Borrowed Time

The federal tide of red ink is frustrating an effort to help homeowners at risk of foreclosure.

IT'S BEEN four months since the Obama administration rolled out its policies to help homeowners battle a declining housing market. As you'll recall, the administration's declared objective was not so much to rescue homeowners who were already in or near foreclosure as it was to identify those who could avoid foreclosure with a little bit of well-timed government support. One of its initiatives, the Home Affordable Refinance Program (HARP), was designed to help non-delinquent borrowers refinance mortgages held by Fannie Mae or Freddie Mac, even if they owed more than 80 percent of the value of their homes, up to a maximum of 105 percent. The administration believed that 4 million to 5 million families might benefit.

Well, the early returns are in, and they are not encouraging. According to the Mortgage Bankers Association, only 13,000 HARP refinancings had taken place as of June. At this rate, there is little prospect the program will achieve its aims as of June 2010, when it is scheduled to expire. The problem? The administration developed its proposal at a time when long-term interest rates were relatively low, in part due to Federal Reserve policies -- and in part due to a flight to U.S. government bonds by risk-averse investors. More recently, long-term interest rates have increased as generalized investor panic has given way to a more specific worry: that the huge U.S. budget deficit is unsustainable and may set off high inflation. In other words, rising deficits are canceling out at least some of the Fed's efforts to keep mortgages cheap.

In response to HARP's disappointing results, the administration has announced looser eligibility requirements. Now homeowners who owe up to 125 percent of the value of their properties can participate. But this is unlikely to make much of a difference. The program can't work as intended without low and stable long-term interest rates. And low, stable rates depend on the market's belief that the U.S. government's finances are in order. Both the Bush and Obama administrations have borrowed huge amounts of money to stimulate the economy over the short-term. HARP's faltering start, however, demonstrates the limits of this strategy: At a certain point, government borrowing crowds homeowners -- and others -- out of the capital markets. This is yet another reason that the Obama administration needs to offer the country a credible plan for fiscal stability.