Affordable Housing Institute : US

As New New Orleans struggles to be born and the Administration continues to punt, leaving a Federal decision vacuum, in which HUD is notable only for its absence, Louisiana’s most senior Congressman is showing leadership:

 

BATON ROUGE, La. - Into the void of the post-Katrina policy landscape, littered with half-ruined proposals, crumbling prescriptions and washed-out initiatives, an obscure and very conservative congressman has stepped in with the ultimate big government solution.

 

Representative Richard H. Baker, a Republican from suburban Baton Rouge who derides Democrats for not being sufficiently free-market, is the unlikely champion of a housing recovery plan that would make the federal government the biggest landowner in New Orleans - for a while, at least.

 

Representative Richard H. Baker, a conservative Republican from Louisiana, has proposed rebuilding homes in New Orleans through an $80 billion federal buyout.

 

Mr. Baker’s proposed Louisiana Recovery Corporation would spend as much as $80 billion to pay off lenders, restore public works, buy huge ruined chunks of the city, clean them up and then sell them back to developers.

 

Sounds very compatible with the AHI prescription, whose eight points were:

 

 

Rebuilding takes capital, and that takes new debt, and that takes claim settlement, and only the Federal government is in a position to provide it. 

 

From the December 26, 2005 New York Times: the state of cleanup

 

As I wrote a few days before posting the prescription:

 

Katrina was too improbable to insure.  But now it has happened.  Now what?

 

Private insurers are expected to pay about $40 billion in Katrina damage, Hartwig said. The flood insurance program will kick in billions more. But total Katrina damage has been estimated at $125 billion, and Hartwig said that figure is probably too low because the interruption of business is only partially included.

 

Who or what fills the $85 billion hole?

 

 

Don’t look for Scrooge McDuck to fill it …

 

It’ll take me a couple of days to write the proper post dealing with the issue.  In the meantime, I’ll leave you with this poser:

 

There are some risks it is not cost-effective to insure.  Hurricane Katrina was one of them.

 

So what happens after one of those uninsurable risks happens?

 

As the New York Times puts it:

 

But now [Louisiana legislators] are focused even more intently on Mr. Baker’s buyout bill; many economists here say there may be no alternative to buyouts for homeowners who cannot make mortgage payments on ruined properties.

 

“It’s probably one of the few last best hopes out there for people whose homes were flooded, and had no flood insurance,” said Loren C. Scott, an emeritus economist at Louisiana State University. “Without this kind of help, there’s a very large number of people who are just sunk.”

 

Months ago (October 26, 2005), I said this:

 

So let’s say what seems abundantly obvious: everything below sea level is economically unsalvageable.  Nothing below sea level should be rebuilt with Federal funding.

 

It isn’t that the homes are physically uninhabitable (although many of them are), but rather than they are economically untouchable (mold).

 

Let’s be clear: we’re not abandoning that property.  Condemnation means compensation: pay the property owners the pre-Katrina value of the property, and allow them to resettle wherever they like.

 

In fact, something very close to this is just what Mr. Baker is offering:

 

Under [Chairman Baker’s] plan, the Louisiana Recovery Corporation would step in to prevent defaults, similar in general nature to the Resolution Trust Corporation set up by Congress in 1989 to bail out the savings and loan industry. It would offer to buy out homeowners, at no less than 60% of their equity before Hurricane Katrina. Lenders would be offered up to 60% of what they are owed.

 

Though this is not a financial amnesty — the owner or loan originator takes first loss — it will liquefy what is otherwise dead capital.

 

To finance these expenditures, the government would sell bonds and pay them off in part with the proceeds from the sale of land to developers.

 

You have to be a little careful when selling long bonds ….

 

Property owners would not have to sell, but those who did would have an option to buy property back from the corporation.

 

Good principles both: voluntary participation and a right of redemption.  And the next principle too is a good one:

 

The federal corporation would have nothing to do with the redevelopment of the land; those plans would be drawn up by local authorities and developers.

 

In simple terms, it’s reinsurance writ large, and though the Times labors to make him sound inconsistent, Mr. Baker is quite logical:

 

His effort is filled with paradoxes. Mr. Baker has devoted much of his Congressional career to reining in the quasi-governmental lending giants Fannie Mae and Freddie Mac, saying they have too much power.  Now, “as free market as I am,” he said, he wants the government to take action in a way it never has before.

 

Paradoxes?  Pfui.  Mr. Baker, to do him proper credit, is being entirely consistent.  In his quest to regulate the GSEs, Mr. Baker has focused on placing proper curbs on the use of sovereign credit enhancement, and in his Louisiana proposal, Mr. Baker is likewise crafting a logical balance between whole credit and stop-loss (government role) and retail origination and first loss (private-sector role).  As I said in my prescription:

 

The corollary to thinking big is not acting small.  It is up to the Federal government:

 

·         To provide the strategic vision

·         To make the big, fundamental decisions that are preconditions of advancement but must inevitably inflame a quarter of the populace

·         To establish the major initiatives

·         To fund the last loss (see next section)

·         To get out of the way once this is done

 

The Administration appears finally to be noticing.

 

President Bush and New Orleans Mayor Ray Nagin, September 12, 2005

 

Sean Reilly, a member of the Louisiana Recovery Authority, said [Donald E. Powell, the president’s Gulf Coast recovery czar] had told him the White House was “on board” with the concept, but needed to tweak the idea a bit.

 

“It came very close,” said Walter Isaacson, vice chairman of the Louisiana Recovery Authority, established by the governor to oversee reconstruction. Top White House advisers “basically like the principle,” he said. And there were promises from them that “we’ll work with you, and we’ll get it on the fast track” for hearings in the Senate Banking, Housing and Urban Affairs Committee [whose House counterpart Mr. Baker chairs. — Ed.], Mr. Isaacson said.

 

Mr. Baker’s fellow conservatives, in Congress and out, are worried about the huge scale of his proposed intervention.

 

Entirely legitimate fears, to be sure.

 

In the House Financial Services Committee, several members tried unsuccessfully to limit the proposal’s spending and duration, or to require that it break even.

 

A rule requiring breakeven would either be toothless or, if toothy, fatal to the intervention.  Worst of all would be a ‘compromise’ that blocks rapid credit delivery while gumming it to death with vague regulations.

 

“It is irresponsible for Congress to write a blank check, drawn on the account of American taxpayers, bound only by the imagination of politicians,” said Representative Jeb Hensarling, Republican of Texas. “We need to ensure that taxpayers are not asked again two or three years from now to pay for the same disaster.”

 

This too is entirely fair.  Let there be no doubt, structuring the financial risks and aligning incentives is challenging.

 

Mr. Baker says to his critics: “If not this, what? And the answers are not good.”

 

As usual, Barney Frank gets it:

 

Barney Frank, talking as usual

 

In the House, his idea was embraced by liberals - “I think it’s a good idea,” said Representative Barney Frank, Democrat of Massachusetts - and shunned by many conservatives. The proposal is about as “good as you get,” Mr. Isaacson said. “My feeling is it’s a test of how sincere the administration is in saying it wants a careful and smart rebuilding effort.”

 

[AHI’s New New Orleans posting archive is here.]

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