My guess is that Keith Hennessey and Dean Baker don’t agree on much, but they both strongly oppose the Obama administration’s HAMP proposal. Baker, who has long championed a right-to-rent approach, has written an excellent critique for The Guardian:

The programme will potentially pay banks and loan servicers up to $12bn to write off principle on mortgages. In exchange, the government will guarantee new mortgages through the Federal Housing Authority (FHA). Those familiar with the housing market will note that house prices are still falling and must fall by close to 15% to get back to their long-term trend. If house prices continue to fall, then the vast majority of the homeowners that take part in this programme are likely to never accrue any equity in their home. Furthermore, the FHA is likely to incur substantial losses on these loan guarantees, as homeowners will again find themselves underwater and many will be unable to pay off their mortgages when they sell their home. Because the FHA hugely expanded its role in the housing market in the last two years, without paying attention to falling prices, it now is below its minimum capital requirement. It will suffer additional losses and fall further below its capital requirements as a result of this programme. By the way, the losses to the FHA and the taxpayers are money in the pockets of the banks, but no reason to mention that detail. For anyone who can see an $8tn housing bubble, this is all as clear as day. There is nothing complex about a story in which the government buys banks out of bad mortgages. But the Washington policymakers could not see an $8tn housing bubble before it wrecked the economy and apparently still haven’t noticed it even after the fact.

This is a scandal. Hennessey makes the point that homeowners with fixed rate mortgages are in a different position from those with ARMs.

Some homeowners were fooled or deceived into buying a bad adjustable rate mortgage (ARM). I feel bad for them and am willing to consider policies directed at them. At the same time, it’s hard to distinguish “fooled or deceived” ARM buyers from “savvy speculator” ARM buyers, so if we subsidize one we may end up subsidizing the other as well. But now let’s look at a homeowner with a fixed rate mortgage who is “underwater” because his home has declined in value so that the house is worth less than the mortgage. His net worth has declined because the value of his home plummeted, and that’s tragic. But since he has a fixed rate mortgage, his monthly mortgage payment has not changed. The decline in the value of their home has not affected his ability to make his mortgage payment, and therefore to remain in that home. He can continue to live in his home and wait for the value to appreciate, just as a stockholder can hold onto a stock after a decline and wait for the price to recover. I don’t see why taxpayers should subsidize him because he lost money on an investment, just as taxpayers shouldn’t subsidize him if he lost money in the stock market.

One has to wonder what exactly this policy intends to achieve. If the goal is to transfer resources from taxpayers to major financial institutions, it is likely to prove a smashing success.