President Barack Obama announced his plan this week to bypass Congress with new government intervention to save the housing market through the entities that destroyed it: Fannie Mae and Freddie Mac.
For different reasons, thoughtful members of both the tea party and Occupy Wall Street should be up in arms at many of the plan’s aspects.
For the tea party, which was sparked by the 2009 rant of CNBC’s Rick Santelli against “pay[ing] for your neighbors’ mortgage that has an extra bathroom” through Obama’s first mortgage “rescue” program, this is a similar bailout for big borrowers.
For OWS, which is concerned with policies that favor those at the top, there should be consternation that this could benefit owners of McMansions worth up to $730,000. And both movements should be concerned that this plan lets banks off the hook for shoddy loans they sold to investors such as pension funds, which serve middle-class workers and retirees.
The plan is to open the gates to massive refinancing for borrowers with loans owned or guaranteed by Fannie Mae and Freddie Mac. Since Fannie and Freddie are under conservatorship by the federal government, the loans are actually backed by the U.S. taxpayer. And many of the loans guaranteed by Fannie and Freddie are actually owned by private investors, including middle-class investors who participate in pensions and 401(k)s.
Although banks handle paperwork with these mortgages, they often don’t own them. They are merely “servicers” who collect fees from owners of the loans.
Establishing the true owners of mortgages is important in discussing refinancing proposals, because borrowers refinancing at a lower interest rates means the owners of the mortgages lose money they would have received under the original agreement. Sometimes that can be thousands of dollars over the life of the mortgages.
Refinancing is a standard feature of fixed-rate mortgages, and investors in the loans take this risk. But for decades there have been safeguards negotiated into the contracts so that owners of the mortgages wouldn’t get swamped by losses all at once and, more importantly, that a refinanced mortgage would still meet the underwriting standards under the original agreement.
But now, bypassing congressional approval, Obama wants to shred these safeguards that govern Fannie and Freddie, which protect taxpayers and investors from being hit by billions in losses.
The Federal Housing Finance Agency (FHFA), which governs Fannie and Freddie, announced today that it would waive refinancing fees, requirements of new appraisals and, most consequentially, the rule that the ratio of a loan’s value to that of a home could not be more than 125 percent. This will allow potentially millions of underwater mortgages to be refinanced.
Some borrowers will no doubt benefit greatly, but taxpayers and investors of all income levels will be soaked.
As Phil Kerpen, vice president for policy at Americans for Prosperity and author of the groundbreaking new book Democracy Denied, notes: “The subsidized-refinancing scheme will cost taxpayers at least $600 million according to the administration’s own estimates, and will almost certainly cost much more than that if any significant number of borrowers actually sign up for the program.”
But this is just the tip of the iceberg. Losses to investors from similar refinancing proposals have been estimated to be $13 billion to $15 billion. This could eat away any stimulus from the extra money borrowers have due to lower interest payments, the stimulus that Obama and supporters of his plan are banking on.
As even the liberal Washington Post acknowledges in an editorial: “Basically what we have here is a plan — if it works at all — that would move money around within the economy, shifting it from bondholders and taxpayers to a select portion of underwater homeowners.
"How much more net spending on goods and services would occur is a wide-open question. While the losses to bondholders would take place immediately, the gains to homeowners would occur in monthly installments over several years.
"Dramatic stimulus? No. A modest aid to repairing household balance sheets? Maybe.”
And the borrowers who do benefit most may not necessarily be poor struggling homeowners on the brink of foreclosure. The limits for mortgages Fannie and Freddie have been hiked “temporarily” to home loans valued as much as $729,750. And the Democratic-controlled Senate just voted last week to keep this loan limit and protect these millionaire mortgages, at the same time Democrats were bashing the GOP for its stance against tax hikes on millionaires.
So middle-class pension holders may very well be subsidizing Joe Fat Cat to get a lower interest rate on the mortgage on his McMansion.
And then there are the hidden bailouts to the banks. Generally, once a loan is refinanced, investors can’t sue the bank who sold them the original loans for fraud or breach of contract.
Indeed, the FHFA admits in its news release that the new program involves “waiving certain representations and warranties that lenders commit to.”
So when it comes to imposing unilaterally a program that could cost billions in losses for taxpayers and middle-class investors, yes, we can and should wait. And yes, Congress, and not just the president, can and should debate.
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