Wonkbook: Is the government getting ready to refinance your mortgage?

at 08:15 AM ET, 08/25/2011


A JL Berry Co. for sale sign hangs outside of a home that is in foreclosure on June 29 in Phoenix, Arizona. (Joshua Lott - BLOOMBERG)
The central unfairness of the financial crisis is that the banks that carried bad debts got bailed out, the homeowners who carried bad debts were left to languish. Three years later, the banks are mostly doing alright -- well, not you, Bank of America -- and the housing market remains a mess.

But fixing the housing market isn't easy, either. You can make the banks eat the losses, but then you have destabilized them. You can make the government eat the losses, but then you are telling the people who are making their mortgage payments that they're going to have to pay for the people who aren't making their mortgage payments. Remember that the Rick Santelli's rant that kicked off the Tea Party was about the perceived unfairness of exactly this. "How about this, President and new administration?" Santelli said. "Why don't you put up a website to have people vote on the Internet as a referendum to see if we really want to subsidize the losers' mortgages; or would we like to at least buy cars and buy houses in foreclosure and give them to people that might have a chance to actually prosper down the road, and reward people that could carry the water instead of drink the water?"

So the politics of that aren't so easy, either. But perhaps you can do something for everyone. If the Federal Reserve can keep interest rates low and Fannie Mae and Freddie Mac are willing to loosen their rules, you could refinance most of the mortgages in this country at around four percent. That wouldn't forgive anyone's debt, but it would make it easier to pay. It would also help a lot of households that are already paying their mortgage each month, but are strapped for cash once they have sent off the check. And because the government takes a loss when homeowners default on a Fannie-or-Freddie-backed mortgage, it could even improve the federal balance sheet over time. Oh, and because the government already owns Fannie Mae and Freddie Mac, the administration could do a lot of this without Congress.

Which is not to say that this approach is easy. If it was easy, it would already have been done. Who exactly qualifies? What do you do about second mortgages? Who exactly is doing the lending? But not doing enough, as we're seeing now, has plenty of problems, too. So as Shaila Dewan and Louise Story report this morning, the administration is considering a refinancing option along the lines laid out here. I would be somewhat surprised to see them end up with the maximalist version of this policy, as many inside the Treasury building have long considered it appealing in theory but less workable in practice. But there's a lot of space between here, where we're doing almost nothing for homeowners, and a world in which we're doing so much that we can't figure out how to get it done.

Five in the morning

1) The administration is considering spurring a wave of home refinancing, report Shaila Dewan and Louise Story: "The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing. One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information. A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds."

2) The deficit will hit $1.3 trillion this year, reports Michael Fletcher: "The federal budget deficit will continue at historically high levels, hitting $1.3 trillion in fiscal 2011, congressional budget analysts said Wednesday. But it will ebb substantially over the next decade -- if the Bush-era tax cuts and other measures are allowed to expire as scheduled, the report said. The nonpartisan Congressional Budget Office says that revenue, coupled with the debt-reduction deal signed into law this month by President Obama, would cut projected deficits by $3.3 trillion, or nearly half, over the next 10 years. But that reduction will be realized only if lawmakers allow a series of tax cuts and other temporary revenue measures to expire. The prospect of that happening is considered dicey by many analysts, given the divisive political environment in Washington."

3) Supercommittee members say they're already making progress, reports Seung Min Kim: "The supercommittee might not have a staff director, rules in place, or a room to meet in, but leaders of the powerful budget-slashing panel insisted Wednesday that progress is being made. Co-chairs Sen. Patty Murray (D-Wash.) and Rep. Jeb Hensarling (R-Texas) said in a joint-statement that they’re engaged in 'serious discussions' on the details...The panel faces a Thanksgiving deadline to slash $1.5 trillion from the deficit. They are not expected to hold an official meeting until after Labor Day, when Congress returns from its August recess. In the release, the leaders said that most supercommittee members are studying over the break -- reading up on the work of past deficit-reduction groups...The committee is under increasing pressure to operate in an open fashion. An aide said a public website is a top priority."

4) Congress will have a matter of days to pass a transportation bill after reconvening, reports Ashley Halsey: "State transportation officials are fearful that another congressional stalemate next month could shut down highway and transit construction projects nationwide and put thousands of people out of work. Facing a Sept. 30 deadline, officials are mindful of the deadlock that occurred this month over extension of funding for the Federal Aviation Administration...Both the federal authority to collect the 18.4 cents a gallon in federal gas tax and authorization to spend the revenue on transit and highway projects are due to expire. 'When Congress comes back, they’re only going to have 11 days to take action,' said Susan Martinovich, president of the American Association of State Highway and Transportation Officials. 'There is a crisis brewing.'"

5) The Fed has a few policy levers left, reports Catherine Rampell: "There are other measures the Fed could take besides quantitative easing. These include changing the composition, rather than the size, of the assets already on its balance sheet so that they have longer maturities. Like quantitative easing, this could lower long-term interest rates, with many of the same pros and cons. There would probably be less political resistance to reconfiguring, rather than expanding, the central bank’s debt holdings. The Fed could also lower the interest rate it pays banks on their reserves. Maybe this would encourage them to hold less cash and increase their lending. There is some debate about how effective this measure would be. If demand for credit remains low, encouraging banks to lend more may not be helpful. Many economists have suggested that the most powerful tool the Fed might employ would be an announcement that it is raising its medium-term target for inflation."

Though there are at least 11 interventions Bernanke could try: http://on.ft.com/naPOWu

Self-cover interlude: Washed Out play a soft-rock version of their song "Far Away."

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Still to come: Mortgage deal talks are hung up over how to deal with a mortgage registry; raising the Medicare retirement age could increase costs; candidate super PACs are gaining momentum; the administration took a step toward approving a major new oil pipeline; and a great deleted scene from the latest X-Men movie.

Economy

Dylan Matthews runs through the nine best studies of the stimulus: "None of the studies are flawless. But while the optimistic studies do, in fact, support the conclusion that the stimulus worked, there is some reason to doubt that the pessimistic studies support the conclusion that it failed. Conley and Dupor found a negative effect on employment and output but, as they concede and critics of the study have emphasized, their results are not statistically significant. Taylor found that the stimulus did not increase government purchases significantly but, as Noah Smith argued, this result could be consistent with the stimulus increasing employment and output. Oh and Reis found a small multiplier for tax transfers of the kind found in the stimulus package, but as they concede, their model produces estimates for key figures that are empirically implausible. Using more plausible figures produces a significantly larger multiplier, meaning the package was more effective than the model initially suggested. Due to these issues, I’m inclined to believe that the preponderance of evidence indicates the stimulus worked."

Mortgage deal talks are hung up over how to deal with an electronic registry, reports Brady Dennis: "State and federal officials negotiating a settlement with the nation’s biggest banks over shoddy foreclosure practices are hung up on how they should deal with a Reston-based company that has acted as a proxy for financial firms throughout the country for more than a decade. Some officials refer to the dilemma as the 'MERS morass,' referring to Mortgage Electronic Registration Systems, whose vast but controversial registry contains roughly 65 million mortgages. The pending multibillion-dollar settlement with banks centers on 'robosigned' documents and court filings and other problems related to mortgage servicing that caused a national uproar last fall. Much of that flawed paperwork flowed through MERS. Meanwhile, the same system helped make possible the boom in mortgage-backed securities that fueled the housing crisis."

Washington's housing and fiscal policies aren't working, writes David Wessel: "There are no cheap ways to speed the healing of housing. Nearly every option is unfair, especially to those who didn't over-borrow. Every big option has big drawbacks. Allowing homeowners, for instance, to renege on mortgage debts in bankruptcy would have pushed banks to modify more loans, but weakened fragile banks. Buying homes from banks and renting them out would be costly. The consequence is that sagging home prices remain a drag on the economy...A wiser strategy would have combined more short-term help for the economy with more long-term deficit reduction, including restraints on health spending and a revamp of the tax code. Had more infrastructure spending been initiated early, it would be creating jobs now. Had politicians cut a deficit-reduction deal instead of creating another committee, people and markets would have more confidence in the U.S. political system's capacity to do what needs to be done."

Obama knows what to do on the economy, he just needs to fight for it, writes Jared Bernstein: "He’s already been making this case regarding the extension of the payroll tax holiday and unemployment benefits...Then, he should roll out a campaign for a national infrastructure program to repair, retrofit, and modernize the nation’s public schools called FAST!--Fix America’s Schools Today...'But...but...Congress will block him,' you say. On most of these ideas, probably so, though I’d put the renewal of the payroll tax cut at above 50 percent, and the unemployment insurance extension only slightly below half. And, as for the rest of his plan, if Obama gets fired up around an agenda anything like the one I’ve outlined, and if he’s very clear about who, precisely, is standing between America and that jobs agenda, I think he’ll not only regain his footing and provide a stark contrast between himself and his opponents, but his fierce advocacy will give the country something to feel good about. And man, we really need that."

We don't need higher inflation, writes Robert Samuelson: "Inflation is hard to manipulate in precise and predictable doses. Once people become convinced that government will tolerate or encourage it, they adapt in unforeseen ways. We can’t know what would happen now, but we do know what happened in the 1960s and 1970s. One adaptation was that companies and workers raised wages and prices much faster than expected. Higher interest rates followed. Rates on 10-year Treasury bonds went from 4 percent in 1962 to 8 percent in 1978. The stock market stagnated for nearly two decades. Consumers reacted to greater uncertainty by increasing their savings rates from 8 percent of disposable income in 1962 to 10 percent by 1971. That’s exactly the opposite of today’s goal -- more, not less, consumer spending. There might be other unpleasant surprises."

Not all tax expenditures are created equal, writes Howard Gleckman: "When many conservatives talk about 'closing tax loopholes' they mean making sure that low-income people pay at least some tax...When liberals talk about ending tax subsidies, they have in mind raising taxes on corporations and on the highest-income individuals...The Earned Income Tax Credit: This refundable credit is aimed at providing cash assistance to low-income working families...The Charitable Deduction: In many ways, it is the mirror image of the EITC. Almost no households making less than $50,000 get any tax benefit at all from the charitable deduction. It is not because they are not generous givers...Nearly 85 percent goes to those making $100,000 or more...The mortgage interest deduction targets most of its benefit to the middle-class and the rich--but not the super-rich."

Memorial interlude: A time-lapse video of the 9/11 memorial in New York being built.

Health Care

Raising the Medicare retirement age would increase health costs, reports Sarah Kliff: "Raising the Medicare eligibility age to 67 from 65 would cost states and private payers about twice as much as it would save the federal government, according to this graph from the Center on Budget and Policy Priorities’ Paul Van de Water. The change would net the federal government $5.7 billion in savings if enacted in 2014. But it would also increase health care costs for many other health care payers, to the tune of $11.4 billion...It’s little surprise that raising the Medicare eligibility age would shift costs to the private sector; someone would still foot these health bills. But how does the change suddenly double the cost of caring for the same group of seniors? That price difference likely stems from Medicare’s efficiency as a health delivery system. The program has consistently seen lower cost growth than private insurance plans."

The administration is behind schedule in implementing the CLASS Act, reports Sam Baker: "The Obama administration will likely fall a year behind schedule in implementing a controversial piece of healthcare reform, according to the Congressional Budget Office (CBO). The budget update that CBO released Wednesday assumes a one-year delay in the law’s new insurance program for long-term care. The program -- Community Living Assistance Services and Supports, or CLASS -- has faced serious skepticism ever since its inclusion in the healthcare overhaul. Under the healthcare law, CLASS is slated to begin collecting premiums next year. But CBO said Wednesday that 'based on the pace of implementation actions thus far,' it doesn’t expect the program to start taking in money until 2013. As recently as March, the budget office was still projecting that CLASS premiums would begin rolling in next year."

Raising the retirement age isn't a bad idea since health reform passed, writes Len Burman: "As a member of the Bipartisan Policy Center’s Debt Reduction Task Force, I supported gradually raising the Medicare eligibility age (even though the ultimate proposal did not include that option). I think it’s a good idea now even though it wouldn’t have been a couple of years ago. Here’s why: The Affordable Care Act (health reform) will guarantee for the first time that everyone can get affordable health insurance coverage through the new exchanges. Pre-ACA, older people not yet eligible could face astronomical premiums if they had serious health problems (as older people often do). Starting in 2014, that won’t be true (and there are subsidies to encourage employers to provide health insurance coverage for retirees until the exchanges start)...The bottom line is that raising the Medicare retirement age primarily affects higher income older people."

Domestic Policy

"Super PACs" are taking shape for next year's elections, reports Dan Eggen: "Until this month, Steven C. Roche was one of Mitt Romney’s most trusted advisers, helping the former Massachusetts governor raise tens of millions of dollars in his long quest for the White House. Now Roche has jumped ship to Restore Our Future, a 'super PAC' dedicated to helping Romney win the presidency by raising unlimited funds from wealthy donors and corporations. The move, first reported by the Center for Public Integrity, illustrates the rise of yet another money-raising vehicle for the 2012 elections: 'candidate super PACs,' which are emerging as de facto subsidiaries of the traditional presidential campaigns. Super PACs are technically independent of candidates and parties, and are supposed to abide by Federal Election Commission rules prohibiting coordination with campaigns. But many campaign-finance experts complain that the line is fast blurring into a distinction without a difference."

Paul Ryan rightly values Congress over the presidency, writes Ezra Klein: "This week, Representative Paul Ryan, a Republican from Wisconsin, ended months of will-he-or-won’t-he speculation by announcing that he won’t run for the presidency. That sound you heard was a million conservative hearts breaking. But conservatives shouldn’t fret: Ryan made the right decision. In our political culture, we overvalue presidents and undervalue legislators...There are a few members of Congress who seem to understand that they have the power, if they band together with enough of their colleagues, to set the agenda and drive policy. And perhaps no member of Congress has done that more effectively in recent years than Ryan. There is simply no doubt that Ryan and the Republicans wrested the agenda from President Barack Obama’s administration this year."

Obama should make a recess appointment, writes Jonathan Bernstein: "Republicans in the House of Representatives are currently attempting to prevent Barack Obama from making recess appointments, contrary to the spirit of the Constitution -- the same Constitution that they read on the House floor at the beginning of the 112th Congress. It’s a complete farce, and there’s no reason at all for Obama to play along. Obama should make a recess appointment in the face of the House GOP’s antics -- now. It would be good for his Presidency, as a display of his influence. Not only that, but it would be good for the Constitution, too...The president’s power of appointment is at stake here, and the president has both ample constitutional room to act and ample reason to do so."

Rick Perry has the right idea on higher ed, writes Kevin Carey: "Perry’s next big higher education announcement, made during his 2011 State of the State address, challenged public universities to use information technology to create a bachelor’s degree program that would cost students only $10,000--total. The price of higher education has skyrocketed in recent decades...A U.S. Department of Education study found that online learning environments are often as good or better than traditional instruction, and for-profit giants like the University of Phoenix have used the cost-saving powers of technology to generate huge profits for shareholders. What nobody has done, however, is use technology to make a serious dent in the cost of public universities. Yet critics dismissed Perry’s idea as 'preposterous' and 'absurd.'"

Deleted scene interlude: Professor X uses his mind control powers to make Magneto look like he's in drag in a cut scene from "X-Men: First Class."

Energy

The State Department looks like it's moving forward on the Keystone Xl pipeline, reports Juliet Eilperin: "The State Department will remove a major roadblock to construction of a massive oil pipeline stretching from Canada to Texas when it releases its final environmental assessment of the project as soon as Friday, according to sources briefed on the process. The move is critical because it will affirm the agency’s earlier finding that the project will have 'limited adverse environmental impacts' during construction and operation...The department will have to conduct one more assessment -- of whether the Keystone XL pipeline is in the 'national interest' -- before making a final permit decision by the end of the year. The proposed TransCanada pipeline...has strained President Obama’s relationship with his environmental base and become a proxy for the broader climate debate."

Kate Sheppard breaks down the Keystone XL pipeline issue: "The Canadian energy company TransCanada has asked for permission to build a 1,661-mile pipeline that would travel from Hardisty, Alberta, down to oil refineries in Houston and Port Arthur, Texas. It would supplement the existing Keystone pipeline, which went into operation last summer and can carry up to 435,000 barrels of oil per day...That existing Keystone line has already leaked a dozen times in just one year of operation. The Keystone XL would cross more than 70 rivers and streams...The much-higher carbon footprint of tar sands oil and its contribution to climate change are also concerns, as are the health problems reported near extraction sites...Unlike most major environmental issues, President Obama doesn't need Congress to do anything here. The decision is entirely within the control of his administration."

Romney now says he "doesn't know" if climate change is caused by humans, reports Dan Berman: "Hours after being called "mushy on environmental issues" by a Republican senator, Mitt Romney has tweaked his position on global warming. Asked Wednesday at a Lebanon, N.H., town hall meeting whether he believed in global warming and if humans contribute to rising temperatures, Romney said he doesn't know. 'Do I think the world's getting hotter? Yeah, I don't know that but I think that it is,' Romney said, as reported by Reuters. 'I don't know if it's mostly caused by humans.' 'What I'm not willing to do is spend trillions of dollars on something I don't know the answer to,' he added. Just two and a half months ago in New Hampshire, Romney expressed concern about climate change and greenhouse gas emissions."

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Jessica Sabbah.

 
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