Expert: One-Size Mortgage Bailout Won't Fit All

New York Times economy columnist David Leonhardt talks with Andrea Seabrook about bailing out failing mortgages. Leonhardt says regulators must be careful not to create incentives for people to walk away from their homes, depressing home prices even further. He also says that while Main Street certainly needs to be helped, there may be better ways to do it.

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ANDREA SEABROOK, host:

Welcome back to All Things Considered. From NPR News, I'm Andrea Seabrook. The government's bailout umbrella is opening wider. Yesterday, the Treasury Department said it would take an ownership stake in insurance companies. That in addition to its earlier takeover of insurer AIG, but that bailout umbrella isn't covering every financial institution. The Feds decided that Cleveland's National City Bank was too weak to save and helped PNC financial services takeover the venerable regional bank.

The root of this crisis, of course, is bad mortgages, and a lot of people, including both presidential candidates, are talking about a bailout for homeowners saddled with those mortgages. Well, not so fast, says New York Times columnist David Leonhardt. He wrote in his column this week, coming up with a large scale homeowner bailout without also helping millions of people who don't need help is almost impossible. First, David Leonhardt says, regulators have to look at two different groups of homeowners.

Mr. DAVID LEONHARDT (Economy Columnist, New York Times): The first group of people who cannot meet their monthly payments or won't be able to soon because they took out adjustable rate mortgages or maybe because they're going to lose their jobs. The second group are people who aren't going to have any trouble meeting their monthly payments, but the house they bought is now worth a lot less than when they bought it. In fact, it's worth less than their mortgage. And so, some of these people have an incentive to walk away from their homes voluntarily because they're essentially making payments on an investment that's never going to pay off.

And what's really tricky is to design a bailout program that doesn't encourage people, actually in both groups, but particularly in the second group, to walk away. Because if the government says, we're going to help anyone who's at risk of foreclosure, suddenly, a lot of people are going to raise their hands and say, hey, guess what? I'm at risk of foreclosure. Please help me.

SEABROOK: So, OK. Let me just be the advocate for the consumer here and say, why not just help everyone?

Mr. LEONHARDT: There are two answers to that. One, it would be fabulously expensive. Potentially, we're talking about trillions of dollars, a price tag that would dwarf the price tag of the bailout we already passed. But there's a second reason, which is in the popular discussion, this notion of helping Main Street and helping homeowners who are in trouble has sometimes gotten conflated.

The fact is, we can help people. We can help Main Street in ways besides simply helping underwater homeowners. We can extend unemployment insurance benefits. We can do things to help people who are otherwise going to be hit by this recession. And it's not obvious to me why someone who bought more home than they can afford is more deserving of government help than say someone who loses their jobs and happens to rent their home.

SEABROOK: OK. Let's talk about the plans that are out there, though. And starting with John McCain's plan. He has a plan that would buy up bad mortgages. What is that? What are the effects of that?

Mr. LEONHARDT: So, the benefit of this plan is that it would buy bad mortgages and help people stay in their homes. And as I've said, we do want to do more of that. The big down side about John McCain's plan is that it would - it has offered to buy those mortgages at their original value. And these mortgages aren't worth what they used to be worth, clearly, because many people aren't going to pay them off.

And so, it would, in effect, be a big subsidy both to the homeowners who bought too much home and even more so, in some ways, to the banks. It's going to be very difficult to come up with another value to put on those mortgages besides the original one because many of these mortgages are chopped up in hundreds or thousands of pieces, and you have to get everyone to agree. So, to buy them back, you may have to overpay for them. But it's very clear that John McCain's plan is overpaying for them. And the question is, is that really the best use of government money right now?

SEABROOK: OK. What about Barack Obama's plan? So far, the most he's said in specifics is that we would halt foreclosures for a period of three months.

Mr. LEONHARDT: What he said is that the companies that participate in the bailout should participate, should be forced to have a 90 day moratorium on foreclosures. This is interesting because a 90 day moratorium on foreclosures is an idea that Hillary Clinton had in the primaries, and Barack Obama opposed. Now, his specific plan here is a little different because it's connected to the bailout.

A 90 day moratorium on foreclosures is a less ambitious plan than John McCain's, and that is both what it makes it better and worse than John McCain's because McCain is so ambitious that it's problematic. Obama's probably wouldn't do much damage. It's not clear it would do all that much to stop foreclosures. This is an interesting issue in which, arguably, Obama is pretty clearly to the right politically than McCain.

SEABROOK: Are there other ideas floating around out there?

Mr. LEONHARDT: There are other ideas. My colleague at the Times, Joe Nocera, wrote about one of those ideas. It's been put out there by a number of people, and the idea is basically to take people who are at risk of foreclosure and say, OK, you can stay in your home, but you don't own it anymore. Instead, you can rent it for a period of time. The rent is almost certainly going to be less than your mortgage payments were. You can maybe rent it for five years. So, the bank repossesses the home, but the government will go to the bank and say, you cannot then kick the person out. And so, that has the advantage of people don't get to keep homes that they couldn't really afford, but they also don't get thrown out on the street, and we don't have all these homes forced on the market at the same time.

SEABROOK: So, the desire to bailout Main Street, as we've been calling it, seems to be understandable. I mean, ultimately, though, in your view, is focusing on mortgages the way to go?

Mr. LEONHARDT: I think it's a way to go. I think we should do more than we have in order to help some people stay in their homes who, it seems like, with relatively little help, we could get them to stay in their homes. But I think it's wrong to suggest that we can solve the foreclosure problem at this late point, or that our entire focus should be on homeowners who bought homes that they couldn't afford.

SEABROOK: David Leonhardt, he writes a column on the economy for The New York Times. Thanks very much for coming in.

Mr. LEONHARDT: Thanks for having me.

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