Obama Mortgage Program Sows Another Credit Crisis
Today, President Obama will revamp, yet again, his program to help middle and working class homeowners, who already owe than their homes are worth or have less than perfect credit ratings, refinance their mortgages. This is all about getting past 2012-not jump starting the economy-and could create yet another credit crisis for Mr. Obama or future president to address.
Since early 2009, through QE1, QE2 and now Operation Twist, the Federal Reserve has suppressed mortgage rates-to jump start housing sales and raise prices, and to assist homeowners with good credit and some equity left in their homes to refinance. All this was intended to increase purchasing power and help lift the economy. And to some limited extent, it has worked. It stopped the slide in housing values, though it has not raised them much, and it has freed up some purchasing power. However, smart homeowners did use much of the money saved on monthly payments to pay down other debt-auto loans, credit cards and the like.
In parallel, the President initiated programs through Fannie Mae and Freddie Mac to help homeowners refinance, up to 125 percent of their home's value. Those permit homeowners to refinance even if they owe up to 25 percent more than their homes are worth, and up to a point those make some sense.
Now the President proposes to open the floodgate-like a political candidate promising the moon, but this time delivering the cream cheese before the election and in a wholly irresponsible fashion.
He proposes to let homeowners, still up-to-date on their mortgages, refinance no matter how much the value of their home has fallen below what they owe and without cumbersome underwriters checks-home appraisals, and rigorous credit and income checks. That is a prescription for more failed loans and another crisis in mortgage finance down the road or huge losses for U.S. taxpayers that can only be accommodated by even bigger deficits and printing money.
For example, homes underwater by 50 percent today will sooner or later be sold and then what? Fannie Mae and Freddie Mac get stuck with the loss. Either future homebuyers seeking loans will have to pay outsized fees to cover these fees, or the taxpayers bail out these government sponsored institutions yet again. Either way, the housing market will take a big future hit, for campaign largess granted today.
Virtually all those homeowners that could not pay their mortgages in 2007, 2008 and 2009, were able to make payments on the day they took out their loans, but when borrowers with big credit card balances even lost some overtime work, never mind their jobs, they could not make payments and started down the road to foreclosure. Consequently, more rigorous underwriting checks have been put in place to fix that.
Now the president proposed to throw those out the window, and let folks who may earn $80,000 a year and owe $200,000 on their home qualify for lower interest mortgages without checking if they have been using the ATM machine to pay their mortgages or otherwise running up credit card debt and auto loans. No checks will be required to ensure applicants have not had a recent dip in income owing to a layoff-and we still have lots of those if the Administration had not noticed.
The impact on consumer spending from this additional credit won't be large enough to be worth the risk-this new program would perhaps, though not likely, refinance as many mortgages as previous efforts and those did not lift the economy much. Banks, fearful of being villainized as accomplices or even ultimately blamed for initially writing the mortgages, may prove smartly reluctant to participate.
What the president is about to do won't create another housing bubble-too many foreclosures are about to hit the market-but it is politically inspired and an economically irresponsible act that could easily result in many more foreclosures and another credit collapse down the road.