By Robert Romano — On July 31, Federal Housing Finance Agency (FHFA) acting director Edward DeMarco once again rejected an Obama Administration plan to bail out borrowers who owe more on their mortgages than their homes are worth, citing cost concerns.
The FHFA, which administers the government’s conservatorship of Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, undertook an analysis of the program, showing reductions of mortgage principal owed for certain borrowers would cost taxpayers more and even potentially result in more defaults.
Even under the program’s best case scenario, the Agency estimated just 248,000 borrowers would be eligible for principal forgiveness under the Home Affordable Modification Program Principal Reduction Alternative — or just 2.2 percent of the 11.1 million borrowers nationwide who are underwater.
That means that even if DeMarco had implemented the program, approximately 97.8 percent of underwater borrowers would not have even been eligible. Therefore, more than $700 billion of the $717 billion of negative equity in homes nationwide would have remained unaddressed.
In other words, even if DeMarco had relented, this bailout would have done almost nothing to solve the problem of underwater borrowers. Yet, Treasury Secretary Timothy Geithner, in a letter to DeMarco responding to his decision not to implement the bailout, maintained the fiction that the program would somehow “help repair the nation’s housing market”.
New York Times columnist and economist Paul Krugman goes further, calling for DeMarco to be fired for not implementing a bailout almost nobody would qualify for, writing, “even if there’s a small net cost to taxpayers, debt relief is still worth doing if it yields large economic benefits.”
But even if debt relief did yield economic benefits in certain cases, this is not one of them.
According to the FHFA, some 80 percent of underwater borrowers who have GSE mortgages are current on their payments. But that could change if a bailout is implemented.
As DeMarco noted in his letter to Congress, selective application of the program could create a perverse incentive for borrowers to miss payments and potentially default in a misguided attempt to qualify for the bailout.
Under the program’s best case scenario — where all 248,000 underwater borrowers qualify — if just 19,000 of the 10.8 million remaining borrowers who did not were to strategically default, it would more than offset any potential benefit derived.
As a result, “HAMP PRA would result in a net loss to taxpayers, even using the model-based assumptions most favorable to the program,” wrote DeMarco.
Of course, it’s all political. Don’t let anyone tell you different.
“Obama’s goal is to build a constituency of borrowers underwater on their mortgages with the hope that they might — emphasis on might — be able to get some relief,” said Americans for Limited Government President Bill Wilson, calling it “nothing more than a cynical election year ploy.”
Indeed. How else to explain all these programs that hardly anyone qualifies for?
Every single year of the Obama Administration, such programs have been attempted, including the failed 2009 mortgage modification program, which fell far short of its goal to modify 3 to 4 million mortgages. In the end, just a fraction of the goal were even modified.
More recently, the White House expanded its mortgage refinance operations to allow refi’s above 125 percent loan-to-value. This would allow borrowers to get into a lower interest rate even if they are underwater on their mortgage.
That was done without any vote in Congress, too, and in spite of the fact the law that put Fannie Mae and Freddie Mac into government conservatorship only allowed refi’s of up to 90 percent loan-to-value.
But, if at first you don’t succeed, try, try again is the Obama mantra when it comes to its many failed efforts at foreclosure “prevention”. With millions more foreclosures anticipated this year, Obama appears convinced that trying the same thing over and over again expecting different results is not insane.
Robert Romano is the Senior Editor of Americans for Limited Government.
