Monday, January 14, 2008

A Jackson Distraction

Fresh from last week's Rainbow/Push Wall Street Project Economic Summit, Rev. Jesse Jackson seems primed to flog his latest pet cause. Much of the summit's agenda focused on the effects of the subprime mortgage meltdown and the attendant rise in home foreclosures. And as foreclosure rates continue to spike, especially in minority communities, Jackson has become especially ubiquitous - even by his standards.

In a recent Wall Street Journal op-ed, Jackson expounded
on how to deal with the mortgage crisis. He submits that while the plan presented by the Bush administration is "a step in the right direction," it does not do enough to address the breadth and depth of the problem. Jackson proposes something on the order of a Marshall Plan for mortgages in order to "restore homeowners' and investors' confidence and dreams."

Rev. Jackson suggests that there is precedent for such a program, to be modeled after the Depression-era Reconstruction Finance Corporation (RFC). In the 1930s, the RFC provided
$2 billion in aid to state and local governments and made loans to banks, railroads, farm mortgage associations, and other businesses. Jackson avers that a similar program would be useful to "save homeowners with subprime loans."

And to put a human face on why America needs a government-sponsored plan to deal with the mortgage crisis (cue the violins), he cites the demographics of those most affected.

Many of the victims of aggressive mortgage brokers were single women, seniors on fixed income, young couples, Latinos and African Americans. They live in every neighborhood in every one of our major cities, and elsewhere. In one block alone on West Madison Street in Chicago, every one of the homeowners is in default on their current mortgage terms. In neighborhood after neighborhood in Chicago, foreclosures have soared to more than 50 per square mile.
Curiously, Jackson's certitude about the need for a solution is not matched by a forthrightness about how the government would intervene to save homes. Should the feds be obligated to pay the monthly note for homeowners facing foreclosure on a subprime loan for six months? A year? Or should the government pay off the loans outright? Also left unanswered by Jackson is how such a massive bailout would effect both home sales and the mortgage market going forward.

It does not surprise that Rev. Jackson has ignored the one of the real problems fueling the rise in home foreclosures. To be sure, major home lenders such as Countrywide - along with securities houses like Merrill Lynch - should have been more judicious both in originating and securitizing risky home loans. But they are also victims of a sort in all of this. Indeed, it appears that rampant mortgage fraud is one of the main factors contributing to the present extremity of foreclosures. Much of this deception was perpetrated by mortgage brokers who operated on the margins of the law, or on the wrong side of it entirely (as reported by the
Chicago Tribune.)

One other factor that we need not expect Rev. Jackson
to comment on - given his fondness for government largess - is the role of the Community Reinvestment Act (CRA) in "encouraging" banks to make loans to borrowers with spotty credit histories. As a lending institution's compliance with the CRA can affect its ability to merge or acquire other banks, major players in the banking industry have a strong incentive to arrange subprime loans for those who might not otherwise qualify for a mortgage. And so long as Citigroup could spin off the loan, it all made perfect financial sense.

What doesn't make sense is for the government to indemnify borrowers at risk of foreclosure - irrespective of whether they were "steered"
as Rev. Jackson would put it, into a subprime loan or whether they took out such a loan to purchase a second home or investment property. As far as I am aware, no one forced these debtors into loans that turned out to stretch them beyond their means; each borrower was assumed to be acting in their informed self-interest. If such was not the case, perhaps our next expansion of government should involve a sweeping (and costly) overhaul of public education.

On second thought, never mind.

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