Rubin Advises Quick Action to Fix Economic Crises Citigroup executive Robert Rubin evaluates proposals made by the top three presidential candidates and others to fix the housing and credit crises. The former Treasury secretary is supportive of the idea of renegotiating loans, especially for people whose houses are worth less than their mortgages.
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Rubin Advises Quick Action to Fix Economic Crises

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Rubin Advises Quick Action to Fix Economic Crises

Rubin Advises Quick Action to Fix Economic Crises

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ROBERT SIEGEL, host:

From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.

This week, all three presidential candidates have outlined plans to revive the sagging economy and keep the housing crisis from getting worse. Hillary Clinton also suggested an emergency working group on foreclosures that might be headed by Alan Greenspan, his predecessor is Fed Chair Paul Volcker, and Robert Rubin.

Mr. Rubin is the chair of the executive committee at Citigroup and was Treasury secretary in the Clinton administration. I spoke with him today and asked him first what he made of the Democrats' plans to deal with the housing crisis.

Mr. ROBERT RUBIN (Director, Citigroup Executive Committee; Former Treasury Secretary): Senator Clinton, for example, talked about the importance - and she's absolutely right about this - of protecting servicers against legal liability if they enter into renegotiation of loans. That's a very, very big issue and a real impediment to moving forward. Both of them have supported Barney Frank's proposal as an effort to greatly increase the numbers of loans that get renegotiated.

Senator Obama suggested amending the bankruptcy law. I'm no expert in the bankruptcy law, but a lot of people who know a lot about this seem to think that would be a sensible thing to do so that primary residences could have their mortgages renegotiated within the context of bankruptcy law. And there are a whole host of other proposals.

I think the key is to sort through them, sort through them quickly, make decisions quickly and act quickly.

SIEGEL: But can there really be a fix for those people in the negative equity situation, people whose house on the market right now is just worth substantially less than the loan they took out to buy the house?

Mr. RUBIN: Oh, sure they could, because what you have is a situation where a lender is never going to get a full recovery. And if the lender forces the issue into foreclosure, then most estimates are that you lose 20 to 25 percent of the value of the house just through the foreclosure process itself and its various intricacies.

And so, that probably in many of those instances is a financially better solution that involves writing down the amount of the debt so that is commensurate with the value of the house, and then permitting the family that's in the house to remain in the house with this renegotiated mortgage. So I think the answer is absolutely yes.

In fact, I suspect that to make this work, you probably will also need some use of public funds.

SIEGEL: In this - still very hypothetical example - the public funds might make up the difference between what the lender initially lent and what they're going to scale the loan down to?

Mr. RUBIN: No, because I think that you clearly want the lender to suffer a loss, so that the answer to that is absolutely no. But it may be that the borrower - the family in the house can live with - you may need some public subsidy. And I think that's the kind of issue that needs to be considered when you sort through these various proposals.

SIEGEL: Another dimension of the problems we're now seeing are the securitizing of mortgages help make a lot of money flow into home loans, and that made home buyers out of - a lot of people who couldn't even come up with a down payment, their presence in the market help keep house prices booming. Now, we see house prices coming down. What would it mean for our economy if both the rate of homeownership went down and home prices went down, say, for a couple of years?

Mr. RUBIN: The decline of home prices is exceedingly significant for our economy. Firstly, a lot of consumption over the last - well, really, over this whole decade has been financed through borrowing against ever-increasing home prices.

Secondly, when home prices fall, people feel less affluent, and that can affect the psychology of investors. And then, falling housing prices are the core, in many ways, of the issues around mortgages, and that very much affects credit-extending institutions. Declining housing prices are very much the center of what's happening in our economy.

The question is what do you do about it? And I think that what you do about it, in the short run, is you do whatever is sensible to try to stimulate demand in our economy. And we've done that with the stimulus now and some other measures. You do it with measures that can increase the availability of new mortgages for people who want to buy homes.

And then thirdly, and very importantly what has not been done is I think that you very badly need to have and quickly need to have measures that affect the very large numbers of mortgages that are either currently troubled, or likely be troubled over the next year or two.

SIEGEL: Now, we note, of course, that you were Democratic secretary of the Treasury, but what did you make of Senator McCain's speech in these problems, which seem to simply interpret what's happened as a bubble, not unlike bubbles with high-tech stocks or other bubbles of the past, and you know, markets went up, market will go down, and market will come back again sometime.

Mr. RUBIN: I think we're in somewhat uncharted waters. I think this is an extraordinarily complicated situation, and I do not think that it is wise or sound or sensible given the level of risks that exists.

We may level through this without great additional harm. That, certainly, is possible. But I think the risks are great enough, so that it is not wise to simply sit and watch this thing work itself out. I think we should act in a sound, sensible, material way. There are a lot of proposals around, and I think we need to move forward.

SIEGEL: Robert Rubin, thank you very much for talking with us today.

Mr. RUBIN: You are more than welcome. It was very nice to be with you.

SIEGEL: It's former Treasury Secretary Robert Rubin, who is now chairman of Citigroup's executive committee.

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