The Administration appears to be gearing up to try to Do Something on the housing and general economy front. Readers have no doubt wised up to the fact that Doing Something, Obama Administration version, generally consists (at best) of largely cosmetic measures accompanied by lots of handwaving. The latest sightings include yet another effort to push the 50 state attorney general settlement over the line by the phony deadline of Labor Day and more chatter among by members of the Democratic hackocracy in favor of an expanded Fannie/Freddie refi program as a way to fix the housing market. That idea appears to be moving front burner, since
Baghdad Bob Ezra Klein has decided to weigh in.
Adam Levitin did such an effective takedown that it obviated the need for yours truly to say anything. On August 25, Levitin, in “Financing Malarkey,” said:
It looks like the Obama Administration is about to endorse some version of the Hubbard-Mayer plan of letting everyone (or at least everyone with an agency mortgage) refinance at today’s low rates, regardless of whether they are delinquent or underwater… I fail to see how such a plan will accomplish much.
The ability to refinance depends heavily on whether a homeowner is current and has equity. Consider, then, the impact on the 4 categories of homeowners under this rubric:
(1) Borrowers who are current and have equity. Refinancing is always possibly for anyone who is current and has sufficient equity in their home. That’s a lot of existing borrowers for whom a new refi program does nothing.
(2) Borrowers who are current but lack equity. There is also a large pool of borrowers who are current, but have insufficient equity or negative equity for a refinancing. A new refi program probably doesn’t do much for them either. It doesn’t take very much equity to do a FHA refinancing, but putting that aside, the Home Affordable Refinancing Program (HARP) allows for negative equity refinancings. There haven’t been a lot of them, however, and I think that bodes poorly for any new program. The closing costs for refinancings can be a major obstacle for households without a lot of extra cash sitting around and with uncertainty as to whether they’ll stay in an underwater house long enough for the lower rates to make the refinancing worthwhile.
(3) Borrowers who are delinquent, but have equity. These borrowers can already get out of the house via a sale. In any case, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent. Lower monthly mortgage payments aren’t going to do a thing to change their delinquency or the pending foreclosure.
(4) Borrowers who are delinquent and lack equity. As with delinquent borrowers who have equity, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent. Lower monthly mortgage payments aren’t going to do a thing to change their delinquency or the pending foreclosure.
So in the end, it’s really not clear who this would help.
Chris Matthews objected in comments to Levitin’s post, which led to a second response by Levitin, which was that he still thought the proposal was lame, in that it didn’t do a very good job either as economic stimulus or as a sop to the housing market (although one can imagine that this is what the Administration is left with in the stimulus category, having signed up so enthusiastically for deficit reduction at a time when that is guaranteed to increase deflationary pressures).
And there is a rather large fly in the ointment, as Klein himself has acknowledged, that any bank that does a refi would expose itself to any rep and warranty liability on the original mortgage. That would seem to make the program a non-starter.
So get this: you have a program that even if it works, won’t accomplish much, and is unlikely to even be taken up by the banks! So that would seem to make it not worthy of support, right? No, predictably, Baghdad Bob will find a reason to support any bad idea as long as it is this Administration’s bad idea:
But it’s worth a try. It’s been endorsed chief economist Mark Zandi of Moody’s Analytics, the National Consumer Law Center, the National Association of Mortgage Brokers, the California Association of Realtors, the California Association of Mortgage Professionals, and William Gross, managing director and co-chief investment officer of fund manager Pimco. And if it doesn’t work, it’s pretty much a no-harm, no-foul sort of deal, as it’s not going to cost the government money if banks don’t refinance mortgages.
Earth to base: implementing weak and ineffective polices DOES have a cost, which is that it takes political capital and keeps a bad status quo intact. Remedies of this sort then lead to “well we need to see how this works” arguments that then delay more effective measures from being implemented Even worse, they also serve to feed the false perception that nothing will work. Notice how the stimulus program at the beginning of the Obama administration, which pretty much every reputable economist said was too small to do much, is now being used to argue that stimulus doesn’t work? Yet another at best not-very-effective housing market remedy will serve to cement beliefs that government intervention won’t work, when that is the only possible route out of a massive private market failure.
So yes, there are plenty of reasons not to act for the mere sake of acting. But that logic doesn’t register with the defenders of this Administration, it seems.