President Barack Obama's plan to allow homeowners owing more than their houses are worth to refinance will create a credit crisis down the road, says Peter Morici, a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
The program seeks to prevent foreclosures by allowing homeowners still current on their federally guaranteed mortgages to refinance even if their home values have dropped below what they still owe.
"That is a prescription for more failed loans and another crisis in mortgage finance down the road or huge losses for U.S. taxpayers that can only be accommodated by even bigger deficits and printing money," Morici writes in a RealClearMarkets column.
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"For example, homes underwater by 50 percent today will sooner or later be sold and then what? Fannie Mae and Freddie Mac get stuck with the loss. Either future homebuyers seeking loans will have to pay outsized fees to cover these fees, or the taxpayers bail out these government sponsored institutions yet again. Either way, the housing market will take a big future hit, for campaign largess granted today."
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Furthermore, the program doesn't address declining home values and won't likely fuel consumer spending by freeing up money otherwise going to hefty housing payments.
"It is politically inspired and an economically irresponsible act that could easily result in many more foreclosures and another credit collapse down the road," Morici says.
Other critics say the move will increase burdens on taxpayers.
"It has the added negative effect of transferring consequences, liabilities, and risks from the financial institutions which entered into loans that are now underwater ultimately to taxpayers," says House Financial Services Committee Chairman Spencer Bachus, according to Reuters.
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