As Housing Goes, So Goes the Economy
The Great Recession began with the bursting of the housing bubble. Today, nearly two years after the recession officially ended, the housing market is still in trouble.
At times, it has looked as if things were improving, like last year’s jump in sales because of a temporary homebuyer’s tax credit or the recent rise in new-home sales from near-record lows. But, over all, sales and construction have been flat for two years, while prices, driven down by foreclosures, are plumbing new depths.
Even a recent drop in foreclosure filings isn’t a reason for optimism. April was the seventh straight decline in monthly filings — which include notices of default, auction and bank repossessions — according to RealtyTrac, a real estate data provider. But the decline appears to be largely the result of banks slowing the foreclosure process in order to keep properties off the market until prices recover. The catch is that prices are unlikely to recover as long as millions of foreclosures are imminent.
This isn’t just bad news for homeowners. Selling and building of houses are one of the economy’s most powerful engines. Until the market recovers, the entire recovery is imperiled. Falling home equity dents consumer confidence, making things even worse.
Since the problems in housing are not self-curing, a government fix is in order. But the Obama administration’s main antiforeclosure effort has fallen far short of its goal to modify three million to four million troubled loans.
Its basic flaw is that participation by the banks is voluntary. Most have joined the program but face no real pressure to meet its goals. Another big problem is that banks often do not own the troubled loans; rather, they service the loans for investors who own them. As servicers — in charge of collecting payments and managing defaults — banks can make more from fees and charges on defaulted loans than on modifications. Not surprisingly, defaults proceed and modifications lag. Banks win. Homeowners and investors lose. The economy suffers.
That does not have to be the end of the story. In a recent hearing in a Senate banking subcommittee, witnesses proposed new laws and regulations to change loan-servicing standards in ways that would prevent banks from putting their interests above those of everyone else.
For starters, various government guidelines on loan servicing would be replaced with tough national standards. Among the new rules, homeowners would be evaluated for loan modifications before any foreclosure — or foreclosure-related fee — is initiated. The bank analysis used to approve or reject modifications would be standardized and public, and failure by the bank to offer a modification when the analysis indicates one is warranted would be grounds for blocking any attempt to foreclose.
National servicing standards could succeed where antiforeclosure programs have failed, namely, in compelling banks to help clean up the mess they did so much to create.
In the Senate, Democrats Jack Reed and Sheldon Whitehouse of Rhode Island and Sherrod Brown of Ohio have introduced bills to establish standards. The new Consumer Financial Protection Bureau can also impose servicing rules. The Obama administration should champion national standards, and Congress and regulators should act — soon.
Standing Up to Unwarranted Police Power
What’s wrong with the police kicking in the door of an apartment after they smell marijuana drifting from it, if they knock hard, announce who they are and then hear what sounds like evidence being destroyed?
Some lower courts have said the answer is pretty much everything, because the police themselves created the pretext for barging in. But the Supreme Court ruled last week that such a warrantless search does not necessarily violate the Fourth Amendment, according to a vague new standard for determining whether the police violated the protection against unreasonable search, or threatened to do so.
They sent the case back to the Kentucky Supreme Court, which is going to have a hard time understanding the new standard — and in any case never resolved whether any evidence was, in fact, destroyed.
Ruth Bader Ginsburg, the lone dissenter in this strange decision, wisely warned that the new rule gave the police “a way routinely to dishonor” the constitutional requirement that they obtain a warrant, by manufacturing an exception to it. There are already exceptions for “exigent circumstances,” emergencies like an imminent risk of death or a danger evidence will be destroyed. But the urgency usually exists when the police arrive at the scene. In this case, the police caused the exigent circumstances themselves.
The new rule undermines the rule of law by shifting the power to approve a forced entry from a magistrate to the police. It empowers the police to decide whether circumstances allow them to kick in the door.
The majority opinion by Justice Samuel Alito Jr. says that the “exigent circumstances” rule applies even though the police triggered the danger that evidence would be destroyed. Apartment-dwellers with nothing to hide, the justice said, are at fault if they don’t take advantage of their right to refuse entry when the police knock. (As if this would be realistic even in Justice Alito’s neighborhood.)
Justice Ginsburg asks, “How ‘secure’ do our homes remain if police, armed with no warrant, can pound on doors at will and, on hearing sounds indicative of things moving, forcibly enter and search for evidence of unlawful activity?”
Her dissent is a reminder of the enduring value of privacy, as well as of her value to American law. It is unsettling that she is the only justice to insist that the law hold the line on its definition of exigent circumstances so that our “officers are under the law,” as Justice Robert Jackson once put it. But it is reassuring to have her stand up for the Fourth Amendment and to police power that is literally and constitutionally unwarranted.
The G-8’s Self-Serving Math
The final communiqués haven’t been written. But the word on the street is that when leaders of the Group of 8 industrialized countries meet in France this week, they will claim that wealthy countries have come close to fulfilling their 2005 promise to boost annual development aid by $50 billion by 2010. They are not even in the ballpark.
The Organization for Economic Cooperation and Development, which keeps track of aid flows, said aid from rich nations in 2010 was $19 billion short of the promises made at the G-8 summit meeting in Gleneagles, Scotland, six years ago. Aid to Africa came in $14.5 billion short.
Yet the G-8 seems determined to fudge the numbers rather than admit to a broken promise. The accountability report published on the G-8 Web site last week inflates the aid figure by not accounting for the fact that a dollar today is worth much less than it was when the promise was made. By this accounting, annual aid from wealthy countries came about $1 billion short.
According to the OECD, most European donors have also failed to hit their pledge to increase aid to 0.51 percent of gross national income. Italy delivered only 0.15 percent; Germany only 0.38 percent. The United States looks better mainly because it didn’t make such a commitment. Last year, American aid amounted to only 0.21 percent of G.N.I. It was, however, one of very few countries that made good on its promise to double aid to Africa.
It is disheartening to know how low a priority the wealthy countries still put on development in the poor world. What’s more, the sleight of hand by the G-8 is unlikely to inspire much confidence in future promises. The only good news, we suppose, is that the impulse to fudge the numbers suggests the leaders of the rich world do have some shame. It would be better if they told the truth and then made good on their commitments.
Protecting High-Risk Students in New Jersey
The New Jersey Supreme Court stood up for the state’s children and strongly rebuked Gov. Chris Christie when it ruled on Tuesday that his draconian school budget cuts violated the State Constitution by depriving impoverished children of an effective education.
In 2009, the state promised the court that it would adequately educate these children through a financing formula that guaranteed districts enough money to provide tutoring, counseling and services that high-risk students need to succeed at school. Mr. Christie sabotaged the plan last year when he vetoed a bill that would have raised revenue by taxing New Jersey’s wealthiest citizens. He then used the shortfall as an excuse to shortchange fair financing by about $1.6 billion, a cut of nearly 20 percent.
The cuts were disproportionately destructive for poorer districts that have weak tax bases and depend most heavily on state aid. Earlier this spring, a state court found that the cuts had already harmed disadvantaged children, placing them at an even greater risk of not meeting state standards.
In this latest, strongly worded ruling, the New Jersey Supreme Court admonished the state to put its house in order and reminded the governor and the Legislature that they were “not free to walk away from judicial orders enforcing Constitutional obligations.” Citing limited authority under the law, the court ordered the state to restore about $500 million to the 31 poorest districts covered in the long-running school financing case. The state is also required to ensure that adequate financing continues to flow as intended to these districts in future years.
Governor Christie, who suggested at one time that he would simply ignore this ruling, has apparently remembered his oath of office and says he will obey. That’s not enough. He and state lawmakers have a moral and legal obligation to do better, not just by the very poorest districts, but by the more than 200 districts being starved of the aid that they are legally entitled to and desperately need to educate their high-risk children.
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