Nearly everyone recognized the obvious steps that had to be taken after 2008’s housing disaster — no more loans to unqualified buyers, no more creative financing, no more packaging for resale of securitized mortgages not worth their face value.
Apparently, President Barack Obama already has forgotten. He proposes a housing fix with more problematic government intrusions like those that contributed to the crisis. His housing rescue plan, at best, will be ineffective. At worst, it may mean another round of financial moral hazards, more pain from main street to Wall Street and, of course, ultimately, more demand on taxpayers.
The president should recognize government’s meddling worsens and prolongs pain. He should allow private lenders and borrowers to voluntarily reach solutions, including foreclosures, so the housing market can find true equilibrium.
When the housing bubble burst, questionable loans to unqualified buyers unlikely to pay back what they owed were a large part of the problem.
When government-backed mortgages were packaged and sold to investors, including many pension funds, the inevitable defaults made many of them time bombs. Ultimately, taxpayers paid for much of the misadventure.
Three years ago the president proposed a fix, the Home Affordable Refinance Program. He hoped to help 5 million people refinance mortgages. Only 822,000 took advantage. Only one-tenth of those owed significantly more than their homes were worth. Today, about 10 million American homeowners are underwater on their mortgages.
A significant problem was the inability of the government to force banks to refinance and risk losing money. The plan’s disincentives included limiting aid to borrowers who owed 25 percent more than their properties are worth, costly upfront fees and banks worried they would be liable if borrowers defaulted on refinanced loans.
Now, the president wants to expand what has largely failed, adding greater financial risks to prod banks and underwater borrowers into refinancing.
Obama’s new program places no limit on how much borrowers can owe, reduces fees and largely relieves banks of liability in defaults. These lowered barriers are meant to encourage refinancing of mortgages in the range of 6 percent interest and higher to today’s 4 percent. The administration estimates an average homeowner can save $2,500 a year, and stave off default. Others estimate savings as low as $312 a year. It would amount to another round of loans to questionable borrowers, with safeguards like fees and liability removed, driven again by cheap money.
The president wants to help homeowners in the hope they will spend what money is left over to stimulate the economy. His plan is more likely to merely delay some defaults while exposing lenders to losses that, if history is any judge, are likely to be left for taxpayers to pay.
It’s understandable to want to save a person’s home. But the government shouldn’t force others’ assets, investments and pension funds to be placed at risk to accomplish the goal, let alone to use taxpayers as the fallback for cleaning up the mess.
As painful as it is to hear, Republican presidential candidate Mitt Romney was correct when he said recently that the government should leave mortgages alone and let the housing market bottom out. The government should allow private banks and lenders to voluntarily work out financially sound refinancing agreements without government’s coercion or perverse incentives. Otherwise, the pain will last longer and the ultimate costs will increase.