A rumor has gone viral. From journalists to bankers, brokers, and bloggers, the buzz is that the White House is about to spring an August surprise: The Obama administration will order the two government-controlled mortgage lenders, Freddie Mac and Fannie Mae, to forgive mortgage debt owed by millions of American homeowners.
Statistics show that about 20 percent of all US homeowner mortgages are underwater. That is, about 15 million Americans have a mortgage that is greater than the current value of their house. That negative equity totals some $800 million, and the rumor has it that it will be simply waived, thereby bringing each mortgage into line with the underlying home value.
Why would such an amazingly expensive thing be done? First, it is less than 100 days before an election in which Democrats could be massacred, and second, Republicans and some Democrats in Congress refuse to spend more money on ‘stimulus.’ The $800 million presidential gift to 15 million voters would not be subject to congressional review, the same way lots of other things were done by this administration, and it would show that President Obama is “doing something” about the faltering economy.
The rumor began when word leaked out that some large banks were secretly telling clients about the plan. It was strengthened when Mizuho Securities indicated that the deepening economic slump shows signs of falling into a deflationary spiral, and that the government would order Fannie and Freddie to increase consumer cash flow by allowing some homeowners to refinance their mortgages—at a lower premium. Presumably, the lucky folks would spend the savings.
That comment was matched by a Goldman Sachs statement noting that the Treasury has promised unlimited support for GSEs (government-sponsored enterprises like Freddie and Fannie) so they would be used in a scheme to support the housing market and the economy.
Would the White House carry out such a desperate ploy? Sure, for four reasons: Unemployment is rising to the deadly 10% figure; the anemic 2.4% second quarter GDP is being downgraded to miniscule 1.7%; there is no more stimulus money coming from congress; and the Democratic Party and presidential poll ratings are in free fall. The fourth reason is a cynical calculation that Americans outraged they must pay for someone else’s mortgage relief are fewer in number than the millions of voters grateful for the White House’s generous gift. Taxpayers have been bilked before, and President Obama has turned a deaf ear to their screams.
The Treasury has an important meeting scheduled for 17 August to review the future of Freddie and Fannie. Hold your breath and hang on.
Chet Nagle is a graduate of the U.S. Naval Academy and the author of Iran Covenant.