Floor Statement on Economy
Floor Statement on Economy
Mr. President, we are in difficult times. Tonight the President will speak to all of us. I look forward to those remarks with great anticipation.
Feb 24, 2009
I told the President, when he appeared before our caucus just 3 weeks ago for lunch, that every night I pray for his success. And I do. Our people are in difficult times. We have difficult economic circumstances. It is imperative that we move forward together as Members of the House and Senate and the executive branch to find solutions to the challenges before us.
Similar to most Members of the Senate, I have a few suggestions. I wish to offer four of them today as we lead up to the discussion tonight and the debate that will follow.
Some of the economic difficulties in the United States are self-inflicted by our own regulatory agencies. In particular, there are two areas I wish to discuss. First is the SEC. Last fall when the markets began to cascade down on Wall Street and when the financial stocks took their initial hit and the subsequent tumble, it was because of short sellers rushing to the market and shorting financial stocks and accelerating the decline of those values. I called Chris Cox, then the SEC Commissioner, and begged him to please implement the uptick rule, which would stop the short selling on the downside and protect the value of those equities.
Fortunately, they did declare a moratorium for 27 days and stopped the short selling and things stabilized. Unfortunately, when that 27 days was over, they reinstituted the former rule, short selling accelerated, and financial stocks deteriorated so that now they are 85 to 90 percent below their value of 18 to 24 months ago. It is imperative the SEC reinstitute the uptick rule to ensure we don’t have people coming into the marketplace and taking advantage of difficulties and suppressing the values of equities even greater than the market might otherwise dictate.
Secondly, there has been a lot of speeches made on the floor about mark to market, and I will make one now. I am going to use specific examples to show you how the imposition of mark to market is hurting our financial institutions desperately, and it is disproportionately penalizing the people we serve.
Mark to market basically takes the position that on any given day you are going to mark your assets based on their value of that day. Given the clients we have seen in mortgage-backed securities and real estate, marking to market has caused a tremendous decline in the asset side of the ledger while liabilities continued to grow, which has caused capital problems in the banking system and exacerbated the financial problems we have today. In fact, mark to market should not be an arbitrary and capricious writedown to zero but, rather, should be a recognition of the transition of values in a down market or in an up market.
The Senate, in 2005, in dealing with the pension crisis and defined benefit programs in America, asked businesses to come in one year and replenish retirement funds because the decline in the stocks was unrealistic. So we passed legislation that provided for a smoothing, meaning we amortized over years 3, 4, 5 or 6 the amount of money a pension fund was short, to give a company the ability to invest capital in the fund to restore it but not to deplete all the capital the company had to operate.
Today, what is happening in our financial institutions, when the FDIC comes in and says you are going to mark to market, and this real estate asset that might have been worth $20 million 2 years ago is worth $6 million today, you are going to take a $14 million hit on the asset side when, in fact, over time that asset might have brought 15, 16, 17, 18 or maybe the original 20 percent because most real estate is absorbed over time and not in one fell swoop. It is very important our financial institutions be able to recognize value in a realistic environment. Some will tell you we don’t want to do what Japan did–and we don’t. Japan, in the 1990s, bought a lot of real estate and put it on the books at what they paid for it. As values declined, they didn’t change the values in the books, and finally when they recognized them, they were underwater.
That was an unrealistic approach. Equally unrealistic is today’s approach of taking today’s economy and saying: Well, because you cannot sell it for X today, that as its value went over time, we could smooth or amortize and approach it realistically. What is happening over and over again, mark to market is causing banks to do things that compound the things we are facing in the Senate and in the House and in our country.
Last December, this body passed the ability for banks to carry back losses against profitable years, pull back some of the money they paid in taxes and provide liquidity. Because of that advantage, which we did for the right reasons, a number of banks took real estate assets in December of last year and wrote them off, even though they were performing, so they could take the loss carryback against income in better years. But now they are coming against the properties as a nonperforming asset and marking it to market in order to call the loan, with nobody out there willing to take them out. The unintended consequences of mark to market and the loss carryback that this Congress passed made it almost impossible for the commercial real estate industry and the development industry and the single-family real estate industry to compete in the United States today.
So my suggestion is to install the uptick rule; second, stop the ridiculous nature of mark to market from absolute to absolute, and put in a mechanism of amortization or smoothing so the absorption of those assets over time is more reflective of reality and less of the dire straits we find ourselves in today.
Third–and I appreciate very much the Senator from California mentioning the housing tax credit–I am very pleased that in the stimulus bill that passed, the credit is now $8,000 rather than $7,500. I am glad it is not repayable now but, in fact, is an actual credit. I am sorry it was means tested and limited to incomes of $75,000 or $150,000, and I am sorry it was only for first-time home buyers.
I believe that until we fix housing, we can fix nothing else. We must fix housing first, and we must have an incentive and a reason for those people to return to the marketplace and begin to absorb the houses that become vacant because of foreclosure, transfer or because of default.
So I hope we will continue to work on catalytic agents to inspire the consumers to come back to the marketplace and buy. That is essential. I think the tax credit of $15,000 for the purchase of any home by a family that occupies that home for 3 years is good for America, good for a business, and it is a small price to pay for what it will bring. CBO estimates its cost at $34.8 billion. They also estimate it would create 700,000 sales and 587,000 jobs in 1 day. That is no bad payback when you consider we have thrown billions after billions at the banking system and the stimulus system.
Lastly–and I know the President will talk about mortgages today–I listened to his remarks last week and am encouraged by some of the things he said. I think there are some things we can do in terms of financing that can help us with our problem.
No. 1, we do have to get back to sound underwriting. The President’s proposals of a threshold of 31 percent debt service to gross monthly income illustrated that the President sees to it that we have fundamentals of qualifications under loans that are made, and I commend him for that.
Secondly, I also recognize the fact that we can refinance loans that are in difficulty today at lower interest rates, amortize them over 30 years, and, in fact, save people from foreclosure. Some we cannot save, but some we can, and I am for that. But we have to remember, just as 1 in 10 houses in America is in default, 9 out of 10 are performing. To those people who are performing, who are making their payments, who are living by the rules, who are doing what is right, the same type of refinance opportunities ought to be available to them as are available to someone who is in trouble.
I fully believe if we would direct Fannie Mae to issue debt with the full faith and credit of the United States of America behind it, we could generate a pool of resources to make loans for less than 5 percent on a 30-year basis in the United States of America, loans that many people who are in trouble could actually find they could work their way through because it would lessen their monthly payment. But to those who are paying their payments but have rates of 5 1/2 , 6, 7 1/2 , 8 percent, give them the same opportunity to reduce the cost of their debt service. Just because they are performing does not mean they should be penalized in a time in which we have 10 percent nonperformance.
I stand here today on the floor of the Senate willing and able anytime, anyplace, anywhere to work with the President and work with the Members of this Congress to address the fundamentals of our economy and the fundamental problems we face.
It is my sincere hope the SEC will take another look at the uptick rule and establish it. I think it will be an advantage to the market, advantageous to investors, and I think it will stop an egregiously bad process.
Second, on mark to market, I don’t want us to go the route of Japan, but I want us to go the route we went in this body in 2005 on pensions and let’s smooth and amortize those obligations without catastrophic writedowns of assets which only cause difficulty in the financial community.
Third, let’s do fix housing first, and let’s make sure we have a tax credit that is meaningful, available across the board, fosters home ownership, restores our marketplace, creates the 700,000 sales we need, and the 587,000 jobs we so desperately want.
Lastly, as we make available creative financing and inexpensive financing for those in trouble to work their way out of a difficult mortgage, let’s not forget those who are playing by the rules, the 9 out of 10 who are making the payments. Let’s make sure we make the same thing available to them so the rates at which they can refinance are equally competitive and as beneficial.