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A Taxing Argument

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.

By Laura Tyson