Obama’s Refinance Program: Underwhelming Policy, Expedient Politics

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Tony Avelar / The Christian Science Monitor / Getty Images

Eagle Ranch, a middle-class housing development started in 1998, is seen on August 3, 2010 in Eagle, Colorado.

Did you know that you can’t be in favor of fixing the housing market and not be in favor of President Barack Obama’s American Jobs Act? That was the underlying message of a conference call with two top Obama advisers on Monday morning, nominally convened to explain and take answers from journalists about the muchtouted new mortgage refinance program Obama is unveiling as he heads out west.

If that didn’t make clear that there is less to the new plan than meets the eye, the fact that the officials wouldn’t put a dollar figure on how much the plan would help the economy or the housing market, or say how many homeowners would benefit from the program, should have been the tip off. The reality is that the plan won’t do much to lift the massive housing debt that is slowly suffocating the U.S. economy.

To be fair, at least several thousand people will benefit from lower monthly interest rates on their mortgages, as the government guarantor of most American home loans, the Federal Housing Finance Authority, moves to rejigger its stalled Home Affordable Refinance Program.

But Obama’s new plan addresses only the size of interest payments on mortgages, not the problem of the underlying principal debt, which exceeds the value of ¼ of American homeowners’ houses. Worse, it only helps some of the people who can benefit from lower monthly interest rate payments to stay in their house.

There are three ways of explaining Obama’s lackluster revamp of the housing program.

First, an aggressive plan to write down homeowner debt could have helped—two years ago. Back then, Obama could have written down principle on most underwater federally guaranteed mortgage loans, instantly wiping out the dangerous lasting effects of the housing bubble, and it would have helped millions of homeowners stay in their homes. It would also have helped banks, because it would have kept more people paying their loans back instead of defaulting on them, leaving the banks with the expensive and labor-intensive process of holding and managing foreclosed real estate. The administration didn’t do that because they were afraid of hurting other banks and well-connected mortgage servicers, as Zachary Goldfarb reports in the Washington Post. They were also afraid of moral hazard—if they gave breaks to some homeowners, they’d encourage others to get in trouble on their mortgages.

But now it’s too late. Those who could adjust there finances to continue carrying the burden of an underwater loan have done so; those who couldn’t have for the most part fallen behind on their payments. That includes 2.5 million homeowners who have been foreclosed on and an estimated 5 million more who will lose their houses in coming years, according to economists’ estimates. HARP only helps those who have stayed current on their loan payments.

The second possible reason for the new program’s limits is that bureaucratic inertia prevented doing more. The head of FHFA, Edward J. DeMarco, has a mandate to protect taxpayers and has resisted easing up on those whose loans his agency guarantees. The White House has finally prevailed on him to make some changes. (Of course Obama could just fire him, but the aides on Monday’s conference call, Shaun Donovan of HUD and Gene Sperling of the NEC, declined to say why they hadn’t done that.) There are also many technical and legal hurdles to changing these programs, and that has been a challenge for those who want to loosen the government’s grip on mortgage borrowers.

The last explanation for the program’s limits is a more cynical one. It is designed to help just enough people to claim movement on the issue, but not to do the politically challenging work of actually resolving the larger threat housing poses to the economy. The reason for doing the bare minimum: to give Obama a political weapon against Republicans in 2012.

Obama won’t have to do much to win on this issue. The GOP has had little to say on providing help to homeowners. After all, the original Tea Party movement was launched by a rant by Rick Santelli on CNBC against bailouts for underwater homeowners.

The conference call on Monday morning with Donovan and Sperling lent credence to this cynical take on the new program. While they vaguely touted aid to homeowners without explicitly stating how many people would actually receive help, they were disciplined in saying how they’ve been forced to act by Congress’s unwillingness to move on housing legislation by itself.

And without diminishing the plight of the thousands of people who will be helped by these adjustments to HARP, given the size of the problem and the relatively small scale of the solution Obama is now proposing, attacking Congress may be the new effort’s primary purpose.