficient to handle payments after the teaser rates expire.
Missing in action in all of this is the U.S. Senate, where the Banking Committee has done nothing about three mortgage-related bills skillfully negotiated with the White House and shepherded through the House with bipartisan support by Rep. Barney Frank, a Massachusetts Democrat and chairman of the Financial Services Committee. These involve stepped up regulation of Fannie Mae and Freddie Mac, reform of the Federal Housing Administration and tighter regulation of the mortgage market.
It's hard to know exactly who's to blame for the Senate's inattention to what is becoming a full-blown economic crisis.
Certainly part of the blame lies with Christopher J. Dodd, a Democrat from Connecticut and chairman of the Banking Committee, who thinks his presidential candidacy is better served by doing talk radio in Iowa than actually getting something done in Washington.
We also can thank obstructionist Republican senators like Richard C. Shelby (Ala.), Elizabeth Dole (N.C.) and Tom Coburn (Okla.) who are using the chamber's quaint parliamentary procedures to prevent action.
You'd think, however, that with his own state near the top of the foreclosure list, Nevada's Harry M. Reid, a Democrat, might feel enough urgency to keep the Senate in session night and day until something is done about the mortgage crisis. Instead, Reid seems determined not to miss any opportunity to reaffirm how truly ineffective he is as Senate majority leader.
Steven Pearlstein can be reached firstname.lastname@example.org.