A response to "Subprime: Hillary's Disastrous Proposal to Solve the Mortgage Crisis."
Richard Thaler and Susan Woodward’s article
on Senator Hillary Clinton’s proposals to address the foreclosure crisis
flagrantly misrepresents her policies. It is necessary to set the record
straight.
In a speech on
December 5, 2007, Senator Clinton called on the mortgage industry and the
investment community to agree voluntarily to a 90-day moratorium on
foreclosures on owner-occupied properties with subprime mortgages, and a five-year
freeze in interest rates on owner-occupied homes with subprime adjustable rate
mortgages. The rate freeze would give the housing market time to stabilize and
would give mortgage servicers an opportunity to restructure unworkable
mortgages and avoid unnecessary and costly foreclosures that harm both
homeowners and investors. The rate freeze is critical because the 30 to 40
percent escalation in monthly payments is a major driver of defaults and
ultimately foreclosures in the subprime mortgage market. Senator Clinton limits
the proposed moratorium and rate freeze to subprime mortgages because the
foreclosure crisis is disproportionately a subprime crisis. Subprime loans
comprise less than 15 percent of all mortgages but more than 50 percent of
foreclosures. Thaler and Woodward are simply wrong when they describe the
Senator’s proposed rate freeze as applying to all adjustable rate mortgages and not just subprime ones. They
support their claim with the statement that, in an “older posting on her Web site,”
Senator Clinton stated that the proposal applies only to subprime mortgages,
but in a “recent speech,” the qualification was missing. But even a cursory
glance at the Senator’s press statements from January would have told Thaler
and Woodward that they were incorrect. On at least seven occasions in January--the
11th, 17th, 24th, 28th, 29th,
30th, and 31st--Senator Clinton released press statements
which clearly state that the rate freeze applies only to subprime mortgages. In fact, the press statement
accompanying the “recent speech” Thaler and Woodward cite (January 24) could
not be clearer on this point. In bold font preceding a discussion of the senator’s
proposal, the press statement reads: “A
freeze in the rates on subprime
adjustable rate mortgages” [emphasis added].
Thaler and Woodward
further distort Senator Clinton’s proposal by suggesting that the rate freeze
would be required rather than voluntary. In the press statement accompanying
Senator Clinton’s “recent speech,” the discussion of the moratorium and rate
freeze proposals is preceded by the following language: “She has called on Wall
Street and the mortgage industry to agree
to the following…” [emphasis added]. And here is the language that precedes the
proposal from the speech in the “older posting” that Thaler and Woodward reference:
“I urge Wall Street and the mortgage industry to voluntarily agree to the following…” [emphasis added]. Senator
Clinton often characterizes her proposed subprime foreclosure moratorium and
rate freeze as elements of a “workout.” The term “workout” was chosen to
suggest the sort of voluntary contract modifications creditors often offer
corporate customers experiencing difficulty repaying their obligations.
In December, Treasury
Secretary Henry Paulson and the mortgage industry presented a blue print
(including a freeze in mortgage rates) for mortgage servicers to address the
foreclosure crisis. Senator Clinton criticized the Paulson plan as setting too
many restrictions and limitations on the at-risk homeowners whose mortgages
would be eligible, and she presented a blueprint of her own. Like Secretary
Paulson’s plan, Senator Clinton’s is voluntary. In her December 5 speech, the
Senator even said that if the mortgage industry did not observe a moratorium
and rate freeze she would consider legislation to indemnify those mortgage
servicers who moved aggressively to modify at-risk loans from investor
lawsuits. So clearly, Senator Clinton’s call for the rate freeze and moratorium
was, like Secretary Paulson’s, a call for voluntary action on the part of lenders
and investors. Yet Thaler and Woodard assert that “Senator Clinton's
policy amounts to a command-and-control approach to economic policy in which
the government announces prices and tells suppliers what to produce.” Here, as
in their discussion of the proposed rate freeze and foreclosure moratorium,
Thaler and Woodward have egregiously misrepresented the Senator’s proposal.
In addition to her proposal for a voluntary moratorium and
interest rate freeze, Senator Clinton has proposed legislation to address the
subprime debacle. She has introduced a bill to modernize the Federal Housing
Administration so that it can provide low- and moderate-income borrowers
alternatives to the subprime market. She has introduced the Home Ownership
Preservation Act to crack down on abusive lending practices, rein in mortgage
brokers, prosecute mortgage-related fraud, and expand foreclosure prevention
programs. She has also introduced the Mortgage Refinancing Initiative Act to
empower the state housing agencies to issue $10 billion in bonds and use the
proceeds to help families refinance unworkable mortgages. She is the only presidential
candidate from either party who has made sensible and bold policy
recommendations to address the vicious cycle of declining housing prices,
escalating foreclosures, and rising losses in mortgage-related securities that
is now driving the US
economy into recession. Her recommendations deserve serious discussion, not
unsubstantiated attacks by scholars who should read her words more carefully than
they apparently have.
Read Richard Thaler and Susan Woodward's reply here.
Laura Tyson is a
professor of economics at the Haas School of Business at the University of California, Berkeley, and a former
chairman of the National Economic Council.