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Thursday, August 25, 2011

Refinancing Mortgages: Only for the Rich?

According to the U.S. Government, prices of homes with government-backed mortgages fell 5.9% in the second quarter of 2011 from a year earlier. This was the biggest decline since 2009, which was on the heels of the credit crisis of late 2008. In 2011, more than one in five homeowners with mortgages owed more than their homes are worth. That translates to at least 10.9 million families, almost none of whom could refinance. While the Treasury Department and Federal Reserve were able to pump hundreds of billions of dollars into American banks, federal programs to assist homeowners have been regarded as ineffective, according to the New York Times. Out of the $45.6 billion in TARP funds (the total being $800 billion) set aside to help struggling homeowners, only $22.9 billion had been spent by August 2011. Fewer than 1.7 million loans had been modified under federal programs as of 2011. Just over 760,000 permanent mortgage modifications had been initiated under the government programs while at least 5.5 million mortgages were in delinquency or foreclosure. Andrea Risotto, a spokesperson at Treasury, said that the unused portion of the TARP funds for homeowners would be used to reduce the deficit.

So it is perhaps not a surprise that even though mortgage interest rates were around 4%, the Obama administration was hedging in 2011 on whether to direct Fannie and Freddie to allow the existing mortgages guaranteed by those agencies to be refinanced. David Wessel observes that whereas taxpayers bore all the downsides of nationalizing the two housing guarantors, the two firms and their regulators have consistently resisted helping taxpayers over their heads on their mortgages.

Even though the mortgage servicers and banks had been at the very least complicit in the liar’s loans of many of the sub-prime mortgages, the Obama administration was not sure even as late as mid 2011 whether homeowners behind in their payments should be able to refinance. According to the New York Times, despite “record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.” Yet it is “unclear . . . whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it.” So it would appear that only homeowners who don’t need the refinancing will be able to get it.

The priorities showing through both with TARP and the refinancing ideas being floated in 2011 may reflect the anti-borrower bias Countrywide and other mortgage originators, whose meagerly educated sales force and managers believed that the struggling sub-prime borrowers were lazy and dishonest idiots who do not deserve a break from the “sacred contracts” (even if constructed as a liar’s loan—meaning a lender lying about the borrower’s income to secure a double commission). In other words, the imbalance concerning the treatment of the banks and the borrowers by the U.S. Government is consistent with the bankers’ selective attention to culpability. Most likely, the sub-prime crisis had multiple contributing sources. Were the government’s responses to reflect this, both the financial institutions and the borrowers would be given some leeway so as to obviate a collapse of the entire economy. Both the major banks and the struggling homeowners would be attended to because the crisis was larger than any one of them. For the government’s priorities to reflect one of them suggests disproportionate influence, which ultimately is detrimental to the republic itself.


Sources:

Shaila Dewan and Louise Story, “U.S. May Back Refinance Plan for Mortgages,” the New York Times, August 25, 2011. http://www.nytimes.com/2011/08/25/business/economy/us-may-back-mortgage-refinancing-for-millions.html

David Wessel, “Tracking Missteps Behind World’s Economic Slump,” Wall Street Journal, August 25, 2011. http://online.wsj.com/public/page/news-tech-technology.html?mod=WSJ_topnav_tech_main