President, Congress Must Call for a 90-Day Subprime Loan Moratorium

By Richard E. Nicolazzo

Whatever the country is doing to solve the subprime loan mess just isn’t working. I believe the time has come to start thinking outside the box.

The crisis, born from the bursting of the U.S. housing bubble, has passed through various stages exposing poor regulatory framework, unscrupulous lending, and a pervasive weakness in the global financial system.

Despite the July 2008 passage of the Housing and Economic Recovery Act and recent actions by lending giants such as Citi, JPMorgan Chase, and Bank of America to modify billions of dollars in mortgages, the housing meltdown appears to be worsening.

The Congressional Budget Office had projected during the summer that the so-called “Hope for Homeowners” legislation would allow about 400,000 troubled homeowners to switch their risky loans for conventional 30-year fixed rates with much better terms.

Early results have been troubling. The government received only 42 applications in the program’s first two weeks and, according to the Federal Housing Administration, only 20,000 applications are expected by a year from now.

Consider some other sobering statistics recently compiled by First American CoreLogic, a market research firm quoted widely on the subject:

• Nearly one in five U.S. mortgage borrowers owe more to lenders than their homes are worth.
• About 7.63 million properties, or 18 percent, had negative equity in the previous month.
• Seven hard-hit states (Arizona, California, Florida, Georgia, Michigan, Nevada, and Ohio) had 64 percent of all "underwater" borrowers.

To make matters worse, the Bush administration, Treasury Secretary Paulson, Fed Chairman Bernanke, and the FDIC continue to squabble about how to get direct aid to homeowners. You might call it political “analysis paralysis.”

The FDIC has a plan to provide a federal guarantee to share in any losses on modified mortgage loans, but the White House has opposed it. The FDIC estimates the plan could help prevent some 1.5 million foreclosures.

Sheila Bair, FDIC chair, was blunt in recent comments: “Today, the stakes are too high to rely exclusively on industry commitments to apply more streamlined loan modification.”

Bold Action Needed Now

While definitive statistics are hard to come by, most estimate the value of U.S. subprime mortgages at more than $1 trillion, with approximately 16 percent of this amount in the adjustable rate mortgage (ARM) category.

Why haven’t regulatory and Congressional efforts begun to turn the tide?

My sense is that the whole system needs time. When you dissect the residential mortgage lending industry, you find a complex web of regulations, paperwork, federal guidelines and other impediments that prevent the process from working smoothly. Anyone who has ever applied for a home mortgage can appreciate the challenge.

The time for more bold action is now.

Immediately, the president and Congressional leaders should call for a voluntary 90-day subprime loan moratorium. Lenders holding the mortgages would be asked to grant borrowers the three-month reprieve and stop all foreclosure actions. If voluntary actions don’t work, Congress should step in and enact legislation.

Designed to work as a cooling-off period, the moratorium would address the immediate need for homeowners to “catch their breath” and work with lenders to restructure their loans.

Eligibility would follow along the lines already established by Congress for the Housing and Economic Recovery Act:

• The loan must be on an owner-occupied principal residence.
• The homeowner must have a monthly payment greater than at least 31 percent of the borrower’s total monthly income, as of November 1, 2008.
• The Borrowers must certify that they have not intentionally defaulted on an existing mortgage, and did not get the loan in the first place by fraudulent means.
• No one with a criminal record could take part in the moratorium.

The moratorium would not be intended as a bailout or as a reward for families who bought homes they couldn’t afford. Instead, it would keep people in their homes.

Rescues Can Work

While the problem is massive and highly complex, history proves radical thinking can work. The 1975 rescue of New York City comes to mind.

With the city $12 billion in debt, financier Felix Rohatyn was brought in by the mayor to set up an entity called the Municipal Assistance Corporation. It raised money selling bonds backed by sales of tax receipts and stock transfer taxes. The goal was to revive the city’s economy while balancing the budget. It worked.

Although no silver bullet exists to solve the subprime loan mess and general downturn in housing, a 90-day moratorium on subprime mortgages is something homeowners and the country desperately need.

While policy makers in Washington continue their debate, homeowners continue to suffer.

Richard E. Nicolazzo is president and CEO of Nicolazzo & Associates, a strategic communications and crisis management firm headquartered in Boston, Massachusetts. Joe M. Grillo, senior vice president, contributed to this commentary.

NEXT FOR OBAMA: 'EXPECTATION MANAGEMENT'

“Public sentiment is everything. With public sentiment, nothing can fail; without it, nothing can succeed."
— Abraham Lincoln, Lincoln-Douglas Debate, 1858

Now, a week after the election, Barak Obama the great “campaigner and orator” must become Barack Obama the great “communicator” as he attempts to rebuild confidence and trust with the American public and the world.

After capturing more than 64 million popular votes and thrashing John McCain, 365-162, on the electoral scorecard, Obama assumes what is arguably the toughest job on the planet.

Like a new chief executive officer who steps into a multibillion-dollar company on the precipice of business collapse, our new president, with no real executive experience, has to manage two wars, protect the U.S. from terrorists, rebuild a staggering economy and fulfill all the other campaign promises he’s made during the past year.

In the world of communications, one might call this entering the realm of “expectation management.”

Let’s be realistic: PR executives like me (and hundreds of others who frequent this website) like to drive the argument that communications is at the heart of any successful endeavor. It’s never been more real.

Rick Stengel, Time magazine managing editor, may have put it best recently when he said, “Obama’s main job is to be communicator-in-chief.”

The millions of Americans who voted for Obama, and even the 53 million who voted for McCain, will likely show patience as the new president gets his feet on the ground and tackles an agenda that is similar to Franklin D. Roosevelt arriving in the capital in the depth of the Great Depression.

Early indications are that Obama and his new chief of staff, Rahm Emanuel, get the picture. On November 7, only three days after the vote, Obama held a press conference. What better way to start directly speaking to the public?

Three days later, Obama and his wife met at the White House with President Bush and the First Lady. Even though the visit – the earliest in recent presidential history – did not produce major policy statements, it stands as a symbol of our democracy and underscores the importance of communication between the man on the way in and the man on the way out.

People Respond to Structure

Obama can take a page from the modern crisis communications playbook:

• Develop a situation analysis encompassing the short-term problems that must be addressed immediately;
• Establish goals and objectives that are achievable;
  Define the audiences;
• Develop key messages and positioning strategies that will resonate with the public (no spin);
• Execute tactics; and
• Measure results along the way through reliable polling.
  

It’s this “structure” or “framework” that can create order from chaos. With this communication plan, Obama “takes control” of the situation and establishes that he’s at the helm with a steady hand.

This process should manifest itself in bite-size messages that the public can easily absorb. Taking small steps is the strategy for success. Past presidents have described the cocoon-like effect that occurs when the commander-in-chief gets into the Oval Office.

No human being can deliver everything at once. Obama must tackle the problems one by one and lay out a clear, concise strategy to deal with each. One way to describe it would be “breaking the bubble” and creating a dialogue with the American people.

News Media is Not the Enemy

Today’s blazingly fast media environment takes skill and sophistication to master. So far, Obama’s troops seem on top of their game. No candidate has used TV, radio, print, online, and cell phone media better than Obama. His administration should keep the same tempo.

Working the news media game is also critical. Jon Friedman, who writes the popular Media Web column for MarketWatch.com, suggests Obama loosen up a bit from this point on.

The best way to deal with potential adversaries is to embrace and listen to their concerns. Those who were around at the time must remember the way President Kennedy quipped along with those that opposed him. In more recent times, Ronald Reagan and Bill Clinton had great karma with the media.

The key point is to create an environment where a message can be delivered (without clutter) directly to the American public.

With the benefit of more than 35 years in the business of strategic communications, I offer the new president some short and long-term recommendations to become the “great communicator”:

• Unlike previous presidents who focused on radio, Obama should consider monthly TV addresses to the nation on Sunday nights at 8:00 p.m. My hunch is there will be plenty to talk about every 30 days. At a minimum, cable channels are likely to broadcast Obama’s full remarks.
• Maximize email communications. The Obama campaign has amassed the email addresses of millions of supporters who can be reached almost immediately. This communications tool creates awareness, understanding and ultimately builds public support for his policies and legislative initiatives. On a frequent basis, his administration should dispatch policy updates and general progress on his initiatives. On election night, Obama’s email message to supporters included the line, “…We have a lot of work to do to get our country back on track, and I’ll be in touch soon about what comes next.”
• Maintain an active website between now and inauguration day on January 20, 2009. http://www.change.gov/ has already been established as a gateway for the transition. It is clean and simple to navigate. The trick now is to keep the site fresh.
• Embrace the so-called new media. Four years ago, it would have been unthinkable for a president to appear on Facebook or be part of the LinkedIn generation. Now, it seems almost essential to be part of these communications channels. Here again, a message can be emailed and reach each key audience at minimal cost.
• Conduct “Town Hall” meetings. While not a breakthrough idea, this format is the right tactic at the right time. The administration could pick a town somewhere in America and get the president out to connect directly with the public. This creates a dialogue with the American people…not just one-way communication.

Nobody can easily predict how things will turn out for the new commander in chief.

As Leon Panetta, the former White House chief of staff who has been advising the transition team, said, “Mr. Obama has little choice but to put his arms around the chaos and make the decisions that involve pain and sacrifice up front.”

In my view, proactive communications and expectation management will play a major role and help define Obama’s success and presidency.

Joe M. Grillo, senior vice president at N&A, contributed to this blog.

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