Administration Planning to Use Fannie and Freddie to Provide More Stealth Stimulus

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Administration Planning to Use Fannie and Freddie to Provide More Stealth Stimulus

The Obama Administration is planning to launch yet another mortgage refi program, this one targeting subprime borrowers who are current on their loans but underwater, extending the government support of the mortgage market to yet another borrower group. The timing raises the question of why this initiative is under consideration now, as opposed to earlier, since it’s hardly news that a lot of homeowners are still in negative equity territory (10.8 million now, according to the Wall Street Journal’s Nick Timiraos, down from 12.1 million thanks to the recovery in housing prices).

It appears that the Administration isn’t convinced that further home price appreciation will restore these borrowers to having equity in their homes any time soon. And perhaps even more important, this program is seen as a way to boost consumer demand, which would somewhat offset the contractionary impact of deficit-cutting. Borrowers who have made payments for five years plus on high-yield mortgages are committed to keeping their homes and presumably have a reasonable level of income to stay current for so long (although any lending entails normal underwriting risks of death, job loss, and disability). But there is still a risk of bad incentives allowing the GSEs to serve yet again as stuffees. From the Wall Street Journal:

Under the proposal, Fannie and Freddie would be allowed to charge higher rates to borrowers in order to compensate for the risk of guaranteeing refinanced loans that are underwater and more likely to result in default. Some economists argue that those borrowers could be relatively good credit risks because they have been paying their mortgages through the financial crisis, and that Fannie and Freddie could turn a profit on such mortgages while helping the housing market.

But industry officials say such a program would work only if banks were given immunity from having to buy back any loans they refinance that subsequently default, and that such a shield would boost the risk for the taxpayer-backed companies.

Rest here…

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One Response to “Administration Planning to Use Fannie and Freddie to Provide More Stealth Stimulus”
  1. This is a receipt for more defaults and walk aways and foreclosures, homeless and the FED cops arresting Americans for walking away from debt. THIS IS AWEFUL!

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