Conference Call with Senate Majority Leader Harry Reid (D-NV), Senator Christopher Dodd (D-CT), and Jared Bernstein, Senior Economist at the Economic Policy Institute, Subject: Legislation Relating to the Housing Crisis
Interview
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SEN. DODD: Well, thank you, Leader Reid. And let me begin by thanking the leader, because he's been just tireless on this issue over the last number of weeks, and we're going to try it again this week.
And let me also acknowledge the participation of Jared Bernstein, who's been very, very helpful and one of the respected voices on economic issues affecting people across the country,
And this is a pivotal week. We had an opportunity several weeks ago to take some steps here, and unfortunately, we were deprived that opportunity because we couldn't get cloture. Now this week we have a chance to do it again. And I've spent a good part of the last number of days here talking not only with my Democratic colleagues on the Banking Committee but also Republican members of the Senate about the ability and willingness of them to work with us to get something done. None of us claim a pride of authorship in every detail, but we need to be stepping up.
As the leader has pointed out, two weeks ago we saw the administration step up and provide some real assistance to Wall Street. It's now critically important that this administration step up and do what they can to help the average American. This problem is growing worse by the hour. It is as serious an economic condition as we have seen in decades in this country, and every day we delay, every hour we delay places more Americans at risk and in greater jeopardy. American homeowners are in difficult straits. They're losing their homes. Foreclosures are on the rise. In my state of Connecticut last week, in the largest city of my state, Bridgeport, Connecticut, 6,000 foreclosures in one city. We've had over 200 calls alone in the last week in my office of people worried about losing their homes.
And I know my state is not the exception. In fact, this is going on all across the country. The headline in yesterday's New York Times, talking about how the members of Congress home over the break have been inundated with concerns expressed by their constituencies across the country about this issue. We're watching home prices continue to fall. Unemployment is up. Families are falling further and further behind in their ability to pay their mortgages. It's now a contagion. It's gone to car payments -- student loans, the ability to buy groceries have all been affected by this growing problem.
So my hope is this week, as the leader tries once again to bring up our Foreclosure Prevention Act -- and he's outlined the various provisions in that bill -- we welcome ideas from the other side, if they've got additional thoughts and ideas on how we can address this issue.
Remember, this economic crisis has as its center a housing crisis, and the center of the housing crisis is the foreclosure crisis. And so we need to address that issue, to find that floor, to find that bottom of this issue, before credit and capital is going to be freed up and begin to work ourselves out of this situation.
So we're urging people who care about this, including the administration now, to step up and get behind our ideas here, so that we can take some action. Failure to act is not just -- failure and failing to act is not acceptable, and so we need to move.
MR. BERNSTEIN: Well -- this is Jared Bernstein -- thank you, Senators, for inviting me to be part of this call, and thank you especially for your responsiveness on these issues.
The goals of economic policy right now might usefully be characterized as the following: help those who can and should avoid foreclosure to do so, often by offsetting their negative equity; resolve the housing crisis by hastening, quote, "price discovery," finding that bottom that Senator Dodd just talked about, and do so conservatively, with a minimum of moral hazard and without throwing good money after bad; provide adequate economic stimulus and safety nets to Main Street as well as Wall Street.
I'm just going to add a sentence or two on each of those points.
The most direct cause of the downturn, as you just heard, is the bursting of the huge housing bubble and its spill-over damage into inadequately regulated financial markets. A big problem we're facing now is that the housing market has a unique characteristic. It takes a long time for price corrections to occur there, and the market can't clear until this correction is complete.
Now, a good way to view the proposals we're talking about today, such as Senator Dodd's idea, is in an enticement for lenders, an enticement for lenders to hasten this price correction process by trading a government-backed loan guarantee for a very significant short sale or a reduction in the original value of the home loan.
Now, how does this legislation complement these goals? Well, the short sales should induce mortgage write-downs of 20 to 50 percent, which implies home prices much closer to the levels most economists view as necessary to clear the market. Now these write-downs close the gap between home value and loan value, thus restoring positive equity for homeowners. The eligibility rules designed to exclude speculation will help limit the government's exposure and reduce the perception of any bailing-out of undeserving players here.
In essence, the plan gives lenders the chance to take a quick hit versus a slow bleed that could end in foreclosure.
Now let me just add a few comments regarding current economic conditions from the perspective of working families and how they play into all this.
This economy is very likely in recession. That's not official, but call is made well after the fact. Looking back over the recovery, which began in late 2001, a few important developments are worth our note.
It was a highly productive recovery. The -- though the rate of productivity has slowed recently, the efficiency gains over this economic cycle were impressive. But unfortunately few of those gains reached middle-income or poor working families, who are in some important ways uniquely economically unprepared for this recession.
The most recent poverty rate is higher than it was in 2000. The median family's real income is lower than it was in 2000. Most recently, on an annual basis, hourly wages have been lagging behind prices since last October. Moreover, working families are heavily indebted, and their most valuable asset, their home, is likely falling in value.
Now at the other end of the income scale, the top 1 percent hold 23 percent of national income in 2006, the highest income concentration since 1928.
Now, the rebate checks from stimulus one will help struggling families, of course, but there's a chance that too much of it will be saved, used to service this debt or end up in the gas tank, boosting petro-state economies more than our own.
So, planning for a second stimulus package makes sense, especially to redress some of the shortcomings in the first package. That might involve extended unemployment insurance benefits, it might involve a temporary increase in food stamp benefits, and also aid to the growing number of states facing budget shortfalls provides direct stimulus. All of these suggestions have a much bigger bang for the buck than tax cuts or rebate checks.
And finally, from the department of, quote, "closing the barn door after the barn is foreclosed," a discussion is currently taking place regarding re-regulating financial markets. I won't speak about this, in the interest of time, other than to say that most observers, regardless of their ideological or political tilt, view this discussion as overdue and necessary.
BREAK IN TRANSCRIPT
SEN. REID: Jared, let me say a couple things before we turn this open to questions. First of all, many of the things you've talked about are encompassed in Senator Dodd's legislation he calls Hope for Homeowners Act of 2008. As you indicated, eligible borrowers would be only owner-occupants eligible for new FHA-insured mortgage. The new loan amount would determined by the lesser of a number of things, which you've outlined yourself.
So I think that's really, really important that we understand that, that there's -- all we want tomorrow is to allow the Republicans in the Senate to allow us to move forward, a motion to proceed to the legislation. If there's something they don't like in ours, there are some Democrats recognize our package is not perfect. I think a couple of Democrats would vote with them. They've got some things that I think are very attractive that they want to put in our legislation. We want them to do that.
Let's legislate the way we used to do around here. If we can accomplish something, as Senator Dodd said, there's credit to go around to everybody. If we don't, the whole program's failure is at the foot of the Republicans. We want to do something. If they don't like what we've done, let's work together and get something done.
Q Senator Reid?
SEN. REID: Yes.
Q It's Emily Pierce over at Roll Call. You know, you sent a letter to --
SEN. REID: Emily, how do you always -- whether it's on telephone, TV, you're always first. How do you do that?
Q Because I know otherwise I'll get boxed out, to be honest with you. (Laughs.)
SEN. REID: Okay. Sure.
Q You've sent a letter to Senator McConnell. Senator Dodd said that he had talked to Republicans on his committee. I'm wondering, though, what your thoughts are on the ideological differences here between what the Republicans and the Democrats want to do, and whether or not you think that that divide can be bridged either by tomorrow or, you know, in the next couple of months.
SEN. REID: Emily, I hope so. We've had some indication of what Senator Bond wants to do. Much of what he wants to do is taken right from our legislation. Let's work together on this. Senator Dodd has worked very hard on the FHA revitalization. We can do that. Vast majority of Democrats and Republicans in the Senate want to do that. I can't imagine why they wouldn't let us move to this legislation.
So in answer to your question, I don't think the divide is that great. Do you, Chris?
SEN. DODD: I don't. And Leader, let me just say once again, failing to act can't be an option, and failure can't be an option. And so when we're -- we've got to move on this. And my hope is -- and I believe, Leader, and I haven't had a chance to talk with you a great deal about this, but just in very informal conversations -- I was really calling a lot of members just to inform them about a hearing we're going to have on Thursday dealing with the Bear Stearns, JPMorgan situation of a week and a half, two weeks ago.
But in talking with them generally about the subject matter, I think there's a strong desire and a recognition that our failure to step up -- this is not simply a matter of the market reacting. In fact, you've got an oversupply of housing right now. The market can't catch up to this. But every day we wait, there are -- resets on adjustable-rate mortgages are going to start kicking in. When these resets kick in, we're going to face a second wave of foreclosures.
And let me just make the point -- when we talk about Community Development Block Grant money, for instance, why are we talking about that? For every one foreclosure in a square block, the value of every other home in that square block declines immediately by 1 percent, crime rates go up 2 percent, you've lost revenues in most communities because of failure to pay -- the inability to pay property taxes. So police and fire and services also deteriorate and decline. So that's why we're talking about that idea.
Why about counseling? Kit Bond and I offered the 180 million (dollars) for counseling to groups like ACORN. They're making a difference. I listened to a woman in Connecticut the other day, Leader, who said, "But for ACORN coming in, I was about to go under here. I got into a bad deal. I'm living in my home." But because of counseling and working with her bank and working with the mortgage- holder, she was able to stay in her home. So that additional funds we're seeking for counseling really can make a difference for people.
These other items as well, I think, are designed specifically to be part of the assistance. And of course I mentioned the idea of finding the bottom in the floor, so that credit could begin to flow again, is critical. But failing to act can't be an option, and failure on this issue cannot be an option. And that's why we need to work together.
Q Senator Dodd --
Q Senator Dodd, Martha --
SEN. REID: That's the first point of the letter I sent to Senator McConnell which I'm confident and hopeful you saw. We're not going to stop. If we can't proceed to this, we're going to stay on housing. This is something that is in the minds of every American.
And interesting, I travel -- this last two-week period, most of the time I spent in Nevada, meeting with my constituents. I went on a tour of three cities for the DSCC. The rich people know something's wrong, people who have made money on this. Jared, as you mentioned, regulation is long past time to have been here. People who are making their money recognize they've had nobody looking at them. And we are -- (inaudible) -- some of the more difficult areas, like derivatives and issues like that. So regulation is way behind.
Q Senator Reid --
Q Senator Dodd, Margaret Talev with --
MR. BERNSTEIN: Can I just make one comment and just --
SEN. REID: Yes, please do, Jared.
MR. BERNSTEIN: Just very quickly, when markets fail, it's a bipartisan issue. A lot of times the partisan debate is do you want more or less market activity, things like -- in this case, you have a dramatic market failure, the failure of credit markets, of mortgage markets to perform efficiently. In that case, it's not a Democrat or Republican issue. It's a bipartisan issue to get the economy back on track.
Q Senator Reid, it's Margaret Talev with McClatchy Newspapers. On the subject of Secretary Paulson's broader plans to overhaul the nation's financial regulatory system -- you've talked about it briefly -- what I want to know is, is there any chance Paulson's plan would be enacted in whole as it stands, any chance it would happen this year? If you don't think it goes far enough, could you tell us where you think it needs to further?
SEN. REID: One reason Chairman Dodd is starting the hearings on Thursday is to kind of get a feel for where the administration's coming from. We are willing to work with the administration to get this accomplished. If they think it can be done by the end of the year, great. But I have to say, having worked with the White House for more than seven years now, we can't have this as they've done in the past; it's their way or no way. This has to be something we work out the way we've always done things, with compromise.
Chairman Dodd.
SEN. DODD: Well, let me -- this is opening day in baseball, so let me use a baseball analogy. I would call this a wild pitch. It's not even close to the strike zone.
I mean, this is a very legitimate issue, but why bring this up today? I mean, clearly this had nothing to do with the current problems we're facing. We've got a contagion. We're in a recession -- I believe that to be the case. We've got people losing their homes, and this problem's spreading to other sectors of the economy. To talk about overhauling the regulatory system is a wonderful idea, but frankly, it's not at all -- it doesn't relate, in a sense, to the issues that we're grappling with here and the problems we've got to confront.
And as chairman of the committee, I'll be happy over the coming months, once we deal with this issue, to hold a series of hearings. I think it's very important. I think with new instruments out there -- there's a lot of duplication. I've got my own concerns about the Federal Reserve Bank becoming -- both dealing with inflation and monetary policy and a regulator, but that's why you have hearings, that's why you listen to professionals who will tell you what needs to be done in order to straighten out a system.
But the notion somehow implied by holding a press conference today that had we done this, we would have avoided this problem, is completely off the mark. That has nothing to do with it. There's been plenty of regulation. The failure is leadership, the failure of the administration to utilize the tools they've been given over the years to deal with the very practices that cause this problem. That's the problem here, not reorganization of the regulatory system.
Q Senator Dodd, a follow up on that?
SEN. DODD: Yeah.
Q This Leigh Ann Caldwell with Pacifica Radio. First, were you consulted by the administration in this plan and unveiling?
SEN. DODD: No. No. I haven't heard from them yet, and that's fine. Look, I'm not -- I've been around long enough, I don't get my ego offended here if they don't call. And at some point, as chairman of the committee, as I said, we'll look at all of this. We'll begin on Thursday. I clearly want to know what went on with the Bear Stearns/JPMorgan. I want to know -- if we've got $29 billion on the line, who valued these assets of Bear Stearns; how did this happen? If we're opening up the discount window, do we invest in banks and broker dealers? Why wasn't it done earlier? Maybe could have Bear Stearns survived all of this?
We've got a -- I -- just talking to both Republicans and Democrats on the committee, all of my members have serious questions they want answered, and that's why we're going to start on Thursday, and clearly at an appropriate time, we'll get to a hearing on how to reorganize the regulatory structure.
Q Senator Dodd, it's Trish Turner with Fox. Can you tell me --
SEN. REID: (Inaudible) -- after the secretary did his press conference today, he said, we've been working on this for a year. And you can imagine, what they've said today, they've been working on this a year -- why haven't they told us? Why haven't they told us that they saw this crisis coming? Why haven't they said anything to one of the legislators that has to work on these problems? They've been working on this plan for a year? That is hard to comprehend.
Q Senator Dodd?
SEN. REID: (Inaudible) -- frankly.
Q Senator Dodd, can you talk about Alphonso Jackson's resignation, please?
SEN. DODD: Well, look. As Senator Murray and I, you may note, a week or so ago, suggested he step aside. And I don't say that with any joy at all, and I don't know -- there are a lot of unanswered questions. Obviously there have been some very serious allegations raised. And to have a secretary of Housing in the middle of all of this crisis that's got these kinds of problems hanging over the office's head, I think is just unwise.
So I welcome his decision. I hope things turn out all right for him. I don't know enough about these matters. They're in the courts, and others are looking at it. But I think it was the right move. We need to have people whose focus and attention is going to be 100 percent on this issue. And secretary of Housing has to be in that position. With these other matters, it's going to be difficult if impossible for that to occur, so this was the right decision.
Q Senator Dodd, could you tell us -- could you tell us the timings that are on the larger FHA bill? Barney Frank is talking about getting it to the floor within three weeks, and I'm curious what you're looking at.
SEN. DODD: Well, again, I spoke -- I speak with Richard Shelby frequently and talked with Richard yesterday, and we're down to basically one issue there. And I'm not going to negotiate here in public on it. But I worked closely with Barney Frank and I want to thank Congressman Frank and the House members. They've been very forthcoming. And I believe we can resolve the differences. My hope would be -- and I'd hope we might even be able to take that bill as it's resolved and include it as part of a package here this week and we could pass it this week if we could reach accommodation on the outstanding issue.
Let me say as well we're going to get to the government-sponsored enterprises, Fannie and Freddie. I want to do that very quickly as I -- if we can as well. A lot needs to be done. We need to have -- what is most important and what the leader here has tried now over and over again, we need cooperation. This is not a partisan issue. Our economy is in trouble. We need people to step up and recognize. This is not a blue state and a red state issue. It's Americans at risk and it's a global problem now. It's going beyond our own shores. This is a time when leadership has to stand up. Our leader has said, come and join with us. We're now waiting for the return to be a part of that debate and discussion, to do something meaningful on behalf of the American people.
Q Senator Dodd, is there anything in the Paulson plan that you could get behind --
SEN. REID: If you'd please be good enough just to identify yourself --
Q Sure. This is Allison Bakshin (ph) with Bloomberg. Is there anything in the Paulson plan that you can go along with or agree with?
SEN. DODD: Well, there's no point in starting that discussion here. Look, we'll have hearings for it. Let me just say I welcome the idea. It's one I've talked about. Others have up here. It's not new. That we need to get our regulatory structure, our institutions in conformity with the 21st century, the global market we live in. And there are places, you could argue, that we're either unregulated or under-regulated. There are places where we're over-regulated or duplicative. Clearly, some serious thought needs to go into it. For me to start cherry-picking here and identifying one provision or another is something I'm not going to engage in.
Q How soon would you start your hearings on that?
Q Senator Dodd --
(Cross talk.)
SEN. REID: (Inaudible) -- take another question or two and then we'll --
Q Senator Dodd --
Q Senator Dodd? Senator Dodd?
(Cross talk.)
MR. BERNSTEIN: I'm sorry, I just want to make one point about timing. There is a true sense of economic urgency regarding issues like the Foreclosure Prevention Act, regarding issues like the Frank- Dodd plan we've been talking about. These are interventions that need to occur as soon as possible to offset very serious economic headwinds we're now facing.
The regulatory restructuring that needs to occur is also important, but it's not as urgent in a timely sense as the (former ?) set of policies we're talking about. And I think it's an important distinction. I think you need to basically treat the illness that the patient is experiencing before you worry about getting the hospital working again.
SEN. REID: Good point.
Q Chairman Dodd, this is Lori Montgomery with The Washington Post. The administration is talking about enacting some of your FHA proposals, getting the lenders to write down loans by regulation. Have they spoken to you? And do you think they're on the right track?
SEN. DODD: No, they haven't spoken to me about that. But again, I'm anxious for us to get legislation done. That's the better way to do this. We passed the FHA modernization bill 93-to-1 here the end of last year. Barney Frank had a strong vote as well in the House. And again, we're very close to resolving the issues and my hope is we can do it that way. I'd prefer it's done that way rather than having the White House going off on its own sort of disregarding the efforts being made by Democrats and Republicans up here to come to come to closure --
(Cross talk.)
Q Senator -- (inaudible) -- McClatchy Newspapers, the economics correspondent.
(Cross talk.)
SEN. REID: (Inaudible) -- legislation most of the things that has been outlined to this point, because what they've done previously has all been voluntary compliance, and that has not helped at all.
Q Senator Dodd, it's Trish Turner at Fox. Can you tell me -- you said earlier this is a failure of the administration to use the tools they have at their disposal.
Can you talk just a little bit more -- can you elaborate on that for me, please?
SEN. DODD: Well, look, the Congress in 1994, 14 years ago, passed the HOEPA legislation. That legislation specifically was designed to give the Federal Reserve the power and the authority -- in fact, required them -- to promulgate regulations to deal with fraudulent, deceptive practices in the mortgage lending business.
That they did -- in fact, they never promoted one, never even wrote one. And so, you know, the authority exists there to deal with this, obviously, to be watching over what's happening with some of these instruments that were being utilized. And not have regulators step up and express the caution or opposition to some of these -- this is not an unregulated area of our economy. It's a highly regulated area of the economy. And so that's why the suggestion somehow that we need to reorganize the regulatory bodies in this country, and had we done so earlier, at least by implication, this problem wouldn't have occurred, is completely and totally false.
Q Can you talk, Senator -- Kevin Hall of McClatchy newspapers -- because you're from a district --
SEN. REID: Okay, this will be the last question. Please go ahead.
Q Yeah, you're from a district where insurance industry is quite important. I know you don't want to cherry-pick this bill, but one of the more sweeping proposals out of this bill is that federal -- because there's 50 state regulators, that insurers can opt out of a state regulatory scheme and go for some sort of new national scheme. That's an important issue to your district. Can you talk a little bit about that?
SEN. DODD: Well, just briefly. And again, I don't want to get down too far in the weeds with you. But I can make a strong case to you with life insurance, that's the case. With property and casualty, it's another matter. There's some very legitimate issues why state regulation makes more sense in the property/casualty area, and why federal regulatory scheme makes more sense in the life area.
But that's a matter we're already talking about up here. I have a number of colleagues -- Tim Johnson cares deeply about this issue. Others do. We're going to try -- and this whole idea of the optional federal charter. We're looking at that, probably hold some hearings on it.
But again, let's get back to this epicenter of the problem here. It's the foreclosure issue. That's what the leader wants to start with tomorrow. We're going to stick with it. That's what he's tried to do over the last number of weeks. We need some cooperation now, bipartisan cooperation to deal with that.
SEN. REID: Jared, Chris, you've been great. Thank you all very much for tuning in, all my (friends in the press ?).
MR. BERNSTEIN: Senator Reid, thank you.
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