Inside Financial Services

Another Harebrained Mortgage Plan From the White House

If anything, it will make things worse than they are now

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I’m at a loss to understand what the Obama administration’s new loan-modification program (HAMP? HARP? After awhile, the acronyms become a blur) is supposed to accomplish. Provide a jolt to the economy? It won’t. Speed a recovery of the housing market? It won’t. Attract new capital to the mortgage market? You must be joking.

The idea behind the scheme, recall, is that the White House wants to enable borrowers who are underwater on their mortgages to more easily refinance. If that happens, the thinking seems to be, borrowers’ resulting lower monthly payments will a) induce people to stay in their houses rather than walk away and thus provide a boost to the housing market, and b) put more money in consumers’ hands, which will help the economy. So here’s the plan, in a nutshell (and, no, what you are about to read is not a joke): the GSEs are supposed to resume some of the aggressive underwriting practices that drove them into conservatorship in the first place. Maximum loan-to-value ratios don’t have to be, say, 80% anymore, and can even top 100%. (These folks are underwater, remember.) Actually, they can be a lot higher than 100%. Prior loan-modification efforts by the government capped LTVs at 125%. Even that limit has now been lifted.

Can’t find an appraisal that will make the numbers work? Don’t worry, you won’t need one anymore. Fees (i.e., GSE revenues) will be slashed. I haven’t read anything yet about there being no need for documentation, but am still looking.

If you feel like you’re having a flashback to the mid-2000s, don’t worry. You’re not the only one. This plan allows the same aggressive underwriting shenanigans that help bring about the housing collapse in the first place. What’s more, it won’t achieve the goals the White House has for it, and will probably only make things worse.

For starters, the macro effect will likely be to slow the economy, not speed it up. Look at the big picture. Yes, borrowers will have the benefit of those lower monthly payments. But they’ll realize that benefit slowly, over the life of the mortgage. On the other side of the trade, meanwhile, the loss of wealth felt by the MBS investors (who’ve had their bonds essentially stolen and replaced with lower-yielding paper) will be immediate and massive. That will not be, if I may say so, on balance stimulative.

Nor will the scheme do much to help shore up home prices. The problem with housing doesn’t have much to do keeping underwater voters borrowers in their homes, remember, but rather simply working through the huge inventory of homes banks have foreclosed on already. And then, after that, working through the shadow inventory of foreclosed or soon-to-be-foreclosed homes not yet on the market. The White House plan will only affect the inventory glut modestly and at the margin. There’s simply no substitute for waiting for the market to clear on its own.

In the long term, meanwhile, this crazy auto-refi scheme will surely drive capital out of the mortgage market. The government’s essentially rigging the system in order to transfer wealth from lenders to borrowers. Wouldn’t that give you pause? The credit markets have already seen what this White House did to Chrysler’s secured creditors during the auto bailout, remember, and must understand it’s willing to give mortgage investors the same sort of treatment. Who’d blame them for demanding higher returns?

Speaking of investors, one other group of them is getting screwed by this deal: Fannie’s and Freddie’s private shareholders. The government owns just 80% of the GSEs, remember, not 100%. (That’s how it managed to take them over without also having to bring GSE debt on to the federal balance sheet.) The rest of the companies are publicly held. The White House has hatched this scheme to benefit its political interests, remember. The financial ramifications of it are incredibly negative for Fannie and Freddie. Fees are being cut, while the companies will have to add billions in dubious, low-yielding assets to their books. It figures to be a financial disaster. If a private entity were acting as a controlling shareholder and pulled a stunt like this, minority holders would sue it in a heartbeat, and the court would no doubt compel the controlling holder to look out for their interests. But this is the federal government we’re talking about. The minority shareholders don’t have a lot of latitude. They are, as I say, unilaterally screwed.

This plan is worse than useless. It’s as if the policymakers in the White House have learned nothing over the past three years. Somebody there needs to start coming up with some ideas that would actually do some good.

What do you think? Let me know!

16 Responses to “Another Harebrained Mortgage Plan From the White House”

  1. Ken Greenberg

    How much would we save if Congress and the Whitehouse all took a one year paid vacation?

  2. George Morriss

    Tom,

    Once again you are right on the money, but there is another group that would be harmed; namely, pension funds. Low interest rates are already doing a number on the funding assumption; now, prepayments and presumably lower reinvestment rates!

    George

  3. peter a.

    NEVER underestimate the ingenuity of Americans when it comes to abdicating responsibility. NEVER underestimate the cunning of politicians seeking reelection. Morals aren’t a hazard if you simply toss them out the window…

  4. Financial Guy

    Another irksome point of this plan is that it doesn’t benefit EVERY borrower who is underwater, but only the ones that borrowed money via Fannie or Freddie. Thousands of homeowners who borrowed from credit unions, for example, have NO recourse under this latest taxpayer-subsidized scheme. This should be illegal, and the politicians advocating this scam should be arrested for perpetrating fraud on the citizenry.

  5. Moses

    Isn’t this similar to the schemes that got us into this trouble to begin with?

  6. rivvir

    1. “There’s simply no substitute for waiting for the market to clear on its own. ” Totally defeatist

    2. if the plan gives money to homeowners, ok, you’ re right, that part is totally stupid. if the plan simply reduces monthly mortgage payments, you’ re wrong. in the latter case, from where do you get “add billions in dubious, low-yielding assets to their books.” in that latter case you are playing mind games.

    Many of those loans are already dubious and there is no increase in risk that i can see. Just the opposite it seems to me. Lower cost on a monthly basis = increasing affordability. Many still may not actually wind up being affordable or economically viable, but more than a few should, and that means full return of capital on those to the loan holder where before there would not have been.

    wish i could get into this more but the computer’s busted and i just don’t have the time. For one thing, this is no transfer of wealth scheme as long as no additional cash is being handed out. in that scenario how do you get transfer of wealth from high to low?

    if ‘m right for any or all of this then you should stop campaigning. forget cain and strive instead for an honest appraisal. Anyone can make numbers by cutting a company me than in half and cutting jobs. Few a smart enough to grow into the numbers unless they get a strong economic tail wind. Think mormon since you think right wing. He’s the closest, and the classiest, you’ve got

  7. daniel

    And what would your plan be? There was so much fraudulent behavior in the mortgage market and we know that many people were sold inappropriate mortgages ( and don’t excuse the financial industry by blaming the person getting the mortgage) that some kind of relief is needed. Also, we see example after example of businesses going bankrupt and then the lenders forgive, reduce, etc the debt to allow the business to continue. Why not with people? Since corporations are people don’t you think people should get the same considerations as corporations.

  8. John Tschohl

    Tom great input. Thanks. Lets hope Obama is retired in a year.

  9. skeeter

    Tom,

    How can we restore employment and end the housing mess?

  10. grover13

    While I agree this is no silver bullet to cure the housing market or jumpstart the economy, to call this a return to the shoddy underwriting standards of the mid-2000s is a bit sensationalist. True, there will be no income verification, no appraisal, and minimal fees. But this program has a simple requirement that many of the standards of the last decade did not- it requires that the borrower has been paying his mortgage to date, on time, without interruption. The point of this is to reward borrowers who have been paying their mortgage on time….where as to this point, all of the modification efforts that include solutions like lower rates and even principal forgiveness were granted to people who couldn’t pay their mortgage, which is nonsensical. This is an attempt to “even the score”, so to speak.

    If you think that using taxpayer money for this activity isn’t fair to you, that’s fine. We can do it the other way- no special programs for anybody. That will save your tax dollars for sure….but it will also continue to flood the market with foreclosures, and drive the price of your home down another 20% from where it is now. Which path do you prefer?

    And save me the babble about how this is “unfair to Freddie and Fannie”. How about this- the government pulls out all of its influence in the housing market entirely, Freddie and Fannie fail like they would have done three years ago without government intervention, and no one gets a mortgage for the next five years. Much better that way, isn’t it?

  11. WanksterBankster

    Good article. One commenter above claims, “Another irksome point of this plan is that it doesn’t benefit EVERY borrower who is underwater, but only the ones that borrowed money via Fannie or Freddie.”

    It’s even more irksome that the handouts are going to people with recent-era mortgages–generally people who hoped to ride the real estate bubble to easy wealth. Why are mortgage holders a protected class of people? They already get unfair tax deductions for interest payments. Renters are getting no handouts, yet have cause none of the economic havoc that bubble buyers and their co-conspirator banksters, realtors, mortgage brokers have caused America.

  12. Bill

    The student loan bail out is worse. You have students obtaining chosen degrees, whose income potential is not aligned with the debt burden. Moreover, contray to liberal thought, the burden of subsidizing the trillion dollars of student loan debt falls on the vast majority of taxpayers who never obtain a college education. “How equatible is that”. Chalk this up to another misguided example of failed socialism so readily embraced by a clueless administration

  13. Todd Martin

    Tom:

    Perhaps they should name the program HEMP? Another great piece. Thanks, Todd

  14. Lender

    The Obama Adminstration has just created ANOTHER sub-prime market.

  15. Finney53

    I have personal knowledge of the misguided effort. Chase contacted me about refinancing at a lower rate with no closing costs. With twenty one years and a 5.5% rate on the current paper, they offered twenty years and a 4.75% rate on the new paper. Oh, and the new paper would have to include private mortgage insurance. Uh huh, you don’t have to guess how long it took me to politely decline their offer.

  16. Are you Kidding

    Boy are you a selfish (Bleep). Many of those people underwater (upside down bought houses with borrowed money that the BANKS coudn’t wait to lend. In the early 2000′s the Banks were selling the “American Dream” at any cost. As long as they could make money by repackaging those loans, nothing mattered. Now when The White House is trying to SAVE the American Dream, you don’t like it. I know many people who have been able to get out of the holes (that they only have their original lenders to blame for) by working with the new bank t modify the terms. This process has to continue until the mortgages in this country are less than the value of the real estate they support. Someone hs to lose money and it shouldn’t all be on the American people who believed the crap they were sold in the early 2000s. I know it is not all black and white, but take some responsibility…

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