In the last few weeks there has been much speculation about the possibility of yet another program from president Obama to help those who are in danger of losing their houses. This will supposedly strengthen the housing market in the USA, although it seems likely that the opposite is true. Obama let fly with a trial balloon for a program that would allow all those with government guaranteed mortgages to refinance at 4%, no questions asked. In other words, there would be a tidal wave of sub-prime mortgages issued by the government to try to cure the ills left from the last time that sub prime mortgages were issued. Here's the thinking: A homeowner with a mortgage guaranteed by Fannie Mae or Freddie Mac would be allowed to refinance the same amount currently left on his or her mortgage at no cost and with no fees and with the interest rate of 4%. This would let folks whose houses are somewhat under water (the house worth less than the mortgage) get new financing to reduce their interest payments. The owners of the mortgages (if it were someone other than the government) would get paid off. The reduced interest payments would come out of the hide of Freddie and Fannie. That means the government would bear that burden since both Freddie and Fannie are technically insolvent. The only ones who would lose are the speculators in Freddie and Fannie stock who would all get wiped out.
Now let's look at the down side. The biggest problem with the program is that it locks people into their homes. Someone who owns a house with a mortgage of $250,000 when the house is only worth $225,000 on the market cannot move. Selling the house would result in the need to come up with the shortfall in the mortgage, something most of these homeowners cannot do. That, of course, is wholly apart from the inability of most of these folks to pay for a new home. If jobs appear at a location other than where the home is located, the homeowner cannot move to obtain that job. And this is a problem which will last for decades.
Another problem is the unfairness of allowing relief to those whose mortgages are guaranteed by the government while leaving those with other sorts of mortgages to fail. There is no logic to that situation.
A third problem is the craziness of keeping people who just cannot afford their homes in a place where they struggle for months and years longer to make slightly lower payments. These folks do not build equity in their homes. They only get somewhat reduced costs to live in a home they cannot afford.
Economically, the program will result in fewer home sales and reduced home building. The people who can afford their mortgages will also be locked into their current homes. That means fewer buyers. Fewer buyers means fewer homes built. In short, the program means that the home builidng industry continues in a depression for a long time into the future.
The alternative is to withdraw the failed programs offered by Obama to help people with their mortgages and allow the foreclosure process to flow fully through the market. This will result in lower prices still in many markets, but the price declines will reverse once the supply of foreclosed homes gets dumped on the market. The problem in the housing market is not that there is a glut of places for people to live. Rather, it is a problem of too many places for sale and too many people fearful of buying while prices continue to fall. Once that is allowed to clear, prices will likely bounce back up a bit and home building can recommence to provide the new homes needed for an expanding population.
None of these courses of action are a panacea for the current difficulties. At least, allowing the market to work unfettered will bring some sort of end to the problems. The Obama "plan" will just drag the inevitable outcome out longer and longer. It will hang over the American economy and reduce the number of new jobs for decades to come.
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