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!