The housing market, and the economy as a whole, improved somewhat last year — the fortunes of the two are undoubtedly intertwined — but there’s still plenty of room for both to get better. President Obama hasn’t given up trying to help the former by letting more homeowners whose mortgages are under water refinance them at lower rates. It’s a good idea, as long as the lenders bear the risk of default, not the government.
Under the federal Home Affordable Refinance Program, homeowners with federally backed mortgages who owe more on them than their properties are worth have been allowed to refinance with Fannie Mae and Freddie Mac for the past few years. This has saved them an average of $3,000 per year on their mortgage payments, decreasing their risk of default while putting more money into the economy. According to a Dec. 26 Wall Street Journal story, over 330,000 mortgage holders were able to refinance through October of this year, up from around 60,000 in 2011.
Unfortunately, people whose loans with private lenders are underwater — roughly half of the 10.8 million total — have not been afforded the same privilege. Last winter, the Obama administration conceived of a plan that would have required the Federal Housing Administration to back the refinancing of underwater private loans, but when the FHA ran into financial problems, Congress refused to approve it. Now Obama is reportedly thinking of getting Fannie Mae and Freddie Mac to back the refinancings, but the plan is basically the same: if borrowers default, the government (taxpayers) would get stuck holding the bag.
These loans wouldn’t be inordinately risky: They would only be available to mortgage holders who are current on their loans. And since the monthly payments would actually fall with the refi plans, it would seem the holders would be less likely to default than before.
Still, the government shouldn’t be the one taking on the risk; the private lenders should. In many cases, they are banks that received government bailouts during the credit crisis. In others, the loans they made were “subprime,” or higher than the prevailing market rate at the time. So with rates continuing to fall, these lenders have scored tidy profits from the loans, which continue to be paid off according to schedule. So why should they be given a pass when it comes to shouldering the risk?
Obama’s FHA proposal involved an assessment on large banks, which also helps explain why it didn’t fly. But it’s a reasonable way to pay for a program that would not only help stabilize the real estate market at little risk, but reduce foreclosures and pump money into the economy.