Op-Ed: What do the candidates' mortgage plans actually do?

By Tom Kaufman and Christian Hudson

Originally Published in the Santa Cruz Sentinel: 03/30/2008

Everywhere you looked this past week the candidates were unveiling the latest and greatest in mortgage plans. That's terrific news for all of us.

The question is whether their plans actually add up: Here's our fact check.

SEN. Hillary Clinton: There's a "crisis of confidence in our country" according to Clinton in her Philadelphia speech this week. On this account she is right. Investors are on the sidelines because they are worried another shoe will drop. However, Clinton complains that if the U.S. can spend $30 billion to supposedly bail out Bear Sterns, then it can certainly spend that on homeowners.

The problem with Clinton's position isn't that she wants to help homeowners so much as it makes it sound like she doesn't understand what happened with Bear Stearns. Is it possible that she and her advisers [and she's not the only candidate in this case] decided the subject is too complicated for politicking and therefore better to paint all homeowners as victims and all banks bad?

Most certainly she's right to seek accountability, but it is important to conceptually understand why the Federal Reserve stepped in with Bear Sterns. It all comes down to this: It is about the money Bear Sterns was on the hook for in relation to other banks. [Think back to those terribly named credit default swaps we've been talking about.] That's what the Fed covered. Not a chief executive's wine collection tab.

The Fed prevented a domino effect: Another bank calls in its mark on Bear Stearns only to find no cash. Well, the amount we are talking about is enough to bring down more banks. Oh yeah, and your 401K, and the banks ability to lend you money.

What Clinton did do, as well as Sen. Barack Obama, is embrace a Capitol Hill plan to allow the Federal House Administration [FHA] to back more mortgages so they can be bundled and auctioned. What's this mean? It means that the government will cover the mortgages and that they can be tossed back on the market to be bought and sold, thus allowing some institutions to get them off their books, while others get them as a deal. This is definitely helpful.

OBAMA: In one regard the two Democratic senators played a game of "me too" this week. Clinton wanted a high ranking panel to recommend solutions, and Obama rightly pointed out he'd been out of the gate earlier with that. The thing is, go ask the Social Security blue ribbon panel if all their hard work really got used. Panels are lovely, but oftentimes the press release looks better than what is adopted.

Obama, after hearing Clinton's $30 billion proposal for homeowners earlier in the week, came out with his own on Thursday. Again, helping homeowners is terrific, but the issue is still whether they both understand what the Fed did. Fed Chairman Ben Bernanke deserves a beer, or a cookie, or something for his efforts, listening to the candidates [including Sen. John McCain] you'd think he was the Rodney Dangerfield of the crisis.

Obama got us excited because he talked about tougher regulation -- but then fell flat on specifics. That's a bummer, we can't tell you what they'll do without them.

MCCAIN: Well, he told everyone this week that he didn't want government involvement in the market, save for the most limited fashion. His reasoning: Don't reward risky behavior by banks or homeowners. He did manage to say the Fed did the right thing.

What is lost in each of these plans is the necessary specifics to right the ship, not just now but for future travels. If you believe in the market and don't want government intervention, where are the investigations and enforcement?

If the candidates want to treat this as the most important issue next to Iraq, let's see the specifics. This week felt more like a starting point than deep into the crisis and the campaign. That's disappointing.

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.

Op-Ed: Wall Street, D.C. Developing a Halle Berry Complex?

By Christian Hudson

Originally published in the Santa Cruz Sentinel: 03/09/2008

Wall Street and Capitol Hill are in danger of developing a Halle Berry complex when it comes to the mortgage mess.

It has to do with illusion.

A number of years ago I bought a then-neglected row house in Washington, D.C. By that I mean when I pulled out the carpet, and the carpet under that carpet, I also pulled out drug paraphernalia. But the house's solid bones, proximity to school and work, plus the neighborhood's architecture and friendly vibe made it a score.

One day while out front landscaping, I spied what looked to be Halle Berry and a sidekick coming up my block! [OK, so clearly not Halle Berry, but her stunt double.]

Stunning, beautiful and gorgeous, she was everything you'd expect from her if she walked out of a James Bond film and onto your stoop.

She had lots of questions: Do I own? What's my loan rate? Then the sell: I can lower my monthly payment if I refinance and restructure. She then complimented me on my house [Is Halle flirting with me?] At this moment, I can't decide who feels prettier: me or my house.

Then the conversation came to a screeching halt. I explained that I liked my 30-year mortgage. She demanded to know why I wouldn't want to pay less. I explained that consistency is better because I'm staying in the neighborhood and not flipping the house for a short-term gain. Besides, I said, the market can't continue to grow at this rate.

"That's stupid," she said. And she continued on to the next house. Wow. Halle Berry's doppelganger just called me stupid. I smiled and laughed to myself. But when I watched her go door to door, the smile disappeared. My neighborhood is diverse in age, professions, economics and racial backgrounds. I love that about my neighborhood.

My ears were deaf to her pitch. At the time I was a journalist, the son of a real-estate appraiser, and a law student. Her next pitch was as likely to fall on an attorney, as it was on a retiree who lived through the neighborhood's hard times of the 1980s crack epidemic.

It is not unlike the stories out in California. Is the guy who only speaks Spanish and relies on the bilingual mortgage broker or lender the same as the woman who can read the contract in English herself?


Right now, both Wall Street and Capitol Hill are painting solutions to the mortgage mess with Black and Decker-sized brush strokes.

But it seems to me that the person who was flipping properties, or buying a second piece of real estate as an investment is much different than my retired neighbor or someone new to the country relying on a broker's language skills.

That's why I think about Halle Berry every time I hear about the subprime mortgage mess. The danger is taking a square peg and jamming it into a round hole. Not every case is the same. Some will read this and conclude it's another example of mortgage holders as victims, while others will point to me as an example of affirmative choice.

Consider the trial balloons currently floating around town: some have Uncle Sam buying up the delinquent mortgages through a government agency or quasi government agencies, others would send mortgage cases before a bankruptcy judge, and still another would push banks to change the mortgage payment in return for a stake in the principal when the house is eventually sold -- a plan that received a boost by Federal Reserve Board Chairman Ben Bernanke in a speech on Tuesday.

The debate about these plans mostly centers around who picks up the tab -- the taxpayer or the market. What we shouldn't lose sight of is whether we are doing a good job of separating real victims from those who knowingly chose to gamble.

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