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The Refi Delusion
Instead of refinancing mortgages, the government should speed up foreclosures.


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Kevin D. Williamson

Providing fresh evidence that it is intellectually exhausted, the Obama administration is flirting with revisiting the mortgage-refinancing market. And like the semi-criminal scam that was the Home Affordable Mortgage Program, this new push is not really about helping out innocent bystanders crushed by the housing crash, but about the hundreds of thousands of market-massacring new foreclosures that are coming down the pipe — foreclosures that may be delayed, even if they are not prevented. The Committee to Reinflate the Bubble is in session.

Banks are reasonably eager to refinance certain kinds of mortgages — what they lose in interest, they make up in fees and other compensation. But the banks are not keen on refinancing a lot of the mortgages that the government would like to see refinanced: those for “underwater” borrowers, who owe more on their houses than their houses are worth.

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Think of it from the lender’s point of view: A loan on a house that exceeds the value of the house is an inherently risky loan. In effect, the banks already have made a bad bet: They’ve got (for example) $250,000 hanging out there for $200,000 in post-crash house. Banks aren’t going to be inclined to reduce the risk premium on upside-down mortgages. But even with that risk, the bank would rather have a performing $250,000 mortgage on its books than a $200,000 house that it might have a hard time selling if it is foreclosed on, which has to be maintained and insured, and which generates no income between the foreclosure and the sale. So the risk of default ought to encourage many banks to refinance borderline cases: A $250,000 mortgage at 4.5 percent is not as valuable an asset as a $250,000 mortgage at 6 percent, but it’s still a more valuable asset than that $200,000 house. But most banks have fairly low foreclosure risks: Those mortgages are mostly insured, often by the government, and those insurance premiums already have gone out the door. Most people don’t want to default, even though it is easy to do so, so the lenders have a pretty good reason to think they’ll win if it comes to a game of mortgage chicken with people who are current on their payments.

There is a way to get banks to agree to a haircut on those mortgage refis: Taxpayers take the haircut for them.

Because the federal government more or less owns Fannie Mae and Freddie Mac, the Obama administration very probably could agree to have those firms bear most of the refinancing losses — all without ever going to Congress or offering any transparency in the finances. And that is what is under consideration: another bailout, courtesy of the U.S. Treasury and the taxpayers laboring in its shadow.

How much good would a refi do for these underwater households? To take our $250,000 example (the median price of a new home hit a peak of $262,600 in March 2007), probably not that much. Lending Tree’s mortgage calculator estimates the difference between a $250,000 mortgage at 6 percent and one at 4.5 percent to be $232 a month. Modifications under other government mortgage-relief programs have similarly run a few hundred bucks a month, and have served far fewer borrowers than their planners had estimated. The old rule of thumb was that the upper limit of a mortgage ought to be 2.5 times income, so a $250,000 mortgage ought to imply a $100,000 household income. (I know, I know, everybody ignored the rules, borrowers above all.) While $232 a month is not nothing, it’s probably not the difference between solvency and insolvency for a $100,000-a-year household. It is true that in the age of Obama, there are a lot of households that used to earn $100,000 a year and now do not (not to mention the curious case of the missing millionaires), but $232 a month is probably not going to be a sufficient lifeline for nouveaux pauvres, either. And if it were, wouldn’t it be simpler to send them checks for $232 than to have the corrupt and bloated beasts known as Fannie Mae and Freddie Mac burrow deeper into the mortgage business, when we ought to be extricating them from it? But a straightforward bailout probably would require passing a law, going to Congress, letting the people’s elected, accountable representatives have a say in things, disclosing who got what on what terms, etc. — not Obama’s style.

Most of the impetus of our national monkey-with-mortgages agenda has been delaying foreclosures and propping up housing prices — along with transferring risk and losses from private parties to the general public. Pushing down mortgage-interest rates encourages higher prices: Borrowers don’t pay as much attention to the real price as they do to their monthly payment. But if we really want to stabilize the housing market, we should be doing the opposite: speeding up foreclosures and letting prices fall until they find buyers who want them and can afford them. That’s the only way to let normalcy return to the housing market. The Cato Institute’s Mark Calabria points out that Bank of America alone has 200,000 mortgage borrowers who haven’t made a payment in two years. Extrapolating B of A to the market as a whole, he estimates that (very roughly) 400,000 to 500,000 borrowers haven’t made a mortgage payment in two years or more. The chance of a borrower’s getting caught up on 24 months or more of back payments is slender.

Those refinances would put a few bucks into the pockets of people pressed for money, which the neo-Keynesians at the White House love (stimulus!). But there are two sides to a loan, and those homeowners’ gain must be somebody else’s loss. It probably won’t be the banks. It’ll be the suckers who in their majority voted for hope and change in 2008.

— Kevin D. Williamson is a deputy managing editor of National Review.



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