Housing refinance proposal unfair to most homeowners

The plan reportedly supported by the Obama administration to force Fannie Mae and Freddie Mac to reduce interest rates for millions of homeowners would mean that some homeowners get government help while their more responsible neighbors do not. 

It would in effect be a backdoor stimulus, one involving pushing taxpayer cash out the door without a vote of Congress. And there is little reason to think it would be much more effective than the fiscal stimulus to date. 

The proposal is to strong arm Fannie and Freddie’s independent regulator into allowing the two government-controlled mortgage insurance firms to weaken refinancing guidelines. Millions of homeowners who remain current on their mortgages but do not qualify for a loan under more rigorous post-bubble standards could see their interest rate reduced from, say, 6 percent down to 4 percent.  This amounts to a $366 monthly saving on a $300,000 mortgage.

Advocates of the idea note that taxpayers are already on the hook for losses because Fannie and Freddie back the mortgages in questions. 

But the suggestion that the policy is then “free” is off the mark because taxpayers will pay for part of the lower interest rates. The government doesn’t just guarantee mortgages; taxpayers actually own many of them through mortgage-backed securities purchased by the Federal Reserve, Fannie and Freddie. 

So, that $366 monthly savings comes about because the fortunate homeowners pay less each month to the owners of the underlying mortgages, including taxpayers. 

This is what makes the plan a thinly veiled fiscal stimulus. It is as if the government sent a monthly check to homeowners whose financial situations are too risky to refinance their mortgages under today’s low interest rates. 

Responsible homeowners who were able to refinance on their own get nothing.

To be sure, sending out checks or lowering monthly mortgage payments for millions of American families (but not their neighbors) could boost spending and support the economy to a degree.  But this is short sighted in the extreme. 

Asserting that the lower mortgage payments will have a huge positive impact on the economy and drive massive new revenue is akin to saying that tax cuts pay for themselves. This is possible, but not realistic. These checks will be funded by borrowing today and therefore involve spending cuts or tax hikes in the future. 

A better approach is to figure out the appropriate lending standards for mortgages to receive government backing and put those into place, including ensuring that taxpayers are appropriately compensated for insuring loans.

We have all learned that housing is a risky asset.  Lending standards should reflect this and housing policy should focus on ensuring a stable market in which American families can secure loans and buy homes, but without sticking taxpayers with uncompensated risks. 

Five years into a housing crisis, it is time to have a thoughtful plan for growth and stability over a longer horizon rather than policies driven by short-term exigencies.

Phillip Swagel is professor of international economic policy at the University of Maryland School of Public Policy and a non-resident scholar at the American Enterprise Institute. He was Assistant Secretary for Economic Policy at the Treasury Department from December 2006 to January 2009.

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