Crisis Clarifies Partisan Divide


By: Wall Street Journal

By GERALD F. SEIB

There are two major political parties in the U.S. for a reason, and it isn’t that two makes for nice symmetry on a ballot. It’s because Americans are split over a very basic question: how big the government’s role should be in a free society.

Occasionally a problem comes along to frame that philosophical divide with real clarity, and such an issue is exploding right now, amid the current presidential campaign. It’s the housing-mortgage mess, which has the potential to leave hundreds of thousands of voters, many in key electoral states, unable to make ballooning mortgage payments next year on their once-attractive subprime mortgages.

Should the government get actively involved in solving the mortgage mess, or is this a problem best left to the free market to work out? Weigh in.

The crunch poses the most basic debate about government’s role in the economy. Should the government let the free market work out such a problem, knowing there will be the short-term pain of more home foreclosures and broader economic erosion, but confident that market forces will produce a more-disciplined economy that will keep homeownership expanding in the long run?

Or should the government intervene, knowing that government interference could disrupt the market forces that helped more Americans buy homes in the first place, but aware that without help millions of Americans and the broader economy will suffer serious short-term consequences?

If there is a better issue to illustrate the philosophical differences between Republicans and Democrats, it would be hard to find. And that’s why the housing mess figures to persist as an issue dividing the parties through the presidential and congressional campaigns next year.

Indeed, the presidential candidates already are responding in character. Democrats Hillary Clinton, John Edwards, Barack Obama and Christopher Dodd have pitched ideas to get the government machinery moving to rescue homeowners. Republican candidates have been far more reluctant to suggest expansive government action.

Caught in the middle is the Bush administration, which is trying to straddle the divide. It has avoided directly intervening in the mortgage market. But it has used its powers to persuade mortgage providers and servicers to offer a five-year moratorium on higher mortgage rates to some at-risk homeowners with adjustable-rate mortgages.

Like a football game that ends in a tie, the Bush plan doesn’t entirely please anyone. Liberals are attacking it for doing too little, conservatives for going too far in bailing out irresponsible lenders and borrowers alike.

In either case, there’s no disputing the huge political consequences of the mortgage mess. Some 1.5 million homeowners will see their mortgages “reset” next year, meaning the low introductory interest rates they have been paying will jump to much more burdensome levels. Already, the Mortgage Bankers Association reported late last week, the percentage of loans in the foreclosure process hit a record high in the third quarter.

To compound the political implications, the foreclosure problem is most acute in politically pivotal California, Florida, Ohio and Michigan. California and Florida together have 28% of the country’s subprime adjustable-rate mortgages, and they account for one-third of the foreclosure proceedings on such loans, the Mortgage Bankers Association reports. Ohio and Michigan are suffering high foreclosure rates on even traditional fixed-rate mortgages and, as a result, are watching housing prices drop.

For those keeping score, these four states carry 119 electoral votes, 44% of the number needed to elect the next president.

Enter the candidates. The presidential contender who has been the most aggressive is Sen. Clinton. As long ago as March, she called on the mortgage industry to agree to a “foreclosure timeout” to stop people from losing their homes as their subprime mortgages ballooned.

Last week, she laid out a broader plan, calling for a 90-day freeze on subprime foreclosures and a five-year freeze on subprime-mortgage rates. She also said she might propose legislation to allow lenders to renegotiate easier mortgage terms without fear of lawsuits from investors who have bought up those mortgages.

For his part, Sen. Edwards has proposed a law, modeled after one in his home state of North Carolina, that would outlaw some subprime mortgages. And he suggests allowing homeowners to go to bankruptcy court to shed some mortgage payments without losing their homes.

Today, Sen. Dodd plans to introduce a broad bill that is expected, among other things, to tighten standards lenders must use in writing new mortgages and prohibit penalties for prepaying subprime loans. For his part, Sen. Obama also has proposed changes in bankruptcy laws, a fund to help homeowners stay out of foreclosures, a tax credit for 10% of a family’s mortgage interest payment each year, and a law criminalizing some of the more aggressive predatory lending practices.

Given the housing worries in key states, it isn’t likely that Republican candidates will loudly advocate inaction. But look for more to begin making the argument that a senior party strategist offers privately: If Democrats are too heavy-handed in response, the first to lose their access to future mortgages will be the very low-wage voters Democrats have been most eager to help.

“One of the main policy objectives for government for the longest time has been to get low-income people into homes,” says Kevin Hassett, an economist at the conservative American Enterprise Institute. “You need to be careful that you don’t crack down on lenders so that you make it hard for low-income people to get into homes in the future.”

Write to Gerald F. Seib at jerry.seib@wsj.com

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