Glenn Hubbard

Romney adviser Glenn Hubbard

Mike Konczal decided to do some sorely missed actual reporting at last week’s debate, seeking out Glenn Hubbard, one of Mitt Romney’s key economic advisers, for a discussion on housing policy.

Hubbard designed a fairly activist housing policy (in the sense that it would intervene in the market to encourage mass rewrites of loans) several years ago with Columbia University colleague Christopher Mayer, something absent from all of Romney’s meager discussion of the topic. So Konczal decided to chat up Hubbard on this. Here’s the entire short discussion.

Mike Konczal: In 2008 you co-wrote a plan with Chris Mayer on the housing market that called for mass refinancing and principal reduction through the GSE. In 2011 you released another plan with Mayer that just featured the mass refinancing. Why was there the change?

Glenn Hubbard: It wasn’t principal reduction; it was setting up a Home Owners’ Loan Corporation model.

There was a debt-to-equity swap in your proposal.

Right. What we focused on in 2011 was trying to give direction to the Obama administration, which was bungling the mass refinancing so badly. That’s why we focused on that. I still think it would be a good idea to have a Home Owners’ Loan Corporation. But the point of that piece was that the Obama administration had bungled every housing plan, so we were trying to provide some guidance.

Earlier this year, HARP, the Home Affordable Refinancing Program, was relaunched as HARP 2.0.

It’s still a failure.

After the relaunch, we are seeing a large increase in refinancing on very underwater homes, particularly those with loan-to-value over 125 percent.

It’s still a failure. If you compare it to the number that Chris Mayer and I had argued, it’s trivial.

Compared to the number of possible refinancing?

Yes. The reason is the GSEs have stood in the way, and the Obama Treasury has not managed the GSEs in such a way as to facilitate its own policies. It’s really quite sad.

But that’s an FHFA problem, is it not?

I’m sorry, but you can’t duck the FHFA.

So you think President Obama should have done a recess appointment [to replace Ed Demarco] at the FHFA?

I don’t manage the Obama appointments, but I do know that the FHFA has mismanaged the president’s own plan.

What would a President Romney put forward in the housing market?

What Governor Romney wisely is focused on is the long term in housing. We need to wind down the portfolios of the GSEs and reassess the governmen’st role in such a way to get more private capital back into housing.

In 2008 you argued that cramdown, or some sort of bankruptcy reform, was a bad idea because it could impact long-term growth. In retrospect, do you still think that?

Yes. I still believe that. I absolutely think that was the correct call.

OK, so first, Hubbard denies that his initial plan included principal reduction, even though it delivered equity back to the borrower by allowing the lender a piece of the upside when prices recovered. He wants to call it an HOLC, which is similar to what Sen. Jeff Merkley has sketched out as a policy, which he is putting into practice with some pilot programs. Konczal didn’t get to ask Hubbard whether he supports the Merkley plan.

Then Konczal asks about HARP 2.0, which Hubbard quickly deems a failure, because it has led to only 118,000 underwater refinancings, far less than Hubbard’s on-paper plan allowed for. Hubbard blames the GSEs, which are independent agencies. Banks themselves have complained about not being able to handle the flow of applications for refis. Where Hubbard is correct is that the GSEs have allowed servicers to stifle competition for underwater refis, which traps borrowers and forces them to pay higher rates.

If Hubbard wants to argue that FHFA has mismanaged the Administration’s plans, I’d agree, though that’s far more the case on principal reduction than it is on refinancing. The President should have replaced Ed DeMarco years ago; it’s a completely valid criticism.

But then when the question turns to Mitt Romney’s plans for the housing market, Hubbard focuses on winding down the portfolios of the GSEs. This outsized portfolio is the only thing that facilitates the kind of housing intervention that Hubbard supports. Unwinding it and bringing back private capital would eliminate the leverage to help underwater homeowners of any kind. And bringing back private capital is a meaningless buzz phrase; the private securitization market has been dead for years now, and there’s no emphasis on fixing that in such a way that would bring investors back.

Finally, Hubbard rejects cramdown and believes he made the right call on it. I don’t think you have much credibility on these issues with such a take, but nobody seems to care about the leveling effect of cramdown in helping secure homeowner relief, despite the fact that going through the private market channels never lives up to the hype.

I hope that Konczal, or someone like him, secures the same kind of comments from an Obama campaign economic point person on housing. They would no doubt focus on HARP’s successes, say that they want to extend it to privately-owned loans, and that would be about that. Treasury has blessed the Merkley HOLC program, but it looks like they’re treating it like a boutique operation rather than something wide-ranging.

Meanwhile the foreclosure crisis continues, and banks continue to hoard foreclosed properties for their own market-distorting purposes. It’s sad that nobody is putting solutions on the table.

Photo by Jeff Maurone under Creative Commons license