Why try to base the economic recovery on dubious financial information from borrowers under Obama's latest home refinancing plan?
President Obama took a bold step Monday to help homeowners who owe more on their mortgages than the value of their homes.
Under the plan, owners with “underwater” mortgages that are also government-supervised will not need to reveal much about their credit worthiness, job security, or other personal information in order to refinance those loans.
Sound familiar? It should.
During the housing bubble, many borrowers obtained mortgages without disclosing critical financial details. Jobs were plentiful then and lenders assumed home prices would keep rising. If someone hid negative information or lied about their prospects of paying down on a mortgage, the risks were largely ignored and passed on to Wall Street investors.
But after that widespread lack of honesty and integrity was exposed in 2007-08, the bubble burst. Will a return to the old ways of lending without much documentation now be a solid basis to boost the economy?
Hardly. Even under the current federal mortgage-modification programs, more than half of those granted new loans were back in default within six months. And those loans were negotiated under strict credit standards, not the loose rules coming from the Obama administration.
The president’s plan may reflect a last-ditch attempt to boost the housing market before the 2012 election. Many of Mr. Obama’s efforts so far have done little to slow down the pace of foreclosures or achieve significant numbers of refinancing.
But his latest plan makes short-term ethical compromises that could lead to negative long-term consequences for the economy, taxpayers, and the federal deficit.