Democrats address a Nevada issue: Foreclosures

Michael J. Mishak

Sunday, Dec. 9, 2007 | 2:22 a.m.

The Democratic presidential candidates, reluctant to embrace Western issues as they campaign here, are now addressing the one subject that is hitting harder in Nevada than in any other state: the subprime mortgage crisis.

Nevada has led the nation all year in the percentage of foreclosures among homeowners, and subprime lending - the practice of extending loans to borrowers with spotty credit - is the key culprit in what has been widely acknowledged as a national crisis.

The issue is politically potent as Nevada prepares to host the third presidential nominating contest in the country on Jan. 19, and candidates are rushing to offer their prescriptions.

President Bush, after weeks of talks among Treasury Department officials, mortgage lenders and Wall Street firms, announced a plan Thursday to help some homeowners by freezing their interest rates for up to five years.

But, as the Democratic contenders were quick to point out, the plan excludes many, if not most, subprime borrowers - including those who are delinquent on their payments - 22 percent of all subprime borrowers, by one count. Barclays Capital, extrapolating from a similar program in California, has estimated that just 12 percent of all borrowers will get relief.

New York Sen. Hillary Clinton and former North Carolina Sen. John Edwards preempted Bush's announcement by unveiling plans of their own Wednesday. Illinois Sen. Barack Obama addressed the issue and outlined his proposal in a speech at the Nasdaq Marketsite in Times Square in September - the same venue Clinton chose for her speech last week.

The top three Democrats have been calling on the administration to convene a summit with the affected parties as early as March, but the intense focus this week on the housing crisis - by the candidates as well as the White House - signals a change in the dynamics of the presidential race as the all-important Iowa caucus approaches. Some political observers are calling the economy the sleeper issue of the campaign, and the candidates are tapping into the public's deep-seated anxieties.

"If we don't tackle the foreclosure crisis, we'll see a cascade of economic consequences," Clinton said in an interview. "That, combined with the already stagnant wage situation for most Americans, increasing costs for health care, energy, education and most of the other hallmarks of a middle-class lifestyle, means we're going to be facing some very tough choices."

On the housing crisis, the top three candidates are in broad agreement: All support some sort of moratorium on foreclosures and advocate freezing fluctuating interest rates to give homeowners time to convert to more affordable, fixed-rate loans. They also propose a fund to help affected homeowners cope with the crisis.

Still there are differences, big and small.

For instance, Clinton is calling for a 90-day moratorium on foreclosures and a five-year rate freeze, both dependent on the voluntary cooperation of lenders. If the financial industry opposes her measures, she said, she would consider legislation to make the steps mandatory - including giving legal protection to lenders who fear being sued by investors for renegotiating mortgages.

By contrast, Edwards would effectively make those measures mandatory from the outset. He proposes protecting homeowners from foreclosures until their lenders offer assistance, and freezing interest rates for seven years. "The important difference is it's something that should be available to every borrower, mandatory for lenders and include a case-by-case examination of borrowers' needs," said Edwards' policy director, James Kvaal.

Both Clinton and Edwards support some kind of reporting system to track the progress of lenders in converting subprime loans.

Obama has proposed a new tax credit on mortgage interest for people who do not itemize their deductions and cannot currently deduct their interest payments. He also supports a government fund to help victims of loan fraud and a change in bankruptcy law that would allow homeowners to renegotiate the terms of their mortgages.

Edwards supports a similar change in bankruptcy law, as does New Mexico Gov. Bill Richardson.

Obama's proposal looks beyond the short-term housing crisis and aims to tackle the resulting credit crunch, said Austan Goolsbee, Obama's economic adviser. Toward that end, Obama is also proposing a middle-class tax cut in the hopes of boosting the country's personal saving rate, which hit zero percent in 2005 and is now negative.

"You have to set up general structures because you can't do this on a case-by-case basis," he said. "Moratoriums do make sense, but by doing those we shouldn't think we're solving the problem. We can screw the cap on the sour milk and keep it from stinking up the house, but at the end of the day we need some new milk."

Another difference: Edwards and Obama propose establishing a fund with public money to directly help at-risk homeowners, while Clinton supports a fund, estimated at $1 billion, to help existing state foreclosure programs.

All three plans provide protections for the two groups excluded from the Bush proposal - homeowners whose rates have already reset or will reset by year's end and those who are delinquent on payments. The plans, however, cover only owner-occupied homes, not those purchased by investors or speculators. About 40 percent of the foreclosures in Southern Nevada have been on owner-occupied units.

In Nevada, the forecast is a mixed bag: Although economists and financial analysts told state legislators last week that a turnaround is on the horizon, spurred by the $36 billion in megaresort construction expected in Las Vegas in the next few years, they said the state's foreclose problem will get worse before it gets better. The crisis, experts said, won't bottom out until late 2008, ensuring it will be a potent issue in the general election as well.