Feb 01, 2012 at 11:44 am
The White House has a good set of ideas out this AM to a) help the housing market and b) help small businesses and start ups. The former sounds good to me; the latter, less so.
First, the economics, then the politics (you can decide whether that’s spinach first or dessert first).
An important exit ramp from recession to recovery is low interest rates, aka monetary stimulus. These feed into low mortgage rates, which are currently at historic lows (30-yr fixed around 4%). That chain of events has historically provided a strong incentive for recovering households to refi their mortgage loan or take out a new one and buy a home.
But this exit ramp has been blocked by the fallout from the housing bust, including risk aversion in credit markets, the supply overhang of homes, continued home price declines (can we carve out a bottom already!?!), and all those underwater mortgages (which block refis).
Many conservatives—not all—just want to punt on this problem (Gov Romney stands firmly in that camp). That’s not crazy, in the sense that in normal times, we don’t need new policy to help creditworthy borrowers refinance.
But these are not normal times. Such borrowers are blocked due to the problems just noted, particularly underwater mortgages and risk aversion by lenders, who’ve gone from massively underpricing risk to overpricing it.
Still, the obvious pushback here is that this isn’t the first time the admin has made a run at this problem and so far, most of what we’ve seen has been underwhelming. Why might this time be different?
One potentially helpful wrinkle is extending the federally insured refis (the Federal Housing Authority would insure the new loans, incentivizing risk averse banks to undertake them) to a large group of homeowners who have heretofore been ineligible.
From a good discussion on the policy in the WSJ:
The new initiative would extend that opportunity to roughly one-third of all mortgages that aren’t backed by federal entities and instead are owned by banks or were bundled by private firms that sold them off to investors as mortgage-backed securities. The Federal Housing Administration would instead guarantee the new loan.
Two caveats, the latter of which is very large. First, will the banks and servicers play along? That’s always been the rub here. The White House has streamlined the process—paperwork around eligibility criteria has jammed the HAMP program from the getgo—but thus far, we’ve seen a consistent lack of interest by private lenders (and by the GSEs too, but that’s another issue—see here).
Second, the FHA needs capital to offset the risk they’re taking on by insuring the banks holding the new mortgages. To raise those funds, the bill calls for a fee on large financial institutions (banks, investment houses), specifically on their leverage. This actually strikes me as a fair way to connect the dots between the housing/finance meltdown/bailout and measures to address the damage.
But this Congress is…um…very unlikely to pass it.
More to come on the small biz stuff out today…it’s got some decent ideas re private funding for startups but there’s also more political candy in there than bang-for-the-buck on jobs.
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