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.
Daniel Indiviglio at The Atlantic:
First, this could really happen. The Treasury has unlimited discretion to plow as much money as it pleases into Fannie and Freddie. So adding several hundred billion dollars to the $150 billion already provided through their bailout would be as easy as the stroke of a pen. Moreover, the government’s other foreclosure efforts, particularly the HAMP program, have had lackluster success. This would provide the principal reductions that many progressives have been calling for to make for more effective modifications — but even for those who aren’t in danger of foreclosure.
Consequently, it would act as a stimulus. Let’s say your mortgage was based on original principal of $250,000. At 6% fixed interest, that would make your payment around $1500. But let’s say the housing bubble dropped your property value by 30%, so the home is only worth $175,000. Now, let’s say that you had paid off $25,000. That leaves $50,000 in principal that the GSEs could potentially write down. Suddenly, your payment would drop to as low as $1,050. What would you do with that extra $450 per month? The Obama administration would hope that you spend it!
This would effectively transfer wealth from all taxpayers to middle class homeowners, since it would only benefit those who have mortgages with the GSEs. The upper class generally has either very large (“jumbo) mortgages that don’t qualify for Fannie and Freddie’s backing or they own their home outright. Poorer Americans, however, don’t have mortgages at all — they rent. So they wouldn’t benefit either.
Whether or not this proposal would successfully stimulate the economy depends on the psychology of those lucky homeowners. We have seen recently that saving has been quite high. So it’s certainly conceivable that much or most of that mortgage payment reduction would be saved or used to pay down other debt. If the recipients spent it, however, then it would stimulate the economy.
Ryan Avent at Free Exchange at The Economist:
Such a move would raise some significant questions concerning issues of governance and the use of previously-private firms to support administration ends. Republicans would be furious. At the same time, it could be a nice shot in the arm for the economy (and, it goes without saying, the White House). But there are few good details to go on, and even less in the way of official substantiation. Who knows what the policy would actually look like or whether it’s truly on the table. But it’s August! Gotta write about something.
Annie Lowrey at The Washington Independent:
The question is whether this really is a good move politically if housing has stabilized. It will be expensive, very, very expensive. And my guess is that Republicans would love to campaign on this, easily and rightly characterized as a mass taxpayer bailout of underwater homeowners. For that reason, I would be surprised to see the administration do it. Forcing the banks to enact cramdown or changing bankruptcy laws would be one thing. But doing this through Treasury, politically, would be quite another.
You know, I happen to have an underwater mortgage: we bought our house at exactly the wrong moment in time. Do you know what we’re doing about it? WE’RE MAKING OUR MORTGAGE PAYMENTS, that’s what we’re doing about it. Because we sat down and worked out how much we could afford to spend beforehand, then we stuck to that number like glue. In other words, I don’t need a handout to pay my bills, and I really don’t need to spend another insanely large sum of money (Hot Air thinks that it could reach 100 billion, which is a large sum of money, even today) that my kids are just going to have to repay later, after the President retires to the global cocktail circuit. And I know that people are going to argue that the majority of Americans can be short-termed bribed in this fashion, but you know something? I don’t think it’ll work. Particularly when it comes to people who have kids.
At some point the Democrats are going to have to accept the fact that you cannot finesse your way out of some situations, and that this is one of those times. Yes, it is going to be incredibly painful for long-term, still-serving federal politicians who can be linked to the crisis. Yes, thanks to 2006 and 2008 that’s going to disproportionately hurt Democrats. Yes, Republican and conservative operatives like myself will (deservedly) mock their pain for it.
If it happens, it will be just another example of why the government should not be involved in running business enterprises that could be done, even if imperfectly, in the private sector. It will also be another example of how we have moved a bit further away from democracy in allowing such a move solely by the executive branch of government.
The blog post includes the poorly considered proposal from Morgan Stanley (that Tom Lawler responded to last week), and an excerpt from a July 16th Goldman Sachs research note that suggested “while there are ways in which the GSEs could provide support through policy, the effects on the broader economy would ultimately be fairly modest.”
Not exactly foretelling a “gigantic bailout”.
This nonsense is part of the silly season. Sure, some small changes could be made to Fannie and Freddie, but nothing like this post would suggest.
Not. Gonna. Happen.
Alert Drudge and the tinfoil hat sites – they will run with this story. It is a political post … I’m already sorry I mentioned it.