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Sep 03 2011

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What the President Needs to Say

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Can POTUS Pull a Game Changer?

You can divine presidential preference from repetition.

By this metric, President Obama loves addresses before joint sessions of Congress.

Not counting the constitutionally-required “State of the Union” address (which has been delivered in person in the modern age), President Obama has gone before Congress twice so far.  Once, right after his inauguration, to lay out the Stimulus plan, and again in September 2009 to re-explain the need for Obamacare to the American people.

Thursday night’s address on jobs and the economy will be POTUS’ third trip to the congressional dais in three years.

By contrast, President Bush did only two, non-State of the Union addresses during his entire eight year presidency, and one of those speeches was after the attacks of 9/11.

It is understandable how these joint session speeches can be like catnip for politicians.

In terms of pomp and ceremony, they are hard to beat. And the president – any president – looks “presidential” at the dais. Moreover, the events normally command a larger TV audience, so its easier to get the nation’s attention, and at least for a news cycle, the president’s comments are the agenda.

But what is truly tantalizing about the addresses are their potential to be “game-changers”; to alter the politics and narrative, and for an administration to regain the political and policy initiative.

Clearly, this is what President Obama and his advisers are hoping for.

August has been a most unkind month for the President. His approval rating dropped to an all time low of 38%, with truly dismal ratings for his handling on the individual issues of the economy, the deficit, unemployment and taxes.

More broadly, poltical independents that deserted the President in the midterms have not come back since. The liberal base is furious at him for accommodations POTUS has made on taxes and spending cuts with the GOP House, and conservatives simply don’t believe in President Obama’s policy prescriptions or leadership.

And that’s sets the trap for President Obama in this almost prime-time address.

He will have the most powerful stage in American politics to reach citizens, but if his message does not raise the bar, to prove worthy of the time set aside for the event, the speech will have cheapened the august joint session as a political prop, and diminished President Obama for using it as such.

And right now, the leaks from White House on the policy elements of the President’s address seem barely worthy of a speech from the Oval let alone a joint session of Congress.

Indeed, it appears as if the White House is intellectually exhausted, seeking to repackage half measures and red herrings that will at best have marginal impact on the economy, and that is if they every get voted out of Congress.

No, if the President wants to change the game in DC, to resuscitate his approval with the American people and improve his chances for re-election, he needs to go for a credible “long ball” that will unite his base, attract independents and put Republicans on the defensive.

Moreover, he will have to do that with proposals that will  not produce results a year out, but now; that will have a real and immediate impact on the economy, and restore hope among America’s economically besieged citizens.

And perhaps most importantly, it will have to accomplish its goals without feeding the narrative of Obama as President addicted to federal spending and debt.

 The game-changer exists.

It does not come without serious risk, but no game-changing strategy every does.

 It will provoke furious opposition, particularly on the editorial pages of the Wall Street Journal but in this case that will not  necessarily be a bad thing, because it will force Republicans, as a matter of principle, to defend “special interests” and fundamentally unfair commercial practices.

President Obama needs to make housing/mortgage reform the central, ambitious plank of his address.

Consider that the financial crisis of 2008 was catalyzed by securitized mortgages that were offloaded on to the market with no realistic cost/risk basis.

Since the resultant collapse of the housing market, the integrity of mortgage lending industry has been harmed by the “robo-signing” foreclosure controversy as well as the more fundamental crisis of title ownership embodied in the use of the MERS electronic registration system to track mortgages.

To that end, the States’ Attorneys General are in discussions with major lenders and banks regarding a $50 billion settlement for reckless lending practices.  Only yesterday, the Federal Housing Finance Agency sued large financial institutions for nearly $200 billion regarding improper securitizations.

This occurs against the backdrop of a housing market where the bottom has fallen out since 2008.

According to the National Association of Home Builders (NAHB) the residential housing sector – compromising both investment in housing stock and services – normally comprises roughly 19% of US
GDP annually; or nearly $3 trillion in economic activity. This sector is now operating at near depression levels as a result of the financial collapse in 2008.

Since its peak in 2006, US residential real estate has lost $9 trillion in value. This is the largest destruction of personal wealth in American history. It is compounded by losses in the financial markets since 2008 that have affected retirement plans, 401ks and pensions, leading to a profound, reverse “wealth effect” for Americans.

 According to CoreLogic, as of June 2011, 27.7 percent of all residential properties with mortgages were in negative equity or near negative equity (less than five percent equity).  This represents over ten million Americans. According to Realty Trac, one in every 611 homes received a foreclosure notice in July 2011.

No sustained recovery of the US economy can occur until there is recovery in the housing sector and restored faith among homeowners in the value of their primary investment.

Yet, efforts of the federal government and lenders to assist distressed homeowners have been piecemeal, and focused exclusively on those who have already defaulted. This solution is not only inadequate, but compounds the problem by creating resentment among taxpayers that those who played by the rules are subsidizing those who did not live within their means.

To solve the problem, President Obama needs a radical, comprehensive solution:

The American Homestead Integrity Initiative

Under the initiative, the President would utilize government leverage over the mortgage markets through the guaranty authority provided by Fannie and Freddie to comprehensively “reset” property values nationwide.

Efforts to allow borrowers to refinance at lower rates  – which are currently under discussion – are simply not enough, particularly for the ten million who are upside-down on their mortgages.

Specifically, the plan would establish two price points.  The property value in September 2008, at the fall of Lehman Brothers, and the property value in August 2011.

Mortgage holders would be allowed to re-finance their properties at the new, lower valuation, and at today’s low rates, into 30 year fixed mortgages.

The “lost value” on the mortgages is not chump change.

Proposing this might very well give the entire editorial board of the Wall Street Journal a durable case of the vapors. But the initiative will have significant upside worthy of the controversy it will create.

First, what to do with the “lost value.” That value in the old mortgage would be divided three ways.

Homeowners with new, modified loans would agree to an “appreciation premium” in the new mortgage that would pay the original mortgage holder a capped percentage of any increase in the value of
the property when sold in the future.  This would be the skin in the game for home owners, not to simply refinance and walk.

For the remainder balance, banks and lenders would write-down the loss on a 50-50 basis with the federal government. Financial institutions would be allowed to write off the loss on their taxes and carry the losses forward over a number of years, to ease the strain on capital reserves.

The federal government would roll its portion of the debt into a Treasury bond, putting US public lands up as collateral, and charge a user fee to all housing transactions (which would ameliorate the threat of another housing bubble) until the bond was paid off.

Home owners who had been foreclosed upon would be given the opportunity to repurchase their homes under the above referenced conditions if they met credit standards, or to seek housing stock from the current backlog of homes under control of Freddie and Fannie.

There are winners and losers in every government initiativec, and there is no sugar coating the fact that the banks, Wall Street, the bond holders of the toxic debt, are all going to get hit hard here.  But the fact of the matter is that the problem will only fester if it is not addressed head on.  Indeed, the benefits of doing this comprehensively and at one time, outway the risks.

First, this initiative will create a real floor in the housing market that will catalyze the conditions for growth in construction and maintenance. See above on the percentage of GDP involved.

Second, it will end the uncertainty in the mortgage market by comprehensively invalidating the the products and practices that created the toxic debt to begin with. It will end the ongoing litigation in one action.

With clean loans of predictable value, not only will predictability and legitimacy return mortgage markets, but securitization of properly valued mortgages can begin, providing Wall Street with capital for business investment and expansion.

But more importantly for average Americans, it will decisively intervene in the foreclosure crisis and ease the silent pain of Americans who have watched the value of their primary investment plummet, with no way to ever capitalize on their investment for retirement or school for their children.

Not only will upside down mortgage holders be unchained from their virtual serfdom to lenders, the new loans and accurately assessed property values would be bigger than any tax cut the Republicans could ever envision.  Monthly mortgage payments would plummet, and housing values would begin to appreciate again.  Struggling families would have immediate cushion, and with extra cash on hand, consumers could begin to spend.

70% of the US economy is consumer spending, and this bolt of liquidity would be broadly felt across the spectrum.

Politically, President Obama cannot lose here. He gets to take on the big “fat cat” bankers and money changers.  But this isn’t a wedge issue, like executive compensation.  This is a matter of fundamental fairness.

The banks and lenders – here and abroad – were bailed out by US taxpayer money in 2008 for essential bad behavior. But the finance industry never sought to reset the market that created the problem to begin with. Indeed, the original plan for TARP wasn’t to provide liquidity to banks – as it ultimately did – but to buy up the toxic housing assets.  The problem was, they couldn’t be priced.

Now we can take that necessary, second step that never happened.

If you are a Republican, you are now on the uncomfortable ground of having to defend the banks and their foreclosure practices while they are raking in record profits.  You have to voice your opposition in the second, massive intervention in the market – again based on moral hazard – but this time, your are exercising your principles in defense of the very firms that defrauded the American public.

Moreover, the President may have sufficient leeway with control of Fannie and Freddie to put something like this on the table, and get private lenders to join in under public pressure.  He may not have to wait for John Boehner and the House GOP.

Most important, this can be immediate without breaking the federal budget.  The US bond with the toxic debt can be held off-book.

Politically, the President is a populist who will be taking up the fight against “special interests” on behalf of American homeowners. He will not only be taking a huge step toward injecting capital into the economy, he will be doing it from the moral high ground.

Tie this proposal to broad tax reform that closes loopholes for rate reduction and deficit reduction on a 50-50 basis, slow discretionary spending over the next ten years, and commit to common sense reforms for entitlements for uncapping FICA and the President has suddenly created an agenda worthy of a speech before a joint session of Congress.

Will he be bold?

Odds are not in Obama’s favor based on his lead from behind sensibility.

But this is also the President who risked conflict with Pakistan to in the hope of finding and killing Osama bin Laden.

If that risk taker comes to the table, a game changer may truly be in the offing.

 

2 comments

  1. Laura

    Just where is the facebook like link ?

  2. Caroline

    Pretty insightful. Thanks!

    My blog:
    DSL Anbieter klick hier

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