Moral blind spots in Obama mortgage refinancing scheme
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 â€śunderwaterâ€ť 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 presidentâ€™s plan may reflect a last-ditch attempt to boost the housing market before the 2012 election. Many of Mr. Obamaâ€™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.
A big reason that banks now demand extensive documentation of those trying to refinance is that they are liable for the quality of those loans. Under the Obama move, the risk of the loans would fall to Fannie Mae and Freddie Mac, the two mortgage giants that were taken over by the government in 2008. They own or insure half of the nationâ€™s $10.4 trillion in home loans. They also have required a taxpayer bailout of more than $130 billion, with more likely after the Obama plan starts in December.
The plan would also call on lenders to look only at a homeownerâ€™s recent record of paying off a mortgage and whether the owner has a job or other source of regular income. Appraisals of a homeâ€™s value would not be needed. Credit checks and many other aspects of a personâ€™s financial history and future would be left out.
To push his plan, the president had to convince the independent regulator of Fannie and Freddie, the Federal Housing Finance Agency, to back off its primary role of protecting those institutions and preventing further losses to the taxpayer. Instead, the agency is now tasked with stimulating the housing market and economy.
But it will be forced to do so with moral blinders on the quality of refinanced mortgages.
The best way to help the quarter of all homeowners who are â€śunderwaterâ€ť is for Obama and Republicans to agree on ways to boost economic growth.
That is the best driver of home prices, not dubious government schemes full of moral hazards that might once again sink the economy and put taxpayers on the hook for bailouts.