James Pethokoukis

Politics and policy from inside Washington

Can mortgage relief become a free-lunch stimulus?

Aug 5, 2010 19:18 UTC

And while we are on the topic of mortgages, I wrote this piece for Reuters Breakingviews yesterday:

Is it time for another “free” lunch? One Wall Street idea to boost U.S. growth is for the government to loosen rules so millions more Americans can refinance mortgages, thereby freeing up cash for spending. A desperate Washington might be tempted, but should think twice. It’s too reminiscent of how the economy first fell into trouble.

A top Morgan Stanley economist ran the “slam dunk stimulus” plan past the Senate Budget Committee on Tuesday. With the political mood making it almost impossible to contemplate spending more taxpayer money to juice demand, the bank’s economists are suggesting a different route to a stimulus — namely having government-run mortgage lenders loosen the refinancing rules on 37 million mortgages they currently guarantee. That would open the door to many homeowners who haven’t been able to take advantage of the current low interest rates because they owe more than their homes are worth, are unemployed or have low credit scores.

The logic is that with the government already on the hook for these loans, there’s nothing to lose from dispensing with any creditworthiness criteria for refinancing. The median interest rate on the mortgages concerned is 5.75 percent. These loans, the thinking goes, could be refinanced to around 4.50 percent. The 125 basis-point reduction would leave a borrower with a typical $200,000 mortgage better off to the tune of $2,500 a year. If, as Morgan Stanley guesstimates, half the affected homeowners took advantage of this, they would collectively have an extra $46 billion a year burning a hole in their pockets.

One problem is that the government has already tried to streamline the refinancing process with little success. Another is figuring out who would pay any associated fees. But most importantly, the whole idea seems like a deliberate re-creation of the super-cheap credit and lax lending standards that led to the financial crisis in the first place. That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.

Then again, the approach of elections in November means Washington is filled with jittery politicians who might latch onto a “hair of the dog” fix for a sluggish economy. Better they push themselves away from the bar.


I’m afraid you have it all wrong. While developing our farm for our retirement the massive residential building that ensued from Government incentives and wall street thieves, and Black Swan Economic Fools caused us to end up with a development that is now underwater. Also, our home that we have owned for 28 years is now worth less than the mortgage, due to our borrowing a modest amount in order to deal with government policy based problems. Bad decision you say. Poor investment you say. The real estate market will not recover and neither will our economy if we continue to bail out the thieves of wall street who created this problem along with a congress and former administration which aided and abetted the thieves. Main street is where the real economy of the US is based. Steal from main street and give it to the rich, that’s what has been done so far and I guess what you continue to advocate while hiding under the cover of budget deficits created by government and wall street. I worked both in the Marine Corps in Vietnam era and in civil service in their college summer program. My father retired from civil service GS-17. Deep sixing was standard practice when I was in the Military, and the civil service is filled with people who run their own businesses out of their government paid for office. We have a lot of waste, but it is not out here in Main Street. We work for a living. Where is Robin Hood when we need him? Get main street back to work and our taxes will end the deficit.

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Obama’s August (Housing) Surprise, Part 2

Aug 5, 2010 19:15 UTC

The Treasury Department has officially denied it is planning the mother of all mortgage bailouts. And I have no reason to doubt Team Geithner. But of course that assumes that the whole idea was not being cooked up by the White House political team (Rahm and Ax) and not the good folks at Treasury. During the financial reform debate, banking lobbyists continually complained that Geither and Summers had been usurped by R&A in policymaking. And I have gotten zero pushback from the WH. Food for thought. More to come.

But here are some of the reactions to my piece:

1. A New $800 Billion Stimulus Through Fannie and Freddie? (Dan Indiviglio of The Atlantic)

2. Is Obama about to forgive billions in  mortgage principal? (Ed Morrissey of Hot Air)

3. An August Surprise from Obama (The Daily Caller)

4.  Help coming for homeowners (Kevin Drum of Mother Jones)

5. An August Surprise from Obama? (Glenn Reynolds at Instapundit)

6. White House to bail out underwater mortgages? (Moe Lane at Red State)


This is my own personal response to the idea of an August Housing Surprise. In a nutshell, I think it’s a terrible idea.

http://youngconservative27.blogspot.com/ 2010/08/throwing-more-money-at-mortgage- problem.html

I used to have a friend who would always ask me for a couple of bucks so she could get something to eat, and she would always promise to pay me back. I always told her that it wasn’t necessary, since it was just a couple of bucks. Over time, though, it started to add up. One day, we learned that a hurricane was coming, and she needed some “real money” so she and her friend could leave town until it all blew over, so to speak. I gave her forty bucks, but I told her this wasn’t like the other times, and that until she paid back the forty bucks, I wouldn’t give her any more money, no matter how little. She never paid back the forty bucks, and I never gave her any more.

Governments have a very specific responsibility with taxpayer money to spend it responsibly and not waste it. With welfare, President Clinton worked with Congress to ensure that people on welfare would someday return to the workforce, which would benefit all of us in the long run. That’s an example of responsible stewardship of taxpayer money. The TARP program is supposed to be another, although it still hasn’t been repaid and the government has accepted stock in smaller banks and lenders in lieu of repayment.

As far as mortgage “bailouts”, that’s simply complete irresponsibility. I would never have been able to “make” my friend repay the forty bucks; all I could do was what I said, to never give her anything else. The government, on the other hand, continues to give and give (our money) to people who will never be made to repay.

Posted by StephenMonteith | Report as abusive

An August Surprise from Obama?

Aug 5, 2010 04:26 UTC

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:

1) Republican leaders believe this is going to happen since GOPers and Democratic moderates in the Senate are unwilling to spend more taxpayer money on more stimulus. But such a housing plan would allow the White House to sidestep congressional objections and show voters it is doing something tangible about an economy that seems to be weakening.

2) Wall Street banks are alerting their clients privately to this possibility. Here is what some are cautiously saying publicly. This from Goldman Sachs:

GSE policies are one of a dwindling number of policy levers the administration has left to pull, so it is conceivable that changes could be made, though there is no sign that a policy change is imminent. The Treasury’s essentially unlimited ability to provide financial support to the GSEs creates an interesting situation over the next twelve months: the GSEs could potentially be used to provide additional support for the housing market and, to a lesser extent, the broader economy in 2H 2001.

And this from Mizuho Securities:

As policy makers ponder their next move the data suggests that they face not only a stalling recovery but a growing risk of deflation taking root in the economy. As a result, the Administration has turned back to industrial policies by approving the purchase of a sub-prime auto lender by GM as a means for pumping  up domestic sales, especially since the latest auto sales data indicates that consumers are still responsive to incentives. This precedent increases the risk that the government will use its control of Fannie and Freddie to increase consumer cash flow and juice the economy again.

Moreover, Morgan Stanley is pushing a mortgage relief plan directly to Congress. On August 3, a top Morgan Stanley economist recommended to the Senate Budget Committee that Fannie and Freddie ease their lending standards to allow millions of Americans to refinance their mortgages.

3) Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.

But that is not happening. What is happening is that the president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

4) And don’t think the White House is worried about financial market reaction. If they thought it would pass Congress, they would be submitting a $200 billion Stimulus  2.0  (3.0?, 4.0?) right now.

August is supposed to be a slow month for Washington politics. But maybe not this one.


HUD recently sent a letter to mortgagees/lenders basically encouraging them to reduce principal on mortgages where the principal amount exceeds the home value. The Treasury provides the lenders and 2nd lein holders monetary incentive paid for by the U.S. Taxpayer.
(the formula for determining their incentive payment can be found here: https://www.hmpadmin.com/portal/docs/ham p_servicer/sd1005.pdf

I don’t know about you, but I have paid my mortgage payments during the past 20 years even when my principal owed was more then the value of my home in the 1980′s. Purchasing a home is a long term investment. The value changes with demand for homes.

As long as the borrower has the means to pay their mortgage they should not have their loan modified and principal forgiven at the expense of taxpayers.

Even those that are behind on the mortgages should only be provided the opportunity to refinance at the current historically low interest rates; and only if they qualify. Too many of these rewritten loans have defaulted a second time at the expense of taxpayers.

If a lender wants to avoid a foreclosure by reducing the principal and rewriting the loan at current interest rates it should not be done at the taxpayers expense. It is to their own advantage to do so as if they foreclose the house will likely sit there and the cost of maintaining it and advertising it will far outweight reworking the loan with the borrower.

Fannie and Freddie are still making loans that do not require even 10% down. They continue to buy bad mortgages and now the Treasury is going to give them Billions more and are authorized to continue to do so.

Enough already. No more Federal Money to bail out Fannie and Freddie which are now basically owned by the Federal Government. It has to stop.

This is why they didn’t include them in the new Financial Regulations Bill which the Dems said did not promote bailout financial institutions because they were too big to fail. They knew they would be bailing out Fannie and Freddie for years.

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