Give markets a chance
America’s housing market doesn’t need another government bailout. But the White House is mulling plans to rescue homeowners trapped by underwater mortgages and above-market mortgage rates by allowing them to refinance into cheaper government-backed loans. Luckily, its latest musings look like a pipe dream.
The Obama administration is considering two proposals, according to the Wall Street Journal, to fix a problem that has been vexing government officials for years. Many borrowers with private mortgages own homes that are worth less than the loan or whose interest payments are higher than the average 3.4 percent for a 30-year fixed-rate mortgage.
Some 900,000 borrowers fall into this category, according to Barclays and JPMorgan. One proposal would allow such borrowers to refinance into a cheaper loan guaranteed by Fannie Mae or Freddie Mac. Another would lower their monthly payments by restructuring their loans even if they aren’t in danger of imminent default.
The first plan, however, needs Congress to be on board. That’s unlikely. A raft of new guarantees would put even more taxpayer dollars at risk on top of the $188 billion Uncle Sam has injected into Fannie and Freddie. And plenty of lawmakers already want to dismantle the two failed housing agencies.
The second proposal has a better chance of moving off the drawing board since it doesn’t require lawmakers’ approval. Yet bondholders are likely to howl in protest. Loan modifications mean less cash flow for those who own mortgage-backed securities. If borrowers aren’t in danger of defaulting, it’s unfair, and imprudent, to punish investors who will be instrumental in reviving private capital’s role in home finance.
The blossoming recovery in the housing market also indicates that another government-led rescue isn’t needed. Home prices may have stuttered in October, but they are up 4.3 percent annually, according to the S&P/Case Shiller index. Meanwhile, a 12 percent rise in rental income is helping clear housing inventories as investors snap up foreclosed properties. And the Congressional Budget Office reckons that refinancing above-market loans would only prevent a small number of foreclosures. With animal spirits reviving, Washington should be planning its exit from dominating home finance, not extending its occupation.