Richard Whalen

The present consumer-led economic slowdown is centered in the housing sector. The presidential candidate who acknowledges this slowdown and comes up with viable proposals to reverse the continuing housing price decline will win over America’s increasingly anxious voters.

Steve Gandel, writing in Money Magazine, reports many Americans are confused about the real stakes in helping fellow borrowers who cannot afford their adjustable mortgages and face foreclosure. It’s not a favor to the irresponsible rabble as much as it is a bigger, selfish favor to us.

Without any government intervention, Gandel warns, “an estimated 3.5 million homeowners could default on their mortgages in the next 30 months. That’s the estimate of Mark Zandi, at Moody’s economy.com. Such a wholesale dump of houses for sale on a glutted market would continue to depress prices.

The Center for Responsible Lending, a consumer group, estimates that an increase of one million foreclosures would lower the prices of as many as 44.5 million homes by a collective $223 billion loss of vanished equity. “If we don’t help homeowners having problems paying their mortgage, everyone’s net worth is going to go down,” says Zandi.

Mortgage lenders who’ve taken big hits would demand much bigger risk premiums from borrowers. Rates would go up and stay up. Fannie Mae and Freddie Mae, which help finance half the nation’s mortgages, have added a 1.25 percent fee to be paid by borrowers. On a $300,000 loan, that’s $3,750. The S&P/Case-Shiller 20-city home price index fell 7.2 percent in November 2007 from the year before, the biggest decline since the index was created in 2000.

Business Week warns home prices could sink an additional 25 percent over the next two to three years, through 2010. That sickening fall would bring the national housing price level back to its long-term growth trend line, a modest 0.4 percent a year after inflation.

A 20 percent decline in housing prices would wipe out all the home equity of two-thirds of the people who bought in the past year, Business Week reports. Most people believe that their houses have not lost any value yet – a shattering awakening to come.

In a 1989 study, Harvard economists N. Gregory Mankiw and David N. Weil predicted that over the next 20 years, home prices would decline by 47 percent after inflation. When people discover they owe more on their mortgages than their homes are worth, experience shows many will simply mail the keys to the lender and walk.

So far, the only plan on the table proposed by President Bush and Treasury Secretary Paulson calls for lenders to help homeowners with 2/28 or 3/27 mortgages. They have a fixed rate now, typically 7 percent, but then it would rise in the next few years to as high as 15 percent. The monthly cost of a $300,000 mortgage, an initial $1995 payment, would nearly double to $3,793.

The Bush-Paulson plan would freeze the initial interest rate for an additional five years. To qualify, a homeowner would have to have a credit score of 660 (out of 850) and home equity of no more than 3 percent. Those with a higher credit score or more equity would be deemed able to refinance or continue paying. They would be stuck – a very shortsighted approach by the administration.

The housing sector depression has the potential to destroy the financial well-being of America’s middle class. I believe Bush’s economic stimulus plan which may not reach most voters until May or later is too small and will not make them feel any better.

It is interesting that the New York Times reports that in their December 2007 poll, as middle-class economic anxiety rose, 49 percent said they were more confident that Democrats would ensure a strong economy while only 31 percent trusted Republicans.

We will get our answer after the votes are counted tonight -- this Super Tuesday evening.