More Mortgage Manipulation

ITEM: President Barack Obama, reported the Associated Press on October 24, "offered mortgage relief on Monday to hundreds of thousands of Americans, his latest attempt to ease the economic and political fallout of a housing crisis that has bedeviled him as he seeks a second term." Under the President's proposal, reported the wire service, "homeowners who are still current on their mortgages would be able to refinance no matter how much their home value has dropped below what they still owe. 'Now, over the past two years, we 've already taken some steps to help folks refinance their mortgages,' Obama said, listing a series of measures. 'But we can do more.' "

ITEM: The Los Angeles Times for October 27 editorialized that the "rescue plan" is an "overdue step that should boost consumer spending, even if it may not avert a huge number of foreclosures. The latter problem requires more aggressive and effective loan modifications, which banks and investors have been reluctant to do - to their own detriment."

ITEM: The Washington Post for October 26 reported: "Federal Reserve officials are considering new strategies to try to lower mortgage rates and help Americans reduce the burden of debt that hangs over the economy." Recently, wrote Neil Irwin in the Post, "leaders at the central bank have become increasingly convinced that problems in the system of housing finance are preventing the interest rate policies the Fed controls from having their usual economic impact. For example, even after Fed action that helped lower mortgage rates, surprisingly few people were able to take advantage by refinancing because they owed more than their homes are worth. But with new efforts by federal housing regulators underway to make it easier for homeowners and the Fed running out of other tools, the idea of further intervention in the mortgage markets is gaining new attention at the central bank."

ITEM: Under the President's most recent housing plan, wrote Chris Vigil in the Pasadena Star-News for October 26, "homeowners with loans backed by Fannie Mae and Freddie Mac that meet certain qualifications could be eligible to refinance their mortgages even if their home is worth less than they owe.... The remarkable thing about this proposal is that it does not cost taxpayers any money. The key is for the major lenders to agree to go along with this proposal."

CORRECTION: The President says the government can do more to affect the housing market. No doubt, but Washington has already done too much. While some sycophants may gush that this latest bit of abracadabra won't cost the taxpayers, that feint is illusory flimflam that would embarrass a third-rate bunko artist.

After all, who is on the hook if the "underwater" beneficiaries of this alleged fix - who owe more than their homes are worth - decide to walk away from their loans? The taxpayer-backed quasi-governmental Fannie Mae and Freddie Mac will be left holding the bag. And the taxpayers have already bailed out those mortgage giants - formally, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation - to the tune of at least $140 billion because of earlier con jobs.

Walking down the same hocus-pocus path that created the housing bubble and collapse - when the government twisted arms to force loans to be given to unqualified buyers and tied up packages of subprime mortgages for sale with gaudy ribbons - is to invite more disaster.

Some people profit from mistakes. To follow the government's latest policies would help ensure we never recover from them.

There are legitimate reasons that banks and other financial institutions don't hand out loans at low rates to those deemed unlikely to repay. This may be regrettable to those who would like a better deal, but that is what would happen in a market not distorted by politics. On the other hand, demagogues live by promises - usually broken ones.

When the federal government, over several administrations, obligated the lowering of underwriting standards, it set up huge numbers of people for a fall. You might think that the nation's agonizing financial condition over the last few years, sparked in large part by the popping of the housing bubble, would make the federal government more prudent. Not really. There may be some in Washington who want to practice economy, but most are decidedly out of practice.

Meddling led to the housing crisis; a succession of patchwork pretend solutions is making it persist and will hurt more in the long run. The Orange County Register (California) has summarized some of the steps that brought us to this pass:

When the housing bubble burst, questionable loans to unqualified buyers unlikely to pay back what they owed were a large part of the problem. Government's encouragement, ranging from coercion to permission, loosened lending standards and fed the problem. Cheap money, thanks to the Federal Reserve's misguided policies, also brought housing within reach of millions who shouldn't have qualified. The resulting upward spiral of inflated values exacerbated the danger.

When government-backed mortgages were packaged and sold to investors, including many pension funds, the inevitable defaults made many of them time bombs. Ultimately, taxpayers paid for much of the misadventure.

Three years ago the president proposed a fix, the Home Affordable Refinance Program. He hoped to help 5 million people refinance mortgages. Only 822,000 took advantage. Only one-tenth of those owed significantly more than their homes were worth.

Today, about 10 million American homeowners are underwater on their mortgages.

Since the Home Affordable Refinance Program (HARP I) had relatively little positive impact, the President came up with what has been dubbed HARP II - providing cheaper loans for those who essentially have no equity in their homes. This is perhaps the 10th different housing fix that has been pushed by the Obama administration. The administration, which tends to build castles in the air with its implausible contentions, has claimed some Americans may save $2,500 a year via this plan. Others, more realistically, peg the potential savings at a bit over $300 annually. For some reason, this quack remedy brings to mind an old definition of a harp: a piano after taxes.

The administration naturally points just at those who might benefit from its policies. It wants credit to accrue to itself for keeping people in homes they can't afford, neglecting to note that would only come by penalizing investors or those who borrowed more prudently.

When you are trying to sell a false bill of goods, it is a trick of the trade not to show the whole deal.

Early in October, a financial regulation specialist from the Cato Institute testified before the House Subcommittee on Insurance, Housing and Community Opportunity, discussing the premise that such actions are necessary because underwater borrowers are a drag on the economy as a whole. Mark Calabria observed that it "is vital to remember that a mortgage is one person's liability, but another person's asset. If we, via policy, reduce mortgage rates for vast number of borrowers, we are also reducing bond payments to vast numbers of investors. Making one group better off at the expense of another is not wealth creation, it is redistribution."

In the same vein, the drop in housing prices has made homes available to many who previously couldn't afford to buy. But there is a reason for giving out waivers, changing eligibility caps, and lowering standards - and that is to make believe this is helping homeowners nationwide, and somehow doing so out of the goodness of the heart of the federal government.

Foreclosures, to be sure, are painful. Nevertheless, they are one means for the artificially inflated market - which now has an oversupply of housing - to clear. Lenders are also capable of working out refinancing arrangements without Washington holding everyone's hands.

Former Massachusetts Governor Mitt Romney was asked in Nevada - shortly after the President made his latest pitch - for his take on the situation. Romney surprised some by telling it as it is. He remarked that the government shouldn't "try and stop the foreclosure process. Let it run its course and hit the bottom. Allow investors to buy homes, put renters in them, fix the homes up. Let it [the housing market] turn around and come back up. The Obama administration has slowwalked the foreclosure processes that have long existed, and as a result we still have a foreclosure overhang." The White House blasted that candor.

Indeed, the administration has rolled out a dizzying succession of interventionist therapies - including the Home Affordable Modification Program, Emergency Homeowners' Loan Program, Home Affordable Unemployment Program, and Principal Reduction Act - before conjuring up the recent revision to the Home Affordable Refinance Program. If the White House were to tell the truth, it would call its measure the Prolonging Pain and Fright Mortgage Investment Act - because that is what it will do.

A number of critics have also noted that most direct beneficiaries will be those who need it least, since they are likely the ones who have stayed current on their mortgages. Yet, don't think that liberalizing mortgage terms by fiat is the last magic trick that is available to the overreaching feds. When this doesn't fix the problem, there is already considerable pressure building among "liberals" to force banks to forgive huge amounts of the principal of loans for those who are over-extended.

Meanwhile, Fannie and Freddie still own or guarantee about half the nation's mortgages. Despite their having helped bring on the housing crisis, they still have an advantage over others in the mortgage business. As Cato's Calabria has commented of those government-sponsored enterprises: "Given that the federal taxpayer is covering their losses and backing their debt, along with the suspension of their capital requirements, no private entity can compete with Fannie Mae and Freddie Mac. We will never be able to move to a more private market approach without reducing, if not outright removing, these taxpayer-funded advantages."

The President is proposing, as University of Maryland economist Peter Morici has put it, to allow those homeowners "still up to date on the mortgages" to 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." Doing that, comments Morici, "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."

The distressed market should not be a surprise. It is what happens with government intrusions, in this case with housing. Moreover, the intended help made matters worse.

Thomas Sowell has chapter and verse on such matters in his book Economic Facts and Fallacies. He makes it clear enough that it could be understood even by someone in the Obama White House. Sowell has the details, for instance, about how people paid less as a percentage of their income for housing before government intervention became so prevalent, explains how the cost of housing rose dramatically when government regulation took off, and shows that the prices of housing in those areas that had more government intervention rose more quickly than in areas with less intervention.

Such facts are unpalatable to those trying to grow the state. In fact, a recent piece by Charles Calomiris in the Wall Street Journal quoted extensively from internal e-mails from top-level risk managers at Freddie Mac and Fannie Mae - so-called government-sponsored enterprises - who tried to warn of the consequences as underwriting standards were being forced lower. They were ignored. Inevitably, the artificially inflated run-up in prices crashed. Calomiris, a professor of finance at the Columbia Business School, writes:

Taxpayer losses at Fannie and Freddie alone may exceed $300 billion. The costs of the financial collapse and recession brought on by the mortgage bust are immeasurably higher. Unfortunately, the Obama administration has perpetuated the low underwriting standards that gave us the crisis and encouraged the postponement of foreclosures by lending support to various states' efforts to sue originators for robo-signing violations.

Now they are trying to deflect blame from Fannie and Freddie by suing the originators who fulfilled the politically motivated demands of the government-sponsored agencies that drove the mortgage crisis. If successful, all of those efforts will further postpone the ability of banks to grow the supply of credit, and they will sow the seeds of the next mortgage bust.

There are those who will still insist that there's not only a free lunch, but a free breakfast, dinner, and a (healthy government-approved) snack to boot. If you give such a man a free hand, don't be surprised when he puts it in your pocket.

- WILLIAM P. HOAR