Mortgage Help Must Be Fair, Not Free

Critics are calling for the Obama administration to do more to help those who are unable to take advantage of the Home Affordable Refinance Program or other ways …

Critics are calling for the Obama administration to do more to help those who are unable to take advantage of the Home Affordable Refinance Program or other ways to avoid defaulting on their mortgages, but others argue only so much can be done at the cost of the taxpayer. Relaxed standards could help more people find help, but it could also set the stage for more speculative loans, second mortgages that go unpaid and a return to the old ways of doing business. Experts note that cuts cost money in some form or another, and further easing restrictions on credit and making mortgages more affordable does not encourage responsible lending or spending. For more on this continue reading the following article from The Street.

Conservative, conservator — the two words sound so alike that confusion is natural. President Obama’s allies decrying his anaemic bid to speed up mortgage refinancings amid record-low rates blame the former, but they should really focus on the latter.

HARP — the Home Affordable Refinance Program — has allowed only 850,000 otherwise ineligible borrowers to refinance mortgages despite standards reminiscent of subprime’s heyday — loans to value (LTV) of up to 125% and relaxed credit checks. Is this not too conservative? Perhaps 3 million more could do so, saving them tens of billions in interest, if easier-to-meet standards were approved.

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The pesky conservator of mortgage giants Fannie Mae and Freddie Mac, the Federal Housing Finance Agency, is having none of it though — and, it turns out, for good reason. Tasked with protecting taxpayers’ huge investment in the agencies, further loosening standards of underwriting and forcing losses on them by swapping higher coupons for lower ones would go against its mission. Administration efforts to replace FHFA’s independent director have failed and now a Congressional Budget Office cost-benefit analysis supports the agency’s stance: some $13 billion to $15 billion in losses would prevent a mere 111,000 defaults — a cost to the taxpayer of about $125,000 each. Even if the standards were relaxed, the existence of second mortgages, the difficulty in securitizing loans without sufficient collateral and the possible need to compensate and indemnify banks before they would make new loans all create problems.

Headlines about record-low rates surely sting the quarter of U.S. homeowners who cannot take advantage of them even through HARP, but cheap mortgages are not a fundamental right. Further lowering the bar for credit would be a particularly ineffective form of stimulus, fraught with moral hazard.

This article was republished with permission from The Street.

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