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 he devoted more time to taxation 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 "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."

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. The point is not Republican or Democratic, 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. Voters in swing states are worst off: 63 percent of Nevada borrowers 46 percent of Floridians and 36 percent of Michiganders owe more than their homes’ value.

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 home 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.

What can candidates do? They can say that though the government can’t stop falling prices, it can stop uncertainty. Regulators 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 off the amount owed to bring the mortgage out of default.

It’s not a bailout of homeowners for reckless lenders to have to write off 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 following the financial industry in "extending and pretending" pain away.


Nicole Gelinas is a Manhattan Institute scholar and a contributing editor of City Journal.

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