Both Candidates Weigh the Best Path To American DreamThe government takeover of Fannie Mae and Freddie Mac is forcing John McCain and Barack Obama to consider the proper fix for the companies' long-term structure. A key question in that effort: How aggressively should a new administration promote homeownership?
Most of the discussion from the candidates has been about how to stem rising foreclosure rates. Both tout homeownership as a central pillar of the American dream. But with many borrowers defaulting on loans and housing prices plummeting in some areas, both also are rethinking how best to achieve that goal.
"This is something the next administration will have to deal with: Are they going to be pushing people into homeownership?" said Dean Baker, co-director of the Center for Economic and Policy Research in Washington and a critic of the government's advocacy of homeownership.
Government policies have promoted homeownership for decades, from Franklin D. Roosevelt's New Deal, which paved the way for the 30-year mortgage, to postwar policies that explicitly ensconced it as a federal goal.
During the 1990s, Washington pushed Fannie and Freddie to expand their role providing loans for low- and middle-income borrowers. In 2002, the Bush administration charted a more aggressive course by pushing for lower down payments and touting vouchers that would allow public-housing tenants to one day own homes.
Neither candidate has suggested that the government's basic goal of expanded homeownership is a mistake. Sen. Obama has proposed a 10% mortgage interest tax credit for homeowners who don't itemize. The goal is to give more low- and middle-income Americans an existing tax subsidy, as two-thirds of taxpayers don't itemize on their returns, according to the Internal Revenue Service. The campaign estimates that the provision would provide an average $500 each to 10 million homeowners.
Both candidates are challenging the way the U.S. has pushed for homeownership, however. "It doesn't mean the goal was flawed. It means that the Bush administration went around it the wrong way," said Jason Furman, an Obama economic adviser. The Democratic platform calls affordable rental housing "more critical than ever," while the Republicans call for a housing policy that recognizes the "needs of renters."
In 2004, President George W. Bush campaigned on lower barriers to homeownership as part of the domestic agenda for his second term. The Republican Party platform that year singled out the down payment as the "most significant barrier to homeownership."
This year's Republican platform makes no mention of that plank, instead warning that "government action must not implicitly encourage anyone to borrow more than they can afford to repay."
Sen. McCain was a leading advocate of raising down-payment requirements on loans backed by the Federal Housing Administration and has warned against lending to homeowners who don't have enough of their own capital in the investment.
The Fannie-Freddie rescue has revealed differences between the campaigns over how they believe the next president should approach long-term reforms. Sen. McCain supports downsizing the companies, then selling them off, severing all ties to the government. His advisers have called for the FHA or other government agencies to make mortgages available to borrowers who otherwise might not qualify.
Sen. Obama's advisers have argued against privatization. "If your only plan is privatization, that is reckless and ideological and risks affordable housing in this country," said Mr. Furman. While parts of the institutions may need to be privatized, he said, the failure of investment bank Bear Stearns Cos. is an example that "a private structure is no guarantee that you avoid problems."
Both candidates have urged stiffer measures to stem mortgage fraud and called for greater transparency in the loan process, so homeowners can better understand their mortgage terms.
Sen. McCain offered his most detailed response to the liquidity crisis in March, when he rejected the use of taxpayer money to bail out speculators or financial institutions and warned against rescuing irresponsible players, from big banks to small borrowers.
Sen. Obama has called for amending the federal bankruptcy code to allow judges to force mortgage lenders to take a loss on their loans as part of a Chapter 13 settlement. He has criticized Sen. McCain for voting in favor of a 2005 bankruptcy bill that critics say made it harder for lower- and middle-class consumers to file for bankruptcy. The bill had the support of Sen. Obama's running mate, Joe Biden.
The Illinois senator also has called for restoring public-housing funding cuts made by the Bush administration, and supports efforts to create an affordable-housing trust fund, which would provide a dedicated source of funding for low- and middle-income housing.
By: Nick Timiaos
Wall Street Journal; September 12, 2008
