They keep doing it. Yesterday, the Obama administration offered a new plan for easing the housing crisis—a modification of the previously unsuccessful HARP program that would permit more underwater homeowners to apply for refinancing of their mortgages so that they could take advantage of the lower interest rates.
Apparently, the White House talking points said that this would make lower cost mortgages available to four million homeowners (a number used by Housing Secretary Sean Donovan). This would reduce monthly mortgage costs by an average of $250 dollars, and produce a total reduction of $12 billion annually.
Even if it actually worked for all those homeowners, $12 billion in savings is not going to revive the housing market—although of course it would be wonderful relief for those underwater homeowners who have acted responsibly to meet their mortgage obligations month after month.
But while many media reports duly followed the White House talking points (NPR somehow managed to report this morning that the saving would be $50 billion, and suggested that it would be like a tax cut of that size), a few things must have been left out.
—The program only applies to those mortgages that are held or guaranteed by Fannie Mae and Freddie Mac—probably 800,000 mortgages, according to their regulator, the Federal Housing Finance Agency. This means that the total saving for these homeowners would be $2.4 billion annually.
—If the interest on these mortgages is reduced, the losses will be taken in part by Fannie and Freddie, meaning that the taxpayers will pick them up.
—If the losses are taken by the holders of securities guaranteed by Fannie and Freddie, the losses will be taken by the investors in these securities, and this new government intervention will mean that it will be harder to sell Fannie and Freddie securities to investors in the future.
—Finally, the vast majority of the holders of these Fannie and Freddie securities are banks and S&Ls, which are already weak because they suffered vast losses on mortgages and mortgage-backed securities they held in the past. Reducing their revenues further at this point will of course reduce the funds they have to lend to businesses, thus keeping unemployment high.
The remarkable thing about all of this is that the administration keeps doing the same thing—adopting programs to “fix the housing market” that are far too puny to have any significant effect overall, but advertising them as game changers.
Beyond the political fumbling, the administration’s continuing intervention in the housing economy is also counterproductive. This program, if everyone eligible applies and gets the promised relief, might free up $2.4 billion to go—hopefully—to retailers. But it will also reduce the earnings of banks by some substantial portion of this number, and the rest will be further liabilities for the taxpayers.
These results were not in the White House talking points, and the compliant media that reported the story based on the talking points will then be surprised in the future when the economy in general—and the housing economy in particular—remains flat on its back.
