Hillary Clinton's Plan for Homeowners

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Clinton argued that providing such FHA guarantees to backstop what would essentially be a private-sector auction would provide the best way of getting the frozen mortgage market unstuck and keeping people in their homes. But she also left open the possibility that the FHA may need to play a more active role in purchasing, restructuring, and reselling such underwater mortgages if providing guarantees to private-sector efforts proves not to be enough.

Clinton also argued that the government might eventually have to step in to directly buy up and refinance homes. While such moves would be temporary, she argued they may be necessary given the severity of the crisis now roiling the markets: "Just as it has in the past, this kind of temporary measure by the government could give our economy the boost it needs, and families the help they certainly need."

Such a system, she argued, could be designed to be self-financing over time. As with the Frank and Dodd proposals, the government would charge risk-adjusted fees to compensate for its expanded role. It would retain an equity kicker in the refinanced property so that it would pocket some of the gain when the price of a refinanced house were eventually to rise. As a result, she argues, there would be no cost to taxpayers over the long run.

Proposals for Fast Action

Rather than wait the several months it could take for the current legislation to work its way through Congress, however, Clinton called for the creation of a high-level panel consisting of former Federal Reserve Board chairmen Alan Greenspan and Paul Volcker and former Treasury Secretary Robert Rubin. With Washington consumed by the debate over whether the government may need to step in to buy up such troubled mortgages—or whether it can simply facilitate an auction between current mortgage holders and potential new buyers, as the Frank and Dodd bills suggest—Clinton called on the three well-respected economists to determine the best solution within the next three weeks.

Of course, were such a panel to convene, the assumption is the trio—each of whom supports a different candidate of the three remaining in the race—would be able to agree on the right course. But that may not even be the point, given the unlikelihood they will meet anytime soon. The proposal is designed to show voters just how Clinton would take the lead on the economy.

Clinton also reiterated her call for Congress to pass a second, housing-focused stimulus package that would include $30 billion in funding to help cities and states struggling with large numbers of foreclosures. The money could be used to buy up foreclosed or abandoned housing, or to improve neighborhoods troubled by blight as homeowners have been forced out.

Clinton said she will introduce legislation to provide legal protection for mortgage servicers who agree to renegotiate mortgages with struggling homeowners. Many such servicers—who typically collect payments and otherwise manage the paperwork for the investment banks, private equity firms, and other investors who actually own the mortgages—fear that if they agree to knock down the mortgage payments or the overall value of the loan, they could be sued by investors unhappy with the declining profits on those loans.

While reworking such mortgages may ultimately be more profitable for investors than foreclosure, the legal complications surrounding them have prevented deals from being negotiated. By clarifying the legal situation, Clinton hopes to speed the workout process.

A Point of Differentiation

Will Clinton's proposals move the needle—either in the debate over how to resolve the housing crisis or in boosting her chances to become the Democratic nominee? "The proposals certainly continue her strategy of driving home the impression that she's thought a lot about these policies, and trying to contrast herself with Obama," says Tom Gallagher, the senior managing director and head of policy research for investment strategists ISI Group.

But for now, Gallagher doesn't see enough Republican support in the Senate or the White House to move more aggressively for taxpayer-backed relief for homeowners. As for any boost the beefed-up emphasis on the economy could give Clinton's electoral chances, he says: "I don't think housing policy is going to determine who becomes the Democratic nominee. Not gaining a revote in Michigan and Florida is infinitely more significant."

Sasseen is Washington bureau chief for BusinessWeek.