James Pethokoukis
Politics and policy from inside Washington
An August Surprise from Obama?
Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. A few key points:
1) Republican leaders believe this is going to happen since GOPers and Democratic moderates in the Senate are unwilling to spend more taxpayer money on more stimulus. But such a housing plan would allow the White House to sidestep congressional objections and show voters it is doing something tangible about an economy that seems to be weakening.
2) Wall Street banks are alerting their clients privately to this possibility. Here is what some are cautiously saying publicly. This from Goldman Sachs:
GSE policies are one of a dwindling number of policy levers the administration has left to pull, so it is conceivable that changes could be made, though there is no sign that a policy change is imminent. The Treasury’s essentially unlimited ability to provide financial support to the GSEs creates an interesting situation over the next twelve months: the GSEs could potentially be used to provide additional support for the housing market and, to a lesser extent, the broader economy in 2H 2001.
And this from Mizuho Securities:
As policy makers ponder their next move the data suggests that they face not only a stalling recovery but a growing risk of deflation taking root in the economy. As a result, the Administration has turned back to industrial policies by approving the purchase of a sub-prime auto lender by GM as a means for pumping up domestic sales, especially since the latest auto sales data indicates that consumers are still responsive to incentives. This precedent increases the risk that the government will use its control of Fannie and Freddie to increase consumer cash flow and juice the economy again.
Moreover, Morgan Stanley is pushing a mortgage relief plan directly to Congress. On August 3, a top Morgan Stanley economist recommended to the Senate Budget Committee that Fannie and Freddie ease their lending standards to allow millions of Americans to refinance their mortgages.
3) Keep in mind the political and economic context. The nascent recovery is already running out of steam. Wall Street economists just downgraded the government’s second-quarter GDP estimate of 2.4 percent to around 1.7 percent. And as even Treasury Secretary Timothy Geithner is warning, the unemployment rate may well begin to rise back toward the politically toxic 10 percent level given such sluggish growth. Many in the White House thought the unemployment rate would be dropping sharply by this point in the recovery.
But that is not happening. What is happening is that the president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.
4) And don’t think the White House is worried about financial market reaction. If they thought it would pass Congress, they would be submitting a $200 billion Stimulus 2.0 (3.0?, 4.0?) right now.
August is supposed to be a slow month for Washington politics. But maybe not this one.
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[...] from Reuters [...]
[...] bailouts, etc.) would therefore depress the Economy even further! And especially not right now. The word about the street is that the QE2 is about to sail. Main Street may be about to get its own gigantic bailout. Rumors [...]
[...] An August Surprise from Obama? (Hat Tip: Brian B.) [...]
Just another progressive slush fund…follow the money.
[...] Pethokoukis, who posts under the heading "Political Risk" at Reuters.com, squawked "An August Surprise from Obama?". According to Pethokoukis, "Rumors are running wild from Washington to Wall Street" [...]
[...] though this story was making the rounds five days ago, it’s somewhat new to me. It seems rumors are flying that Barack Obama is preparing an August [...]
Wouldn’t it be great if the gov’t would pay all the homeowners mortgages off which would allow for more homeowner spending. I believe that instead of giving to main street the gov’t should help the homeowner. 15 million homes could produce buying if there was more money in their bank instead of the mortgage companies.
HUD recently sent a letter to mortgagees/lenders basically encouraging them to reduce principal on mortgages where the principal amount exceeds the home value. The Treasury provides the lenders and 2nd lein holders monetary incentive paid for by the U.S. Taxpayer.
(the formula for determining their incentive payment can be found here: https://www.hmpadmin.com/portal/docs/ham p_servicer/sd1005.pdf
I don’t know about you, but I have paid my mortgage payments during the past 20 years even when my principal owed was more then the value of my home in the 1980’s. Purchasing a home is a long term investment. The value changes with demand for homes.
As long as the borrower has the means to pay their mortgage they should not have their loan modified and principal forgiven at the expense of taxpayers.
Even those that are behind on the mortgages should only be provided the opportunity to refinance at the current historically low interest rates; and only if they qualify. Too many of these rewritten loans have defaulted a second time at the expense of taxpayers.
If a lender wants to avoid a foreclosure by reducing the principal and rewriting the loan at current interest rates it should not be done at the taxpayers expense. It is to their own advantage to do so as if they foreclose the house will likely sit there and the cost of maintaining it and advertising it will far outweight reworking the loan with the borrower.
Fannie and Freddie are still making loans that do not require even 10% down. They continue to buy bad mortgages and now the Treasury is going to give them Billions more and are authorized to continue to do so.
Enough already. No more Federal Money to bail out Fannie and Freddie which are now basically owned by the Federal Government. It has to stop.
This is why they didn’t include them in the new Financial Regulations Bill which the Dems said did not promote bailout financial institutions because they were too big to fail. They knew they would be bailing out Fannie and Freddie for years.
[...] here comes the Apocalypse: Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington [...]
[...] This maybe old news to some and I’m not sure how I missed this article, but it’s well worth reading. http://blogs.reuters.com/james-pethokouk is/2010/08/05/an-august-surprise-from-ob ama/ [...]
[...] expensive: the additional trillions of dollars it will take to reinflate the housing bubble, or the estimated $800 billion of negative equity that is out there? There’s no [...]
[...] expensive: the additional trillions of dollars it will take to reinflate the housing bubble, or the estimated $800 billion of negative equity that is out there? There’s no [...]
[...] than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater homeowners with negative equity of some $800 [...]
[...] found out that yahoo mail has a twisted sense of humor, there’s a small chance that we might all get our mortgage debt reduced, the economy still sucks, snopes.com is a big sham, [...]
[...] finishes with his take on the speculation that Obama will be ordering Fannie Mae and Freddie Mac to ‘forgive’ the debts of various groups of irresponsible [...]
[...] James Pethokoukis, August Surprise from Obama?, Aug 5, 2010 http://blogs.reuters.com/james-pethokouk is/2010/08/05/an-august-surprise-from-ob ama/ [...]
[...] James Pethokoukis said he heard tale of a Fannie / Freddie I assumed it would be something along the lines of this [...]
[...] housing prices have declined anyway by about one-third from their 2006 peaks, resulting in some $800 billion of negative equity for homeowners. Making matters worse, they may fall another 20 percent should the economy remain [...]
[...] housing prices have declined anyway by about one-third from their 2006 peaks, resulting in some $800 billion of negative equity for homeowners. Making matters worse, they may fall another 20 percent should the economy remain [...]
[...] following article is from [...]
[...] following article is from [...]
[...] Rumours of huge Main Street mortgage bailout - FULL STORY [...]
[...] two days after I posted “My Solution to the Foreclosure Crisis,” below, I read this report that Obama is considering a significant proposal along the lines I discussed. We’ll have [...]
[...] This is obviously why the administration quickly shot down rumors of a homeowner bailout when they cropped up this summer. And it’s probably why it will never happen. But before you sneer, ask yourself the [...]
[...] If this is true, then the federal government is about to send a huge jolt of adrenalin into the economy. Too bad it would also result in you having to pay (a lot) for someone else’s mortgage: Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011. [...]