Friday, August 26, 2011


Obama Jobs Plan
May Be Aimed at
High Risk Mortgage Borrowers

“It almost seems to me you want to have some type of announcement or policy, program or something from the federal government that provides that clear signal that we are here supporting the housing market and this is indeed a good time to really consider buying,”

-- Frank E. Nothaft, the chief economist at Freddie Mac, talking to the New York Times about a reported administration plan to offer lower mortgage rates to borrowers with bad credit.

At the center of the Panic of 2008 were defaults on cheap mortgages for Americans with poor credit. The latest idea to reverse the resulting recession is for the government to offer cheap mortgages to Americans with poor credit.
There have been rumblings for weeks that the economic plan to be offered by President Obama after he returns from his vacation would be aimed, at least in part, at trying to re-inflate the American housing market.

Nearly non-existent interest rates, tax-rebates and free money for banks that refinanced underwater borrowers have not worked to reverse perhaps the steepest slide in home values ever. Even when there was hope for recovery, home values kept descending.

There are lots of problems for American homeowners, but one of the biggest is that foreclosures continue to hit the market. Rather than clearing the glut of foreclosures from the bubble burst that preceded the panic, lenders have been forced to delay the process. That has prevented homeowners in good standing from getting top dollar for their homes.

And now, mortgage delinquencies are on the rise again for the first time since 2009.

The other problem is that banks, fearing looming regulations from the Dodd-Frank financial law and leery of the weakening economy aren’t keen to make loans of any kind, especially when returns are minimal.
The dribbles from the White House on housing have hinted at some big ideas: having the government hold and lease foreclosed homes and even having the government fully take over busted and bailed out mortgage buyers Fannie Mae and Freddie Mac.

The trial balloon in today’s New York Times puts the earlier leaks in perspective. The idea is to have the government offer to refinance the mortgages of millions of Americans whose credit scores prevent them from grabbing the lower-than-5-percent commonly available to qualified buyers today.

The administration is envisioning an $85 billion instant stimulus as those with poor credit see their rates drop dramatically. But to do it, the government would likely need to take over Fannie and Freddie.
Remember, it was providing cheap loans to people with poor credit that exploded the “government subsidized entities,” and any path to taxpayers ditching the lenders that have soaked up more than $300 billion in bailout funds involves a path to fiscal solvency.

No way the private market will tolerate Fannie and Freddie returning to their old ways. It means a takeover and lots of new rules.

One of the criticisms on the left of the Obama efforts to revive the housing markets have failed is because they have been modest and voluntary. This would be large and mandatory.

But part of the reason the president resisted something with, as they say at the White House, “bigness” has been that Americans who pay on time and keep their credit in good shape would deeply resent a subsidy for the credit unworthy.

Another problem: If the government will give cheap money to almost anyone, banks may get out of residential lending altogether. That could have the same effect as the president’s health care law is forecast to have on insurance: a massive shift to public rolls.

Obama Knows the Political Power of Debt and Deficits
“The problem is, is that the way Bush has done it over the last eight years is to take out a credit card from the Bank of China in the name of our children, driving up our national debt from $5 trillion for the first 42 presidents – number 43 added $4 trillion by his lonesome, so that we now have over $9 trillion of debt that we are going to have to pay back – $30,000 for every man, woman and child. That's irresponsible. It's unpatriotic.”

-- Then-Sen. Barack Obama campaigning in North Dakota in July 2008.

One of the things that made Barack Obama so attractive to independent voters in 2008 was his indignation over the national debt. He snatched the issue of fiscal restraint away from Republicans, even as the GOP nominated one of its top budget hawks.

Obama was ostentatious in his refusal as a senator to vote for one of President George W. Bush’s requested increases in the debt ceiling and he raided Republican leaning suburbs as a candidate with promises of returning fiscal restraint to Washington.

As president, though, Obama has argued that he and the Democratic supermajority in Congress that greeted him in Washington had no choice but to escalate deficit spending because of an economic crisis and joblessness, driving up the federal debt more than $4 trillion in less than three years.

But remember Bush explained the deficits of the Republican Congress as crisis-oriented too, explaining that the disruptions of 9/11 and cost of the Global War on Terrorism were also temporary, unavoidable and reversible.

Candidate Obama knew that voters might cut politicians some slack in the name of crisis management, but that patience expires. And if anything, patience now will be briefer.

Bush was asking folks to remember the deadliest foreign attack ever on American soil and Obama is asking folks to imagine that the economic circumstances would be worse today if the government hadn’t borrowed trillions more. The Panic of 2008 was just 33 months ago, while 9/11 is now approaching the decade mark. Which event can you remember most clearly?

The latest Congressional Budget Office projections on debt, deficit and the future of the economy say that the three largest deficits in the last 65 years will be the ones from the Obama era and that barring massive tax increases and cuts, the debt could grow by $8.5 trillion in the coming decade.

His fellow Democrats may rage at Obama for not fighting harder for a third round of Keynesian stimulus borrowing, but Obama knows what they may not: the potency of the debt as an electoral issue with independent voters.

In this way Obama is trapped between what he knows and what he believes. He knows that independents like fiscal restraint, but he believes that government spending is needed to revive the economy.

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