James Pethokoukis
Politics and policy from inside Washington
An August Surprise from Obama?
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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.
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Houses in exchange for votes. plain and simple. So those of us that planned ahead and played by the rules – have paid out bills on time and didnt overextend are now going to have to pay for those that purchased homes they knew they couldnt afford as Obmama forgives their loans. —
I’ll be penalized for paying my bills. Obama’s effort to buy votes will bankrupt us all.
This administration will continue to drive us into ruin.
Pray for our incompetent president who thinks money grows on trees.
Psalms 109:8
Let his days be few; and let another take his office.
AMEN!
We can help mortgage holders all we want but if they’re unemployed, back to square one. Staggering…….
This is outrageous if true! We cannot afford to keep paying for poor decisions made by government and consumers! Obama and is ilk have to go. They are killing the country. This is what happens when you give the keys to the car to kids! Where are the adults?
OH NO!!! another stimulus…we will Never GET OUT OF DEBT!!!! THIS PRESIDENT IS INSANE! just arrest DODD, FRANK AND RAHM FOR THEIR LYING ABOUT FREDDIE AND FANNIE, THOSE LIARS MADE MILLIONS AND COOKED THE BOOKS, THEY ARE GROUND ZERO FOR THE MESS!!!!!
ANOTHER IDEA, STOP TAKING VACATIONS WE CANNOT AFFORD!!! AND STAY OFF THE GOLF COURSE AND THE PHONE, STAY INSIDE, AND NO COMMUNICATION WITH THE WORLD. FOR THE NEXT YEAR, THIS WILL HELP THE ECONOMY IMMENSELY!!
The moral hazard consequent to such a forgiveness of indebtedness would result in a political class struggle unlike any previously encountered in this country. It would pit Americans in default against everyone else. In November, no Democrat could get elected, not even as dog catcher. To avoid such a counterproductive outcome, the Administration should simply forgive indebtedness on every mortgage, not to exceed $150,000. That would provide a stimulus and stop the progressive slide toward deflationary, debt driven paralysis experienced in Japan for the past decade.
Where is Mr. Obama going to get the money for this spending spree? Out of our veins maybe?
As an American who has sacrificed, pinched pennies and done without to pay his mortgage off, I despise this thief of a president who continues to steal from me and my family. The sooner my state secedes from this corrupt nation of thieves, the better.
I am no freeloader, I have owned and made money off of 5 houses over the years, and then I bought a house in florida april 2008 and a week later lost my 26.00 an hour job. Paid 160 and the last appraisal was 55,000.00. HOA tripled due to all the foreclosures in the neighborhood. I am no fan of Obama and I know he is just buying votes for the democrats. I will take any relief I can get but they are never getting my vote.
If Obama does this I am going to be furious beyond belief. Why should I bail out people who could not comprehend what an adjustable rate mortgage was? Obama has it wrong. People aren’t mad that we’re bailing out Wall St instead of Main St. They are mad we are bailing out irresponsible people (both Wall St and Main St).
This is designed to buy mid-term election Democrat votes. The policy would reward financially irresponsible Americans and the political party whose vocal rejections of Fannie Mae/Freddie Mac oversight helped lead to the housing collapse. Write your Senators and Congressional reps, jam the phone lines, man the barricades. We’ve got to take back our country from those lying, stealing, irresponsible wolves.
A possible way to reward borrowers who are current on their payments and would like to trade up would be to let them take over a larger loan and turn their house and loan back to the bank. The banks win and home owners who can afford higher payments win.
I am no James Carville, but in addition to the fact that this idea is Constitutionally perverse, inequitable, and will engender untold unintended consequences, it is really stupid politics.
This administration is tone deaf to public opinion. If they try this the Tea Party and worried Independents will look like soothsayers. This “stop or I’ll shoot” with a gun to my head strategy (witness Tuesday’s MO vote on Obamacare) is incredible.
If Democrats want to lose both the House and the Senate in November, by all means pursue this!
Investors are buying the foreclosures at the court house steps or from the banks in short sales, settling on them and then renting back to orginal home owner at fair market value. THE GOVERNMENT COULD DO THIS!
The bank and foreclosures mills are manufacturing documents to slide under the courts nose when the cases are uncontested in foreclosure and making a nice profit that is not pasted on to the true investor since they have no idea who that would be! THIS WINDFALL PROFIT SHOULD BE GOING BACK TO THE AMERICAN CITIZENS BY WAY OF PAYING DOWN THE DEFICIT!
If there was a true party of Interest they would never allow the home to be sold 20 to 40% under fair market value and fliped in a few short weeks at a windfall profit. THIS IS THE AMERICAN PEOPLES BAIL OUT REFUND THEY ARE TAKIING!
Banks have rules that say no REO agent shall have more than 100 REO listing yet only a few select real estate agents in any city get to handle hundred of sales a year and also earn windfall profits and sell the REO’s to the first bidder sometimes a friend or family memeber while the other agents are starving. Again who’s interest are they protecting certanilly the the investor/owner.
The Banks used secutitization to sell the notes off sometimes to more than one party. These are very different type loans than we had prior to 2002. No one is following the rules except the homeowner who is stuggling at this point. Unemployed and Underemployed. Good for you if you still have a job and do not find yourself in this foreclosure mess. Don’t judge until you walked in someone shoes.
Attorneys who fight foreclosure are offering to take the case for what fair market monthly rent is in the area and if they win want an equity share in future value.Not a bad deal for the attorney! Everyone is out to make money on the homeowner.
NO wonder folks polled say they never want to buy again! They are being raped by everyone!!!
I want my home, I can afford a a payment but got behind due to reduced income and a medical issue, I did not buy above my means. I tried to work with the bank with no luck. I can’t walk away till they foreclosre because I am responsible for the home. If I could pay fair market value with a modification with a true party of interest that allowed for shared equity in the future I would jump at the chance to keep my home!!
I just don’t think the government can figure out how Wall Street pulled this off or they know and they do not want it to go public.
Homeowners are not asking for a FREE HOME in a Foreclosure fight they are asking the court not to reward the entities who are submitting false documents to get a FREE HOME. Home Owners are DEMANDING the bank show proof of ownership with a full accounting of what transactions have taken place on the home owners Loan Number. A pretty straight foward question yet no bank seems to want to turn over the accounting documents. Why is the court accepting this??
I will loose 250,000 with down payment and monthly payments over the past five years if my home forecloses. I am vested in this home and would love to talk with the investor I know as a homeowner and an investor we could work it out. We just have to many middle men in the way who have their own agenda’s!
Right, and who’s going to administer this program? The loan mod program has not even figured out how it’s supposed to work.
Look at the number of completed mods compared to those who have applied. One family member is currently going thru a 3rd attempt at a mod and not thru any fault of her own. The Fed just keeps switching the rules because at the outset there were no rules … good luck with all that.
“The political calculation is that the number of grateful Americans would be greater than those offended”
Um, One in five would be grateful while enraging four of five….
Ever get the feeling they’re never going to stop until every last one us who isn’t a politically connected billionaire is living on food stamps in section 8 housing?
Here is the real deal – the tax payers are already paying the banks for the loss on every foreclosure via FDIC. So why not simply help the taxpayers by the same amount directly by adjusting mortgages to the mkt value? Makes perfect sense. Same amount and damage that we will have to deal with anyway as taxpayers, but it goes to the homeowners rather than the banks who have not done anything. Then the homeowners will be able to stimulate the economy when their payments are drastically reduced and fears removed.
Forget your car – that is BS. The banks are deserving of this, they appraised homes at these values even when their analysts knew this whole thing was going to blow up.
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves something for nothing from the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the results that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s great civilizations has been 200 years.”
Alexander Fraser Tytler (1742-1813)
I don’t think so, James. I think you hit the publish button a little too soon.
http://www.marketwatch.com/story/report- no-massive-refinance-program-on-the-agen da-2010-08-05
As it was, the odds of something like a unilateral change in refinancing would have been blocked in the courts by bondholders. I mean, this would be stealing from bondholders.
There is no better way to say this, but F!! this; it is pure buls!!t. Where is the fairness in this. It’s nothing more than generational theft. Dear Mr. Obama, do not do this, it’s morally wrong.
ahhhh.. the sound of civil unrest – the economy getting better??
I pull credit every day – credit scores are trending lower
I see home values every day – values are still declining
I see consumers income everyday – income is trending down
I see consumers assets every day – personal savings is trending downward
I see the best of the best borrowers finding it very frustrating to refinance or purchase a home as underwriters are asking for documents never asked for before…
I talk with ailing homeowners every day – successful loan modifications under President Obama’s Making Home Affordable plan are minimal and quite frankly a joke as banks put forth no effort to modify loans
Strategic Defaults are on the rise – the number of consumers who have the ability to pay, good credit and a solid job but are fall further underwater with their homes value are walking away in masses.
Strap on your seat belts people… this ride is about to get rocky…
I read the comments and i am jsut shock at the blindness of people and the untenable positions and dilusional perspectives they have on this world and our Great Country. So we are all on the same page, its is and became so (a Great Nation), because people are and were free to take care of themselves and to take the risks of life they chose. God help the American people who have been robbed of that immeasurable joy and satisfaction;taking care of one’s self and family and a life tempered by the challenges unbuffered by “Big Brother”. Shame on the liberal and minority leadership and the “phonebook lawyers” for being the enablers and promoters of such a big fat lie: Government is here to help you! And to BakerLawFl, you must want this country to look like a cross between mexico and europe; you give the judicial branch the latitude to manage the marketplace and you’ve seen the last “Free Market” capital available for lending transactions and mortgages. How much you want to bet BakerLawFl is a “trial lawyer”.
I dont know (beyond a reasonable doubt) whether the President is as corrupt and narcisitic as he appears or he is just that shallow or hollow of a man. Either way if WE THE PEOPLE come november dont throw every bum out of congress that we can and start shrinking what’s inside the “Beltway”, well then WE THE PEOPLE… “get the government that we deserve”…I think that was Lincoln.
God Bless America and God Speed WE THE PEOPLE to a Revival of our souls and wisdom for the age.
In the near term it would help underwater home owners. However it does not address the stronger underlying issues in the economy – mainly unemployment.
The amazing rate at which the federal debt has grown in the last two years is making people very nervous. I think the long term effects would be negative.
Until there is an underlying strength and confidence in the economy, there won’t be a real recovery for housing.
This is blatantly unfair.
If those people are going to get part of their mortgages written down, then write down the mortgages of the rest of us instead of making the people who play by the rules look like fools.
And here’s a prediction. Home prices are still too high (according to the Case-Shiller graph), they will still drop in price if the economy does not recover. I base this prediction on the Obama/Dem agenda (cap-and-trade, and amnesty for 12+ million) as well as the fact that we have sent millions of jobs overseas over the last 10 years and this is going to continue.
There isn’t going to be a real healthy recovery until we get manufacturing back here. Manufacturing jobs create wealth because it require labor to extract natural resources, it requires skilled labor to process those resources into useful materials for building things, and it requires skilled labor to design and build those useful materials into things we want and need. This creates wealth. For a simple example, if somebody goes into the woods and chops down a tree and then takes the tree and makes 2×4′s out of it, those 2×4′s are worth something to somebody.
Don’t be upset. The fiscal budget for 2010 is $3690 Billion. “A $200 Billion Stimulus” is chump change in comparison.
For example, we pay over $260 Billion in interest for loans every year. If a large portion of those loans are forgiven, then we will save significantly on interest payments, and if Fannie & Freddie recover because of this move, we will make/save nearly $3000 Billion through our bailout investments.
This is the best possible play the government pull to win over US support. It would have been done long ago but Bush’s plan only helped big business. Obama cabinet focuses on the people (votes), they have this move up their sleeve, IT WILL BE DONE!
This insane! When will this debt funded spending spree ever end?
What about all the people that have already lost their home? What about those that have lost their jobs?
What about the millions of responsible hard working Americans who are also suffering and have lost their security without any prospect of a government handout or bailout; are they now to be saddled with yet more government debt and ever increasing taxes?
Unfortunate this is only a rumor. Sooner it is done, the better for the economy. How come banks can pass on toxic assets (when they report loss or file taxes), but homeowners, millions of whom have lost 50 percent and more of the value of their homes, must hold on and commit financial suicide while the banks feed fat.
Give each family a 75,000.00 stimulus check. They could pay down their debt( mortgage payment), invest, provide a college tuition, buy a new car, down payment on a 2nd home.
This was the suggestion of one Rush Limbaugh, But I doubt Obama would adopt this option.
What people don’t realize about any type of debt forgiveness is, the IRS see’s the full amount of the forgiven debt as INCOME. So, if you make $50K a year, and the forgiven debt was $30K, you would owe taxes on that additional $30K of income.
I am seriously considering becoming reckless, careless, and irresponsible. Apparently living in the moment and having no regard for the consequences of ones actions are not only the order of the day, but they are endorsed and thoroughly encouraged. What in the hell have I been thinking?
Reckless, careless and irresponsible bankers, brokers, and insurers all got us all into this mess by not doing due diligence. They were more concerned with earning fees than they were with the quality of the loans because they were passing the risk off on others. They were the swindlers in these transactions and they all got made whole, when they should have gone to jail, or been taken out and shot. Why should the swindled not be given the same treatment? Why is it that the sharpies, who always get theirs, always say I’m all right, Jack, and pull up the ladder behind them? If I must go into debt to help someone, I would far rather do it for the honest little guy, struggling to feed his family on the bottom, than the scum that always rises to the top.
Forgiving debt is a form of bankruptcy. This possible action is a form of forgoing foreclosure and allowing people to stay in their homes during this crisis.
A better way with less impact on the economy is to allow the Feds or Banks to own the “Excess Debt” in people’s homes and offer owners a way-out by charging affordable rent to continue to live there. People should be allowed to keep their market value interest in the home. Home values are going nowhere, at least in my lifetime. There is no longer an “American Dream” for the younger generation.
It is unconscionable to just kick people out on the streets, due to the bad timing and encouragement by the shyster banks or mortgage companies, who knowingly allowed people to take “the deal of a lifetime.”
The Real Estate “Bubble Burst” was inevitable, although I did not believe market values would fall this far. The Feds and the Financial Institutions, who caused the crisis, should assist the public in retaining their home, or find them a more affordable place to live in a similar place that they had prior to the Great Re-Pression of 2008/2009.
There are enough “abandoned” homes now to allow people to “downgrade” to more affordable living quarters prior to the “forced upgrade” to higher living. This plan would require major coordination by Fannie and Freddie. It won’t happen, but it is a better plan than forgiving debt.
I say take the mortgage relief and sack the incumbents.
The purchase of a home has never been a promise of guaranteed returns. Buying a home (and subsequently sucking out the equity) has always been a game of “craps”. You roll the dice…you take your chances.
Most of the time, homebuying has proved to be a good investment. Sometimes…not such a good investment. But now, Obama wants to change the rules of this “craps” game.
It’s still “you roll the dice…”, but if you lose, the dealer doesn’t scoop YOUR chips off the table…he leans over and grabs the chips from the guy next to you. You get to keep playing…
To “amboycharlie” at 6:59 AM:
“Reckless, careless and irresponsible bankers, brokers, and insurers…”
You left out the criminal Dem politicians & political cronies…Clinton/Clinton, Dodd, Franks, Waters, Raines, Gorelick, etc, that used the Carter-era Community Re-Investment Act to ramp up to steroidal-abuse levels, the sub-prime lending to folks that couldn’t even balance a checkbook…shoot, probably didn’t even HAVE a checkbook.
Yes, there were bankers, brokers, insurers, (and, appraisers, closing attornies), that cheated. And, they should be punished if they broke the rules. But, most of these folks were simply operating BY THE RULES put in place by the Dimwits above that simply let go of the reins.
Ignoring the grotesque financial implications…
If only 1 out of 5 mortgage holders is underwater, how does giving a bailout to 20% of the people make political sense!?!?
If the administration even formally PROPOSES this- expect Democrat losses in the triple digits in the house and pretty much every Dem senator up for re-election losing as well.
And as an added bonus- legislation passed that bans something like this ever taking place once the new congress is installed.
Forgiving debt is a form of bankruptcy. This possible action is a form of forgoing foreclosure and allowing people to stay in their homes during this crisis.
A better way with less impact on the economy is to allow the Feds or Banks to own the “Excess Debt” in people’s homes and offer owners a way-out by charging affordable rent to continue to live there. People should be allowed to keep their market value interest in the home. Home values are going nowhere, at least in my lifetime. There is no longer an “American Dream” for the younger generation.
It is unconscionable to just kick people out on the streets, due to the bad timing and encouragement by the shyster banks or mortgage companies, who knowingly allowed people to take “the deal of a lifetime.”
The Real Estate “Bubble Burst” was inevitable, although I did not believe market values would fall this far. The Feds and the Financial Institutions, who caused the crisis, should assist the public in retaining their home, or find them a more affordable place to live in a similar place that they had prior to the Great Re-Pression of 2008/2009.
There are enough “abandoned” homes now to allow people to “downgrade” to more affordable living quarters prior to the “forced upgrade” to higher living. This plan would require major coordination by Fannie and Freddie. It won’t happen, but it is a better plan than forgiving debt.
Jewel Health: http://www.jewelhealth.com
If he thinks the 90% of Americans who are honest, buy what they can afford and pay their bills will put up with this, it will be an August surprise FOR Obama.
America, wake up! Nothing Obama and his gang of Proggy thugs & thieves do is intended for the betterment of the USA.
Borrowing (stealing) to solve debt problems, is like creating cosmetics from one’s excrement. Maybe it could be made to ‘look good’, but the reality stinks!
This would be Obama’s final nail in the coffin of the USA..
Forgiveness of debt under current Internal Revenue Code would be considered a taxable event. . . adding the debt forgiven to an individual’s income for federal tax considerations. . . Now, if only the federal government would assure that its employees, 3rd party contractors and political representatives were current in paying their federal tax liabilities.
Does no one here see what’s going on?
It would be worse than you could possible imagine. This is how it would work in practice. If this doesn’t make you mad, nothing will.
Suppose someone owes $500K mortgage on a house now worth $300K. In a refinance, the original mortgage is paid in full and a new one issued. Fannie would forgive $200K and issue a new $300K mortgage.
Let’s follow the money. Where would the $500K that Fannie (we the taxpayers) pays to terminate the original mortgage end up? Who owns the original mortgage(s)? They were most likely sliced and diced into tranches, aka toxic mortgage debt. And who owns that debt? It’s the buyers of the CDO’s, villain #1 on the list of enablers who caused the financial meltdown.
Our tax money would bail out the fat cats, pay them in full. A lot of the money would bail out European banks, who own large amounts of mortgage debt. Morgan Stanley owns a ton, guess why they are lobbying Congress.
Obama would frame it as a helping hand to Main Street America, but in reality it would be $100B’s or more direct taxpayer money to the pigs who caused this mess. Why do you think Congress removed the limit on subsidies for Fannie and Freddie. In return, we the taxpayers would own the newly issued mortgages.
All you Lefties who think this is “for the people”. Hell no, it’s for all the big thieves who got us into the mess to begin with.
who is john galt?
“Atlas Shrugged” – Ayn Rand
Who is John Galt?
Debt forgiveness for mortgages is the wrong approach. Instead the federal government through Freddie and Fannie should guarantee the price of every home in the US at the price the current owner paid for it if it was purchased in the last 5 years. for home purchased more than 5 years ago, the guaranteed price would be an average similar home in the community. this would immediately stabilize the housing market , end foreclosures and stop the erosion of most people’s most valuable asset. The federal government already guarantees bank deposits and the prices of some agricultural commodities. why not home values? Also for years , the federal government pushed home ownership as a way to build equity. the Federal government has an obligation to back up this policy by guaranteeing the value of this investment. Otherwise , the government is saying to the american people ” You screwed up. You trusted us.” Yes it might cost a lot of money but this is the kind of spending that economists like Krugman are advocating. It is certainly better than wiping out debt obligations and forcing more banks into failure.
What is wrong with these people? Are they serious? We are going to mortgage our kids futures to help save people who are underwater. I have a failing business right now – not worth anything near what it was when I bought it. Will Obama give me the difference there? The insane asylum has truly been emptied.
SURELY THEY ARE TALKING ABOUT LOWERING THE INTEREST RATE AND NOT FORGIVING THESE LOANS. IF THEY FORGIVE THE LOANS AND CREATE EQUITY, THESE BORROWERS WILL JUST SELL THEIR PROPERTY AND MAKE A PROFIT. IF THEY LOWER THE INTEREST RATE THE LOAN BECOMES AFFORDABLE BUT THERE IS NO WINDFALL CREATED. THE NEW NOTE SHOULD BE DUE ON SALE…
We purchased a home in 1988 and we put down 25% (to qualify) which was a $100,000 with a 40 year arm. Less than two years later our home dropped to half of what we paid.Talking about a bad loan!! No one bailed us out. We hung in there for 15 years and the price of our home went up and then we were able to refinance. Then we refinanced again and we still have only paid off $60,000 of the loan.
My neighbors bought the same place as ours but they got interest only for 5 years. They have 15 to 20 people who live there. It has now been 5 years and they are still here. They have paid nothing off their mortgage. Now if they are forgiven thousands off their mortgage it would be a sweet deal for them. It would be outrageous and unfair for all of the us who have hung in there for the American Dream!!!!!!