Mitt Romney’s State of the Union Challenge on the Mortgage Crisis
by Eliot Spitzer and Dylan Ratigan


Finally, a presidential candidate came out and honestly addressed the biggest problem in our economy, the enormous debt overhang in our mortgage market. A few days ago, Mitt Romney was at a forum in Florida talking about foreclosures, and his comments were actually refreshingly honest about our housing and banking situation and the need for a debt write-down.

We’re just so overleveraged, so much debt in our society, and some of the institutions that hold it aren’t willing to write it off and say they made a mistake, they loaned too much, we’re overextended, write those down and start over. They keep on trying to harangue and pretend what they have on their books is still what it’s worth.

Mitt Romney was pointing out that the banks are carrying debt on their books at inflated values. When was the last serious politician to make that point, openly? There’s more.

In some cases, if the debt is not in something you can service, it’s like you have to move on and start over away from those debts. It’s helpful if you get an institution that’s willing to work with you, but if you don’t you have no other option.

Romney is now saying that if you can’t pay your debts and your lending institution won’t work with you, walk away. Perhaps this isn’t so surprising, though, as Romney is an expert in debt restructuring. This is actually just common business sense.

And finally, he offered a real solution to the mortgage debt crisis.

The banks are scared to death, of course, because they think they’re going to go out of business… They’re afraid that if they write all these loans off, they’re going to go broke. And so they’re feeling the same thing you’re feeling. They just want to pretend all of this is going to get paid someday so they don’t have to write it off and potentially go out of business themselves.”
This is cascading throughout our system and in some respects government is trying to just hold things in place, hoping things get better… My own view is you recognize the distress, you take the loss and let people reset. Let people start over again, let the banks start over again. Those that are prudent will be able to restart, those that aren’t will go out of business. This effort to try and exact the burden of their mistakes on homeowners and commercial property owners, I think, is a mistake.

This is the right approach to the problem. If you force the banks to recognize losses on the mortgage debt they are holding, then all of a sudden they will have an incentive to write down debt. Otherwise, a bank will do anything it can to maintain the fiction that the debt is worth 100 cents on the dollar, including lie, harass, and robo-sign.

There are ample reasons for cynicism, the cup overfloweth with them, perhaps. Still, what’s shocking about these comments is how casual they are, as if it’s common knowledge that the banking system is still insolvent and that our debt loan cannot be paid back. Among financial elites, it in fact is common knowledge. Tim Geithner noted this when he talked about Lehman Brothers and the “air in marks” on the debt it was holding on its books. And Martin Feldstein on the Republican side and Alan Blinder on the Democratic side are both arguing for debt write-downs. Everyone knows this has to happen, that the accounting manipulation needs to stop. But Mitt Romney actually said it.

We’re pretty sure that Romney will walk these comments back if necessary, since he holds positions only insofar as they are convenient. Since at that same forum he called out for praise one of the most bank-friendly state officials in the country, Florida Attorney General Pam Bondi, we can probably measure his adherence to this common-sense approach in micro-seconds.

But what this episode shows is that the solutions to our crisis are understood. In the book Greedy Bastards, the question of restructuring debt is considered in detail. We need a debt deal, as Romney inadvertently noted. More fundamentally, getting rid of the accounting gamesmanship will lead to a healthier economy because it will align financial assets with real economic assets. As another example, credit default swaps are linking American banks excessively to an unstable Eurozone. Credit default swaps are in fact yet another accounting game designed to further balance sheet fictions. Dick Grasso offered his solution to this obvious problem. We can, according to Grasso, simply declare these contracts online gaming, and void them.

What Americans should be taking from this episode is that finance, while complex, is not conceptually hard. If it’s a lie on the balance sheet, it’s going to be destructive to ordinary people. If you stop the balance sheet lying, the economy will do better. But while Mitt Romney might have said this out loud, they all know it behind closed doors. Our question is, who will be the first to make this a policy reality?

Category: Foreclosures, Real Estate, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Mitt Romney’s State of the Union Challenge on the Mortgage Crisis”

  1. Futuredome says:

    The problem is, the banks can’t write down the debt. About half of them are insolvent globally. That would crater global GDP and create more debt.

    People just can’t seem to understand this. It is why they keep on playing their foreclosure and fraud games.

  2. TR says:

    Do banks even own our mortgages? These are pensions and retirees aren’t they? Overseas many of the home loans are cross border and in worse trouble because of currency issues. Selling them to investors for rentals is spooky. This looks like the S&L crisis. You and I will be footing this bill if they can’t drag it out till the economy recovers. This mess is so tragic.

  3. Sechel says:

    A mortgage is a secured debt, and especially if you live in an non-recourse state defaulting and putting the property is certainly a viable and legal strategy albeit with credit implications. This is no different than a commercial developer defaulting on a loan which nobody claims is a moral issue. In some cases the best relief for an underwater home owner is default. Actually seeing strategic defaults would be healthy as it would force lenders to properly evaluate the security of the credit and the ability of the person to repay. Credit eventually gets repaired and there’s always somebody who will rent a place to person who has previous credit issues under some terms.

  4. And then, of course, we still have the little matter of student loan debt…

    How many live in the dream world believing that those loans will be repaid?

    The people in this country have a lot of waking up to do.

    The financial services sector left Adam Smith behind decaddes ago…

    Productive investment was just too tough… and persuading politicians was just too easy…

    Bleeding a pliant and trusting public became the preferred path to profits… but that could only go on so long.

  5. ilsm says:


    Too bad Willard could not get a $4M tax break to send TBTF missionaries around the country selling a phophet’s tale on TBTF.

    Those big insolvent banks can fail, it merely means the shareholders lose their risky bets.

    The fed and states can charter hundreds of small banks or several millions of individual mini banks with access to the fed window formerly reserved for the TBTF’s monopoly on monetary issue.