Presidential Candidates Should Get Real On Mortgages

As campaign season gears up, White House hopefuls understand that voters’ top concern is the economy. But the candidates are ignoring the biggest drag on growth: the housing-bubble hangover.

Recent speeches are typical. Last week, former Minnesota Gov. Tim Pawlenty went to Chicago to give his economic pitch. Pawlenty’s remarks clocked in at nearly 2,800 words.

But Pawlenty devoted more time to “S Corps and LLCs” in the tax code, as well as the capital-gains and interest-income tax, than to what’s on everyone’s mind. On housing, he said only that “home prices are in the gutter.”

Former Massachusetts Gov. Mitt Romney did slightly better. In his New Hampshire kickoff speech, he said that “foreclosures are still at record levels and “the prices of homes continue to fall.” He talked of meeting a Las Vegas couple who live surrounded by “abandoned houses.”

By talking of tax “carve-outs” and the Environmental Protection Agency, candidates risk looking out of touch with what people are thinking about.

People are terrified about how much they owe on their houses. Between 2000 and 2007, outstanding mortgage debt more than doubled. Today, nearly half a decade after the housing bubble peaked, outstanding debt is down only 5 percent. This is too much debt for the economy to withstand.

This point is not Republican or Democrat, moral or immoral. It is math.

Nearly 30 percent of homeowners with mortgages either owe more than their homes are worth, or are pretty close, according to CoreLogic. Voters in swing states are worst off: 63 percent of Nevada borrowers owe more than their homes’ value, 46 percent of Floridians and 36 percent of Michiganders.

People worry, too, that home prices haven’t hit bottom. More than 8 percent of mortgages are delinquent, according to the Mortgage Bankers Association, down from last year’s 10 percent, but still portending more foreclosures -- and price declines -- to come.

Voters fear that without ever-rising prices on which to draw, they haven’t saved for other aspects of the American dream, such as their children’s college educations and their own retirements. And with so much of their money going toward bad debt, they can’t save enough now.

Until Americans gain certainty on housing, fear will dampen economic growth. We’ve all heard of “animal spirits” driving the economy. Right now, Americans feel not spirited but depressed and trapped. Their depression is repressing growth.

What can a candidate do?

He -- or she -- can say that though the government can’t save people from falling prices, it can save them from uncertainty. Financial regulators, after falling down on the job for a decade, owe the American people an end to this unnecessarily long process.

Regulators, prodded by a new president, should force mortgage lenders and mortgage servicers (who handle paperwork for the lenders) either to foreclose on a defaulted mortgage within less than a six-month period, or, if the lender cannot do so while respecting the rule of law, to write down the amount owed to bring the mortgage out of default.

It’s not a bailout of homeowners for reckless lenders to have to write down bad debt. It’s only a bailout if the government provides rescue cash either to lenders or borrowers.

Let’s get this problem over with, see what house prices should be, and see, too, how many other people walk away from an impossible debt burden, cutting their losses rather than follow the financial industry in “extending and pretending” pain away.

Allowing a see-no-evil approach to outstanding mortgage debt, in fact, is President Obama’s biggest failure, and the GOP candidates should make that clear.

Such a breakthrough would cause more financial turmoil, which may be why candidates are quiet. Better to have an economic crisis in the open than one behind closed doors.

This piece originally appeared in Washington Examiner

This piece originally appeared in Washington Examiner