Pay­ing your neigh­bor’s mort­gage

The Washington Times Weekly - - Editorials -

To­day’s glut of un­wanted homes on the mar­ket, with un­end­ing fore­clo­sures in some parts of the coun­try, is a se­ri­ous drag hold­ing back any chance of eco­nomic re­cov­ery. In­stead of eat­ing our peas — as Pres­i­dent Obama lec­tured Amer­i­cans to do — and let­ting the mar­ket find its equi­lib­rium, the ad­min­is­tra­tion is look­ing for an easy, tem­po­rary way out of the prob­lem through mod­i­fied mort­gages for un­der­wa­ter home­own­ers. It won’t work. The Obama ad­min­is­tra­tion wants to let mil­lions of home­own­ers with gov­ern­ment-backed mort­gages re­fi­nance their loans at cur­rent low rates, which are about 4 per­cent.

A very large per­cent­age of those loans are un­der­wa­ter, and the home­own­ers couldn’t get lower rates without gov­ern­ment in­ter­ven­tion. The White House is act­ing as if forced re­fi­nanc­ing is a free lunch. It’s not.

Re­duc­ing the in­ter­est rate that Fan­nie Mae and Fred­die Mac get paid on these loans will cost the gov­ern­ment-spon­sored en­ter­prises tens of bil­lions of dol­lars a year.

The re­al­ity is that Fan­nie and Fred­die are ef­fec­tively part of the gov­ern­ment, and they hold $730 bil­lion and $680 bil­lion worth of mort­gage se­cu­ri­ties re­spec­tively.

The Fed­eral Re­serve Sys­tem has $900 bil­lion worth of se­cu­ri­ties in­sured by Fan­nie and Fred­die. The Trea­sury held about $80 bil­lion of those se­cu­ri­ties in July.

What all this means is that tax­pay­ers are in­vestors in mort­gage-backed secu- ri­ties whether they want to be or not. Don’t be­lieve the Obama ad­min­is­tra­tion’s pop­ulist rhetoric that it wants to re­duce the costs of bor­row­ing for home­own­ers at the ex­pense of big in­vestors in mort­gage-backed se­cu­ri­ties.

In this case, what Democrats re­ally are try­ing to do is re­dis­tribute wealth from all tax­pay­ers to un­der­wa­ter home­own­ers, not from fat cats to the starv­ing home­less.

This is a Hail Mary pass that won’t work. There is lit­tle ev­i­dence that low­er­ing pay­ments re­duces the risk of de­fault and foreclosure. If that were in­deed the case, pri­vate lenders would have an in­cen­tive to mod­ify mort­gages, which they aren’t do­ing on a mas­sive scale. It’s also not clear why ir­re­spon­si­ble peo­ple who bought larger houses than they could af­ford should be re­warded with cheaper mort­gages than the mar­ket is will­ing to pro­vide. Once again, the thrifty will be asked to bail out the prof­li­gate. The moral haz­ard and per­verse in­cen­tives cre­ated by such a sys­tem are sym­bolic of an Obama econ­omy that in­hibits smart in­vest­ment and growth.

The bot­tom line is, un­em­ploy­ment has a far greater im­pact on de­fault risk than mon­key­ing with mort­gages. If mil­lions of job­less Amer­i­cans had work, they wouldn’t be de­fault­ing on their loans. To cre­ate jobs, gov­ern­ment needs to cut spend­ing and red tape so the pri­vate sec­tor has the con­fi­dence to in­vest in new hires. Wash­ing­ton bu­reau­crats won’t out­smart the mar­ket. In­stead, they need to let the hous­ing mar­ket find its bot­tom, which is when re­cov­ery can be­gin. Any­thing else sim­ply pro­longs the pain — and this Great Re­ces­sion.

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