SLOW MOTION KATRINA. Rep. Barney Frank’s House Committee on Financial Services began its hearings on the meltdown in subprime mortgage credit this morning, taking testimony from key regulators. I would be surprised if the resulting policy changes are bold enough. Congress first needs to act to prevent a rolling epidemic of foreclosures, that will only depress property values and, in turn, create more foreclosures. We need to help both innocent borrowers who filed good faith applications, and those who were the victims of either a bait-and-switch mortgages or of a falling housing market. I'd exclude speculators. “Only” one to two million homes are expected to go into foreclosure in the next year because of back-loaded hikes in interest rates -- unless Congress or the executive branch does something big. On a national scale, two million foreclosures would represent a lot of heartbreak and would accelerate the slide in housing prices, but some experts argue that the overall economic hit would not be that severe. However, a lot of these expected foreclosures are highly concentrated in low income and minority neighborhoods, and for those areas this is a true Depression-scale disaster. Think of it as Katrina without the water. Like the response to Katrina, the Bush’s administration’s proposals are too little and too late. These borrowers are precisely the people targeted by Bush’s “Ownership Society” rhetoric -- hard working low income, first time homeowners aspiring to join the American dream. The Democrats are proposing to have Fannie Mae and Freddie Mac refinance some of these distressed mortgages, but what we really need is something like FDR's Home Owners Loan Corp, which refinanced millions of homes during the Great Depression. Applicants would apply for refinancing, and would be assessed on whether they were speculators or bona fide owner-occupants deceived by misleading terms. The cost to the government of subsidizing the interest would be in the single-digit billions. That’s not petty cash, but it’s a lot less than the cost of the Savings and Loan collapse of the 1980s (over $400 billion), and if the result is to stave off a cratering of housing values or a further hit to credit markets, the national benefit could be in the trillions. This is part of my new daily commentary on the financial meltdown and the demonstrated failure of right-wing economics. Check out the rest here. --Robert Kuttner
