February 1 2012
We Don’t Need No Stinking Housing Refinance Scheme!
Nicole Kurokawa Neily
One of the worse proposals in the President’s State of the Union speech last week was one to restructure the housing market. From the transcript:
…responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief.
And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates. (Applause.) No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust. (Applause.)
President Obama is unveiling his full proposal this afternoon; according to the Wall Street Journal, “The plan aims to help borrowers who are current on their mortgages refinance into lower-interest federally insured loans. Borrowers would qualify even if they owe more than their homes are worth or if they have trouble securing a new mortgage from a private lender.”
Let’s dissect this plan, shall we?
First: NO, IT’S NOT WRONG TO LET THE HOUSING MARKET HIT BOTTOM. IT IS CALLED A MARKET CORRECTION. Bubbles don’t burst to half-bubbles… they deflate entirely! Yes, it’s going to stink. Yes, it will hurt. But is it necessary? Absolutely.
To clarify: we want to give MORE power and influence to the agency that messed things up so royally before? The Federal Housing Administration currently backs 9 out of 10 mortgages already. The housing market crashed because the government guaranteed homes that were overvalued in the first place, messing up the natural signaling method that should have existed. Why on earth would we want to not only continue that practice, but expand it?!?!
In addition, it’s important to note how fiscally unsustainable the FHA is: they’re dipping into reserves, meaning they’re currently losing money. Which means they’re backing BAD INVESTMENTS. In November, Fox Business’ Elizabeth McDonald noted: “Back in 2009, we found FHA only had a ‘teacup’ of money against a flood of potentially bad loans out of the seven million it insures. Today it only has $31.7 billion in reserves, out of which only $2.8 billion is set aside to back its $1 trillion book of business.”
Why throw good money after bad, and make everyone pay for the bad decisions of a select few? Those people knew what they were getting into with their rates and the amount they were borrowing. They weren’t coerced.
In trumpeting the $3,000 that homeowners will save, the President implies that society as a whole will be better off. But as the Cato Institute’ Mark Calabria points out, “The error in this logic is that it looks only at one side of the balance sheet. A mortgage is one person's liability, but it is also another's asset. Lowering rates may cut monthly payments, but it also drives down payments on mortgages and mortgage-backed securities. Since you will have made mortgage investors poorer, they will, by the same logic, reduce their spending, lowering demand.” Brilliant.
And finally: why are banks paying for this harebrained scheme (aside from the fact that they’re an easy target?) When we tax banks, we reduce available equity… so banks will have less money to lend to qualified homebuyers in the future. Talk about cutting off your nose to spite your face!
Banks made risky loans because the government said it would cover the risk. Let’s just have the government END that practice, so banks change their behavior going forward and taxpayers don’t have to shoulder the burden.