Housing Crisis Looms Larger in Campaign


By: Wall Street Journal

By ALEX FRANGOS

PONTIAC, Mich. — The sour housing market is taking on added significance in the presidential race as candidates look for votes in foreclosure-heavy states such as Michigan, Nevada and Florida.

With an eye toward Michigan and Nevada next week, New York Sen. Hillary Clinton mentioned the foreclosure crisis in her New Hampshire victory speech and was scheduled to talk about it with voters last night in Las Vegas. Former Arkansas Governor Mike Huckabee talks about it in a new television advertisement on the economy that he is airing in Michigan.

“You can’t have 44 foreclosures a day in a city like Las Vegas and not have somebody come out and ask some questions about it,” says Marcus Conklin, a Nevada Democratic state assemblyman who is leading a committee examining the mortgage issue. He hasn’t endorsed a candidate.
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Economic hot buttons like globalization and job outsourcing may resonate with voters, but it is the housing market that is directly affecting more voters’ wallets. Price declines are limiting homeowners’ ability to move or to tap home-equity loans. Job losses are heavy in housing-related industries. Several states, including Nevada, are expected to see government budget coffers suffer as the local economy reels.

Yet candidates must be careful in pitching housing proposals. “The candidates need to thread a very small needle, showing they have sympathy for those cheated out of homes, but not offering a government handout to businesses or individuals who deliberately took on huge risks,” says Elizabeth Warren, a Harvard Law School professor. Ms. Warren has consulted with several Democratic camps but isn’t on staff with any of them.

The top three Democratic candidates have called for various measures that move beyond the current administration’s effort to get lenders to voluntarily modify troubled loans. The Democratic plans share elements, including the creation of a federal fund to help homeowners refinance onerous mortgages, legal protections for lenders to free them to alter individual mortgage terms, and tighter regulation of lenders to prevent future crises.

But the plans from Democrats contain some differences, which could become accentuated in Nevada, and later, in big states such as California. Both Mrs. Clinton and John Edwards have said that if the mortgage industry doesn’t voluntarily agree to enlarge and lengthen the terms of a plan backed by Treasury Secretary Henry Paulson and agree to a foreclosure moratorium, they would force the lenders to do so through legislation.

Barack Obama opposes making laws to force such moves. An Obama adviser says that a mandatory moratorium and rate freeze — which could force lenders to hold loan interest rates below market levels — could deter them from re-entering the market and would delay the return of liquidity.

There could also be legal issues, the adviser says. “There would certainly be some serious constitutional issues to consider from the government trying to directly change the terms of millions of mortgage contracts after the fact,” the adviser says. Mr. Obama thinks the industry should make these changes voluntarily.

Republicans for the most part support President Bush’s approach on the issue, to get lenders and mortgage-bond investors to agree voluntarily to modify some troubled loans. They haven’t unveiled separate plans like the Democrats, but two candidates, Mitt Romney and John McCain, have indicated that more might need to be done should the situation worsen, a view echoed by Mr. Paulson earlier this week.
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“There’s clearly an additional need to consider other measures,” Mr. McCain said Wednesday. “I will know within a very short period of time whether these policies are succeeding or not,” he said of Mr. Paulson’s plan to persuade lenders voluntarily to modify some troubled mortgages. Mr. Romney has called for the creation of a business cooperative that would pool the bad loans in one entity that would then be able to handle individual solutions with homeowners. Romney’s aides also say he favors increased funding for a government chartered housing-services agency called NeighborWorks America.

Mr. Huckabee mentions the housing market in his new ad. But he hasn’t proposed government intervention. He said in Iowa that he fully supports the administration’s voluntary plan.

Messrs. Obama and Edwards support a bill currently in the Senate to amend bankruptcy law to allow judges to alter the terms of a mortgage. Advisers say such a move would give troubled homeowners more leverage in getting lenders to alter loan terms before filing for bankruptcy.

Clinton advisers say that while the senator isn’t opposed to such a move, she believes other measures should be taken to help distressed homeowners before they get to the point of a bankruptcy hearing. “You don’t want courts sorting out two million people,” says Lawrence Benn, Mrs. Clinton’s deputy economic director, referring to rough estimates of the number of home-foreclosure notices that have been sent nationwide. “There needs to be something in an earlier stage than bankruptcy.”

Mr. Obama has a proposal that others don’t: Giving the majority of homeowners who don’t itemize deductions on their federal tax returns a separate home-interest deduction to ease the burden on troubled mortgage holders. “Virtually no one facing foreclosure is an itemizer,” says Obama economic adviser Austan Goolsbee. The move would be equivalent to reducing the interest rate on a typical mortgage by 0.75 percentage point and would cost the Treasury $5 billion to $8 billion a year, according to Mr. Obama’s campaign.

But doing nothing more could bring peril from voters. Mark Pisco, 55 years old, a homebuilder from Milford, Mich., came to see Sen. John McCain speak Wednesday at an airplane hanger in Pontiac. He was somewhat disappointed with Mr. McCain’s economic message, which centered on job retraining and technology, not more urgent help for housing and the economy. “It’s a long-term plan. It doesn’t do anything in the middle of the Michigan recession,” he says.

Last year was the first in decades that Mr. Pisco, a longtime Republican, didn’t build a single new home. He hired fewer workers as his business was limited to renovations. “It’s a very tough time,” he says. To prevent future crises, the government needs “tighter regulation on the banking industry,” he says. Lenders “actually put people in trouble by giving those subprime loans. They created this disaster. They buried us,” he says.

Write to Alex Frangos at alex.frangos@wsj.com

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