Robb: A better way to fix the housing messby Robert Robb on Feb. 23, 2009, under Edge, Opinion
Well, at least President Obama’s housing plan isn’t as bad as his stimulus plan.
It is, nevertheless, unnecessarily costly and cumbersome.
The common refrain that the economy won’t be fixed until housing is fixed has some validity. But it doesn’t offer much useful guidance for policymakers.
Assuming government officials can fix housing assumes that they know how many homes should be bought and built and what they should cost. They don’t. No one does. That’s why there are markets.
Instead, federal policy regarding housing is best seen as a welfare program, using the term descriptively, not pejoratively. The question is what government should do to help people cope with the stress the burst of the housing bubble and the economic contraction have put on mortgages.
There are three categories of people who could use assistance:
• Those who bought more home than they could afford, assuming that rising values would permit a later refinancing;
• Those who are having trouble making payments due to a loss of family income;
• And those who want to sell their homes but can’t because their homes are now worth less than they owe and they cannot afford the loss.
Obama spoke, as did President Bush before him, about separating the deserving from the undeserving in any assistance program.
But that’s impossible. An assistance program can, and should, be limited to primary residences. But beyond that, aid will fall on the just and the unjust alike.
Obama proposes that Fannie Mae and Freddie Mac refinance loans they own or guarantee up to 105 percent of current value.
He also proposes that other lenders write down the loans of borrowers who cannot afford their mortgages. Lenders would eat whatever reduction would get mortgage payments down to 38 percent of the borrower’s income. The federal government would then subsidize a further write down to 31 percent of income.
This is very costly. The program would require another $275 billion federal outlay to provide Fannie and Freddie additional public capital and subsidize loan write downs.
It’s also of limited reach and relief. Underwater mortgages not owned or guaranteed by Fannie and Freddie would be ineligible for refinancing under that part of the program.
And the write-down relief is good for only five years. After that, payments can pop back up. Unless home values or family incomes have sharply rebounded, the same affordability problem reappears.
There’s a better solution that’s both broader and less costly. It’s grounded in two realities: (1) the default rate on mortgages that are underwritten for income is very small; and (2) the market power of a government guarantee.
Here’s the proposal: For a short period of time, say two years, the federal government will guarantee the refinancing of any mortgage on any primary residence so long as the monthly payments don’t exceed 31 percent of family income. It doesn’t matter what the home is worth or how long the payment term has to be, even if it exceeds 30 years.
This would be at the option of the homeowner. Existing lenders don’t have to take a hair cut or consent. They are paid off.
The guarantees would work the same way as the existing Fannie and Freddie guarantees work. They would buy qualifying refinanced mortgages and then resell them with a guarantee, for a fee.
This part of the Fannie and Freddie business model was working fine. They were brought down by the subprime mortgage-backed securities generated by others that they bought for investment.
A federal guarantee should lubricate the private market to originate such loans and buy them in the secondary market. Federal losses, given the income underwriting, should be minimal and covered by the fees.
Since September, the federal government has been guaranteeing, for a fee, money-market funds. There have been no losses and the government has collected over $800 million in fees.
A housing plan based upon refinancing guarantees, not outlays and hair cuts, would do more and cost less.
Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: firstname.lastname@example.org