The Los Angeles Times says that the President, tired of Congressional ‘inaction’, is using executive powers to help homeowners who meet certain conditions to refinance their mortgages at lower rates. The move is designed to pick up the housing market and by reducing mortgage payments thereby increase the amount of consumer spending on other items.
“We can’t wait for an increasingly dysfunctional Congress to do its job,” he [the President] said. “Where they won’t act, I will.”
But David Reilly at the Wall Street Journal points out that as in everything else there is no free lunch in the housing market. The owners of mortgages will have to accept a lower yield, thus paying for the lunch.
The thinking is that this will reduce defaults. Or as FHFA said, “Such refinances bring benefits to borrowers, to housing markets, and to [Fannie Mae and Freddie Mac] and taxpayers.”
Missing from that winners’ list: investors who finance housing markets by purchasing mortgage-backed bonds. They will fund this new effort. Here is how: As homeowners refinance, investors who bought mortgage bonds will be given back their money and will have little option but to reinvest at far lower yields. The transfer is the difference in yield. …
There is also likely to be little sympathy for bondholders having to give up money to shore up housing. But that ignores that the government is picking winners and losers. Effectively, it is deciding some losses on some things are acceptable, say on 401(k) retirement plans, yet aren’t on others, namely housing.
From the political point of view the program was targeted largely at Nevada and states where the rate of foreclosures were highest. “Nevada had the nation’s highest per-household rate of foreclosure filings at one in 44 in the third quarter, followed by California at one in 88 and Arizona at one in 93.” The program will bring immediate political relief to the administration in these states.
But the program appears to be part of a wider administration strategy to stimulate the economy. The LA Times Business section reported that it might soon be accompanied by Fed purchases of mortgage securities.
Another Federal Reserve policymaker signaled Monday that the central bank may launch a new round of mortgage-bond purchases to boost the housing market.
The comments by New York Fed President Bill Dudley came on the same day that the Obama administration announced a major overhaul of its mortgage-refinancing program for loans owned or backed by Fannie Mae and Freddie Mac. …
Noting that the Fed last month decided to shift more of its massive securities portfolio toward longer-term Treasury bonds to pull down long-term interest rates in general — including mortgage rates — Dudley said in response to audience questions that the Fed “potentially could move to do more in that direction.”
Recent market speculation has centered on the idea of the Fed printing money to buy another large chunk of mortgage-backed bonds. The idea would be try to push mortgage rates even lower, which could help spur home purchases and refinancings….
Long-term Treasury bond yields have risen since late September as worries about another U.S. recession have faded, eroding some of the “haven” demand for government bonds. That has helped to put upward pressure on mortgage rates.
The involvement of the Fed would add another dimension to the mortgage relief plan. Not only would the administration be picking “winners and losers” by transferring incomes between private individuals, but it would also subsidize housing by pushing down the mortgage rates with printed money. If carried on indefinitely, such artificial prices might distort the housing market, creating an incentive to purchase houses at prices only tenable because of the subsidy. Ultimately such a program would have to be wound down unless continued in perpetuity.
But it seems clear that the full extent of the President’s plan is still emerging. Whether it will assume the proportions of temporary relief or yet another institutional warping of markets is yet to be seen.
Hot Air points out that the whole housing issue is politicized. It quotes the Washington Post which in a long article examining the genesis of the current program, argues the President was afraid to implement the debt-reduction provisions passed by his own Congress under TARP, in the amount of $50 billion. They realized that if they actually carried out the provisions under that act that disaster impended. “The president’s inner circle of economic counselors — Geithner and White House economic advisers Lawrence H. Summers and Austan Goolsbee — did not favor a big program of debt reduction.”
The advisers also worried about the problem of “moral hazard,” when forgiving debts could encourage borrowers not to pay back loans.
Rather than targeting debt, the administration focused its efforts on making monthly mortgage payments more affordable — for example, paying banks to lower the interest rates on loans. At the end of the day, homeowners would still have as much debt.
Stymied at going down that road, the President searched around for another way to mollify the homeowners. The recent proposal represents the best effort. Even as the current program was being crafted the President’s advisers were still worried it would blow up in his face. “Even with this less-dramatic approach, Obama’s economic advisers worried about spending too much taxpayer money to help borrowers who still might not pay back their loans. So they excluded large categories of borrowers, including those who could not provide extensive documentation of a steady income.” The result was a program whose explosive filler was limited but whose vote-attracting payload would be correspondingly small.
Days before the program’s unveiling, David Moffett, the chief executive of housing finance giant Freddie Mac, arrived at the White House with a last-minute warning: Freddie’s analysts had concluded that the proposals were unlikely to help the millions Obama hoped. But, he recalled, the White House didn’t want to hear it.
But Hot Air reckons that despite the shambolic nature of the current initiative the President could not resist using the occasion to attack the “do-nothing” Republican congress despite the fact that he was wrestling with a legacy dilemma created by his own party. “Now Obama wants to claim that he will use his executive authority to act where Congress won’t, but clearly Congress hasn’t been the problem here. They authorized tens of billions of dollars that Obama requested in early 2009, but the administration has incompetently bungled those programs with little to show for it.”
The reality is that the President is running out of moves because he is running out of money. However much he wishes to pander to his base, there isn’t much pander left in the larder. Thus he is in the position of being “all hat and no cattle”. What the Washington Post fails to address, however, is the possibility that the Fed will step into buy up more mortgages. Yet even there the options are ultimately limited. The European Union, which comprises an economy roughly the size of the United States, has learned there are limits to the financing consumption on credit.