Friday, February 3, 2012

The Permanent Foreclosure Crisis and Obama's Refinancing Obsession - Credit Slips

 Here is a sensible look at the foreclosure crisis with a few reasons why the politics of housing is so ridiculous.  There are no solutions to the problem that have perpetrated on the public by the banking criminal and the Federal Government.  The lowering of interest rates and refinancing does nothing to help most underwater homeowners and it does little to lower payments.  The risk of the perpetual stagnating real estate market are becoming very high.  As we have seen housing prices drop again this past year, we are on the verge of destroying the golden goose that has provided for so much of America's prosperity in the past 50 years.  It is amazing how uninterested the parties that be are in fixing the real problems that have plagued the housing industry for the past few years. 

The Permanent Foreclosure Crisis and Obama's Refinancing Obsession - Credit Slips

The Permanent Foreclosure Crisis and Obama's Refinancing Obsession

posted by Alan White
For the umpteenth time, President Obama has announced that his solution to the foreclosure crisis is to encourage "responsible" homeowners to refinance at lower interest rates. Adopting the Tea Party rhetoric and blaming home buyers who got houses in 2006 for their inability to foresee what few economists foresaw, Obama has steadfastly refused to push for principal reductions and payment suspensions for homeowners behind in payments, lest their luckier neighbors who bought at lower prices become resentful. As a result, he continues to offer help to homeowners who need it least.
Behind the rhetoric is an important policy choice: who will bear the billions of mortgage losses that have yet to be flushed out of the system. Principal reduction modifications for defaulted borrowers would distribute the losses among taxpayers (via Fannie and Freddie), private investors and banks (who hold non-GSE loans), and give underwater homeowners some relief. More importantly, principal modifications mitigate the aggregate losses to the system while accelerating the necessary deleveraging. Refinancing current borrowers does nothing to prevent the huge deadweight losses from continuing foreclosures, at 50% loss severities, on homes whose owners are delinquent. Choosing to do no more for the 7 million or so delinquent mortgage debtors means maximizing losses to those homeowners, but also to taxpayers and investors. It would certainly help to continue driving down home prices, which does benefit new first-time buyers, but at a huge aggregate cost.
In fact, as conservator of the nationalized Fannie Mae and Freddie Mac, the federal government could make the needed modifications of delinquent mortgages happen with a stroke of the pen, more or less. Instead, the Administration proposes the dubious strategy of loading up the FHA portfolio with 4% mortgages at 125% loan-to-value ratios, thus continuing the process of transferring future mortgage losses from banks to taxpayers, and amplifying those losses, while letting the foreclosure crisis continue, just as Mitt Romney proposes. Nothing about the refinancing strategy moves forward the process of realigning mortgage debt to home values. Instead, the strategy relies on the doubtful proposition that home values will soon return to rising at their pre-2007 clip.
Pacta sunt servanda and the housing market and broader economy be damned.

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