The New York Times ran a front-page article Friday about the suffering of heavily mortgaged Americans in the aftermath of the burst housing bubble. Congress and the White House are considering a few taxpayer-financed bailout proposals, the Times reported, to help the nearly 9 million peoplea number that could grow substantially as the housing market continues its declinewho owe more than what their homes are worth. One of the proposals would create a new federal agency to buy mortgages from investors at cut-rate prices and slash the debt that homeowners owe. Another would entice mortgage lenders to reduce debt on their own in exchange for a federal guarantee on the remaining balance. But before presidential candidates rush forward to propose any of these bailout plans, they should start paying attention to what the public, as opposed to the media, thinks about it all.
The Times feature was a lesson in how to pitch a new entitlement. The story didnt focus on minority single mothers who struggled to buy their first homes and are now seeing them ripped away. Instead, it described the plights of people more likely to garner empathy from the papers affluent readership. The Times is trying to sell this bailout by packaging it like Social Security or Medicare, programs that more affluent voters support because the programs benefit themrather than like welfare, a poverty program that middle-class Americans have always resented.
We thus learn of the Breakstones, a Memphis couple earning more than $250,000 annually. Stuart Breakstone custom-built a house eight years ago, but ended up incurring far more debt than what the house was worth in a slumping market. So the couple had to fork over $65,000 in cash when they sold the house recently, since the sale price was far below the amount that he still owed. (They decided to sell the house in the first place because, after marrying two years ago, they and their three children from previous marriages needed a bigger house than the one Mr. Breakstone had built, the Times helpfully tells us.) Today, the Breakstones could owe more than their new house is worth, too, because theyve borrowed so heavily against it.
The Times also implies that its not only freedom from foreclosure that should be a new American entitlement, but also freedom from any anxiety over home prices at all, as well as the right to have a house whose value rises every single year. Consider this passage concerning millions of Americans trapped in their homes: The vast majorityembedded in their communities, their children in public schools, their reputations at stakewait nervously in hope that prices will bottom and rise once again, eliminating their negative equity and restoring their freedom to sell or refinance.
But Times readers arent biting. More than 400 online responses to the article ran 20 to one against any taxpayer rescue, citing principles of fairness and basic economics. Some readers pointed out that able-minded people are responsible for their own financial decisions, or that a bailout would punish people who behaved rationally during the housing boom. Ill be darned if my tax dollars have to go save some folks who couldnt understand what variable rate meant, or who bought beyond their means, wrote one. I have excellent credit and did not overextend myself. Any one who studies history could see the pattern and should not have gotten caught up with this recent cycle, wrote another. The changing housing market meant that I, a lifelong renter, would finally have a chance to purchase a home now that prices are being lowered, noted a third.
A bailout will also encourage reckless behavior down the road, argued one correspondent: Any so-called government rescue will simply serve to encourage such irresponsible actions sometime again in the future. And though disguised as compassion, a bailout would benefit a powerful special interest at the expense of the taxpayer: Why should government reduce exposures these banks have? another response asked. They lent these dollars.
The objections go on and on. Indeed, in a follow-up piece today, the paper reported that state and local governments mini-bailouts have met with resistance from people who consider the assistance undeserved and adamantly oppose anything that resembles a taxpayer bailout. A few things are clear from this overwhelming reaction. First, if President Bush proposes a taxpayer bailout for homeowners, as the Times thinks he may, his approval rating will plummet so low that he may end up owing us approval.
Second, all three presidential candidates are overestimating the public demand for a rescue package. Though Senator Hillary Clintons plan is farther-reaching than Senator Barack Obamasshe would impose a moratorium on foreclosures and freeze interest rates on adjustable-rate mortgages for five yearsboth Democratic presidential candidates have proposed spending taxpayer dollars to save some homeowners from foreclosure. Republican Senator John McCain has also said that hed help responsible homeowners in trouble.
In a race that has revealed few differences on domestic policy, one candidate could distinguish himself or herself by saying, as sympathetically as possible, that while some homeowners will undergo pain for the bad decisions that they and their lenders made, the government cant compensate people for their financial losses, or keep them in homes that they cant afford, without causing problems that would be worse than the one were trying to solve. The candidate who says eloquently what the public is already screaming may find that doing so adds up to votes.
Nicole Gelinas is a contributing editor to City Journal and a Chartered Financial Analyst.