Op-Ed: It's the mortgages, stupid

by Tom Kaufman and Christian Hudson

Originally Published in the Santa Cruz Sentinel on 1/27/08

Interest rates and mortgages are rarely seen as the battle ground for the hearts and souls of voters, but with a tsunami of foreclosures having first wiped out home values and then washed away in ripple-effect fashion much of our 401k stocks, it shouldn't be a shock to see Sen. Hillary Clinton leading off her first answer during CNN's latest battle royale debate on Martin Luther King Day with economics.

Not unlike an ESPN SportsCenter anchor clicking through playoff highlights, the senator from New York ticked off her game stats: $110 billion economic package, $70 billion going to the mortgage nightmare, 90-day foreclosure moratorium, 5-year freeze on interest rates ... But, the thing about blink-once-and-you-missed-it stats is just that, they might hit you like a wave, but as soon as you catch them they roll by undissected.

Hit the rewind button: So, what would a five-year interest rate freeze look like?

Like the law, policy is less like a scalpel and more like a cudgel. A well-intentioned action is very likely to have broader consequences.

First, Clinton isn't talking about all rates, but rather the adjustable ones that go up after a certain amount of time. That might sound good, if you are someone writing a mortgage check, but what if you want a loan in the next five years? That might be a different story because banks tend to like loans repaid according to their terms. In other words, if I'm the bank and you tell me that the interest rates on my existing home loans are not going to adjust up like I was banking on, guess what? I'm not lending to the homebuyer. That is a possibility under this plan.

Secondly, there is a ripple effect: If lenders are reluctant to lend to homebuyers, then people can't buy homes. If people can't or won't buy homes, then those trying to sell in order to get out of a jam will go into that foreclosure column, thus worsening the problem.

Third, what if the market accepts the five-year freeze on the adjustable rates and the potential negative repercussions don't materialize? Then, in theory, her package works. That's terrific, but in doing so we'll have protected both those who are legitimately victims of being sold a bill of goods by swarthy lenders, and those who knew what they were doing and were gambling by flipping properties. There's that cudgel again. Should the latter be bailed out while penalizing the prudent penny-pincher patiently waiting to buy a home once the market cooled off? Worse yet, if stocks continue to take a beating, then that penny-pincher takes another hit because instead of jumping into the housing bubble she saved, and those savings are probably to one degree or another in the very stocks currently crushed under the mortgage fallout. Isn't she arguably mortgage road kill here, too?

Lastly, Clinton's press release on her Web site calls for accountability -- laudable to be sure -- but one suggestion to help ease the cudgel's bluntness might be for a more vigorous enforcement of the existing laws to go after those who exploited the lending system. That means more funds for more enforcers, but it also might separate the victims and the dice rollers. Untangling the two might lead to a better way to help those legitimately victims while staving off creating another class of mortgage road kill.

Tom Kaufman is the Capital Markets Committee Chairman for the American College of Real Estate Lawyers and is a partner at Hunton and Williams LLP in Washington, D.C.

Christian Hudson is a former Santa Cruz resident now practicing finance and real estate law at Hunton and Williams LLP in Washington, D.C.