Mortgaging the Future

Taxpayer bailout to cost $5 to $10 billion

February 1, 2012

With the housing market weak and his job approval ratings under 50 percent, President Obama unveiled a new housing plan today at an appearance in the important battleground state of Virginia.

The Wall Street Journal reports that the proposal includes Federal Housing Administration-subsidized refinancing of mortgages backed by government-sponsored enterprises Fannie Mae and Freddie Mac. The cost: $5 to $10 billion:

The latest refinancing push complements an existing program that makes it easier for homeowners with mortgages backed by Fannie Mae and Freddie Mac to refinance.

The new initiative would extend that opportunity to roughly one-third of all mortgages that aren't backed by federal entities and instead are owned by banks or were bundled by private firms that sold them off to investors as mortgage-backed securities. The Federal Housing Administration would instead guarantee the new loan.

The call for government-backed refinancing comes despite past failures to stimulate an enfeebled housing market. Historically low interest rates and government inducements to refinance have not stopped declines in housing prices or cleared the market. A January 31 report by Wells Fargo Securities states,

New home sales for December showed sales weakening somewhat, and the latest reading for the S&P/Case-Shiller Home Price Index showed a larger-than-expected decline in November. We remain somewhat optimistic about the outlook for 2012, but we generally see less improvement than does the consensus.

In 2009, President Obama and the Democratic-controlled Congress implemented the Home Affordable Modification Program to help borrowers refinance their homes with taxpayer dollars. HAMP became the subject of controversy and provoked CNBC anchor Rick Santelli’s famous call for a new American Tea Party.

When he announced the 2009 initiative, President Obama declared that HAMP would lead to between 3 and 4 million restructured mortgages. To date, however, not even 1 million homeowners have used the program. In a July 2010 report to Congress, Neil Barofsky, special inspector general for the Troubled Asset Relief Program, wrote:

Despite a seemingly ever increasing array of HAMP-related initiatives designed to encourage participation in the program, the number of homeowners being helped through permanent modifications remains anemic, with fewer than 400,000 ongoing permanent modifications (only approximately 165,000 of which are in connection with the TARP-funded portion of HAMP), and HAMP has not put an appreciable dent in foreclosure filings. Indeed, the number of trial and permanent modifications that have been cancelled substantially exceeds the number of homeowners helped through permanent modifications.

The president announced that his latest attempt to bolster the housing sector will be paid for by a tax on large financial institutions. According to the Journal, Rep. Scott Garrett of New Jersey, a Republican, said such a measure would be dead on arrival—suggesting that Obama’s appearance today is more about politics than serious policy making.