Two Sets of Ideas From the White House

February 1st, 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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11 comments in reply to "Two Sets of Ideas From the White House"

  1. Michael says:

    “An important exit ramp from recession to recovery is low interest rates, aka monetary stimulus.”

    …um, we’re in a liquidity trap. The zero lower bound means that interest rates are contractionary by definition.

  2. Michael says:

    I don’t understand why the obvious solution to the jobs problem — hire lots of people to do deferred maintenance on our crumbling infrastructure — isn’t allowed to be discussed.

    • cat says:

      Because Uncle Sam is sitting at his kitchen table balancing the checkbook and realized income doesn’t match his spending so he’s tightening his belt just like Real Americans would. /snark

      Its depressing to think about, but most of the people elected into the US Government are either incompetent or feathering their many different metaphorical beds. Then you have the GOP culture warriors whose goal is to do the opposite of whatever the Dems want. It leaves very little room for people willing to do the right thing.

  3. Tyler says:

    “High interest rates force the federal government to pay more interest on its bonds, notes and bills. Low interest rates allow the federal government to pay less interest. Government interest payments go into the economy (except for foreign payments). This enriches and stimulates the economy. Low interest rates provide less money, so enrich and stimulate less than do high rates. This is why, contrary to popular myth, low interest rates do not, cannot and never will grow the economy. If you own any T-securities, you understand that the government pays you less when rates are low, which gives you less money to spend.

    “In short, the Fed’s low-rate policy reduces the federal deficit, which in turn, reduces economic growth.”
    – Rodger Mitchell,

    • Michael says:

      Not all deficits are created equal. The marginal propensity to consume of the recipients of the largesse is key.

    • Chigliakus says:

      Am I misreading or is this guy actually claiming that a high FED funds rate leads to a boom and a low rate leads to a recession? I think he needs to test his model against empirical evidence, if he even has a model.

  4. PeonInChief says:

    Hmm. If we were bailing out homeowners by forcing cramdown on the investors and the banks, it might make sense. Homeowners get refinanced, and bankers take the losses they so richly deserve. But refinancing underwater mortgages? That’s subsidizing the banks, as an underwater mortgage has a very good chance of failing even if it is refinanced at a lower interest rate. One lost job, one illness, one death or divorce, and that refinanced mortgage is in foreclosure–and we the people get to pay off the bankers. And we get to pay them as though there were no housing bubble and the shack was really “worth” $350K.

    Bad idea.

  5. the buckaroo says:

    … rumor has it Sen. Bernie Sanders to sponsor & introduce “Right to Alternative Energy” bill requiring Enterprise Zone agglomerations for the manufacture & assembly of solar & wind devices to be installed on all applicable private & public property throughout the sunbelt…California to Florida.

    In conjunction with Smart Grid build out, the ability to serve the industrial & business community during peak hours drives oil to secondary alternate status.

    …woke up, got out of bed, dragged a comb…

  6. the buckaroo says:

    …and this is a band aid approach to the hemorrhaging. The principal is the killer. Weed out the obvious scammers & give relief to the unwashed masses. Was it their fault a few bad players (post Glass era) screwed the pooch?…just saying.

  7. John Torrey says:

    Romney in last Thursday’s debate, on Fannie and Freddy:

    “He should have been anxiously telling the American people that these entities were causing a housing bubble that would cause a collapse that we’ve seen here in Florida and around the country. And are they a problem today? Absolutely. They’re offering mortgages, again to people who can’t possibly repay them. We’re creating another housing bubble, which will hurt the American people.”

    *Everybody* knows we are NOT “creating another housing bubble.” To say we are is disqualifying.