The Obama administration has tried various means, from massive stimulus spending to reductions in federal payroll taxes, to nudge the economy back to prosperity. But the collapse in real estate values, which continues its slow-leaking deflation, remains a drag that slows everything down.
The administration has tried a mortgage refinance program with no success. By some reports, the program has helped nearly 1 million people in more than two years, but only about one-tenth of them owed on mortgages larger than the value of their homes. Now President Obama has announced a new mortgage refinance program. Exact details of the plan have yet to be made public, making accurate appraisals difficult. However, while it would be foolish to expect this plan to have a dramatic effect on the economy, what we know about it so far has some merits.
For one thing, it would apply only to people whose federally backed mortgages exceed the value of their homes and who have remained current on their payments. These are the responsible homeowners who are sitting on mortgages that have become toxic assets. Not only are they unable to sell those homes, in many cases their mortgages become ticking economic time bombs. For instance, when such a homeowner dies, the asset returns to a bank that cannot recoup the money it has lent. Or perhaps some otherwise responsible homeowners may decide it is in their best interest to default on the loan in order to get out from under expensive payments. In any event, these slowly dissipating mortgages will remain troublesome for years to come as defaults slowly trickle out.
Obama's plan would reduce refinancing fees and provide the types of guarantees that would put lenders more at ease when issuing the loans. It would encourage shorter term mortgages and apply even to homeowners who are only slightly above water.
Because this program applies to people who have demonstrated they are committed to making their payments, it will not reward bad behavior the way a program would that applied to people who foolishly borrowed more than they could afford. It will instead begin to accelerate the cleanup of toxic mortgages held by people who find themselves in a situation not of their own making.
It would be naive to believe this program is the total answer to the sluggish economy. It applies only to mortgages guaranteed by Fannie Mae and Freddie Mac, not to the many guaranteed by other investors. It also is a government intrusion into natural market processes, which always comes with risk, sometimes in ways that cannot be predicted.
However, this appears to be a positive and relatively clean way to begin to deal with a mortgage crisis that shows no signs of disappearing quickly on its own. It is, therefore, a plan worth watching carefully.