The new loans for the latter would be insured by the Federal Housing Administration. The cost, at least $5 billion depending on participation rates, would be paid by banks, which would be charged fees, and by current holders of mortgage-backed securities, who would be bought out at face value rather than market rates.
Congress probably won’t, and shouldn’t, sign off on that part. Billed as a twofer that prevents foreclosures and stimulates consumer spending, the proposal actually just shifts money around — the proposed fee on banks would get passed on to customers — while adding risk to the FHA’s books. By focusing on those who have kept up their payments through the crisis, the president claims to reward “responsible” homeowners. You could argue that he is trying to make banks bail out borrowers who have shown they don’t need it.
Still, there are promising ideas in the package. As an alternative to taking lower interest payments in the form of reduced monthly payments, Mr. Obama’s plan would allow homeowners to convert the savings to equity. They’d pay the same amount as they do now, but their outstanding principal would decline more quickly. If Mr. Obama limited eligibility to loans already held by the government-sponsored enterprises Fannie Mae and Freddie Mac, there would be practically no additional risk to the government. As households build wealth, they become more confident about spending. Yes, that represents a transfer from Fannie and Freddie bondholders, but prepayment was a risk they assumed when they bought the paper. The administration can make these changes without congressional action.
The second promising idea is a pilot program to encourage conversion of Fannie’s and Freddie’s foreclosed inventory into rental houses. Private investors, many of them local “mom-and-pop” operations, are already doing this; for them, the collapsing homeownership rate is a golden opportunity. The biggest constraint, however, is that Fannie and Freddie won’t approve more than 10 sales to a single investor.
This limitation reflects the legitimate concerns of the GSEs’ regulator: Large-scale “bulk” buyers demand deep discounts to offset the risks and costs of managing dozens of homes. Yet if they ultimately fail at that difficult task, the houses wind up back in foreclosure. Still, it’s worth experimenting with more generous funding for multiple purchases.
Even if all goes well, nothing the president proposed approaches the overhaul that housing needs. Uncertainty is the great enemy of the housing market, and at the moment uncertainty reigns — from questions about a pending legal settlement between state attorneys general and mortgage servicers to puzzlement about the government’s ultimate role in mortgage-backed securities. Setting clear and consistent rules is the great unfinished task — too great, alas, for this election year.
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