President Barack Obama is expanding his use of federal regulations by prodding the financial sector to sell low-interest mortgages to millions of cash-strapped homeowners “independent of how deeply underwater they are,” said Shaun Donovan, Secretary of the Department of Housing and Urban Development, Monday morning.
White House officials worked with real-estate and financial-sector groups to shift the financial risks that have kept high-risk borrowers from getting mortgages. Under Obama’s plan, low-interest mortgages will even be offered to homeowners who need to borrow 125 percent of a house’s value, Donovan added.
The president announced his new housing plan in Nevada, a state he carried in the 2008 election and which political analysts say he will need in 2012.
In addition to what amounts to a large-scale loan guarantee program for holders of existing government-backed mortgages, federal risk-based fees will be reduced, legal obligations to federal agencies on existing loans are being dropped, and private-sector risks will be automatically shifted to the government on new loans, Donovan said, adding that the president pushed the new policies.
On Wednesday the president is slated to announce new student loan policy. He will appear Tuesday in Colorado, another must-win state for his re-election campaign.
White House officials have packaged the announcements as necessary actions amid congressional opposition to Obama’s one-year, $446 billion stimulus bill, the American Jobs Act.
These moves mimic the federal policies that spurred the real-estate bubble in the last decade.
The announcements create risks for taxpayers, but they may counter Obama’s slide in the polls among homeowners and younger voters.
The new measures’ immediate costs are unclear, partly because they shift the complex risks of mortgage and student-loan defaults from private investors to the federal government.
White House officials today sought to counter likely opposition to the bailout from financially cautious homeowners, saying the new provisions are available only to the homeowners who are up-to-date on their mortgage payments.
The volume of student loans has risen rapidly in recent years as employers and students clamor for university credentials, even as colleges raise their prices. This year the amount of outstanding student loans is expected to exceed $1 trillion, even as default rates rise in step with the increasing number of unemployed and underemployed graduates.
Many protesters at the Occupy protests in New York, Washington D.C., and other cities say they are students with college degrees who don’t generate enough income to pay back the heavy loans.
If the Obama administration’s home mortage plan works, house prices will rise, shrinking the number of Americans who are underwater on their mortgages, said Gene Sperling during a Monday morning press conference. Sperling is director of the National Economic Council at the White House.
Obama is trying “to make as many borrowers as possible” eligible for new mortgages, Sperling announced.
This risk-adjustment strategy, however, can be risky for taxpayers.
In part, the current recession was caused by federal efforts on the part of Presidents Bill Clinton and George W. Bush to have the federal government shoulder finance companies’ mortgage risks by granting mortgages to lower-income Americans.
The risk were lowered by having government-backed agencies, Fannie Mae and Freddie Mac, guarantee risky mortgages prior to them being sold to Wall Street investors. Subsequently, the investors — and the banks’ shareholders — lost billions of dollars in stock value when too many loans were unpaid.
This risk-shifting strategy allowed Bush and many legislators to spur the post-9/11 economy without appropriating more funds via Congress.
The resulting real estate bubble reached its peak in the southwestern states of Nevada and New Mexico, and in parts of California. In those states, low-income Hispanics bought homes late in the bubble and lost much of their family wealth once the bubble burst in 2007.
Nationally, the decline in housing values prompted spending cutbacks by millions of homeowners, precipitating a national recession that was the Wall Street meltdown worsened — a collapse brought on by the financial sector’s realization of how many mortgages were failing.
The new announcements are being packaged by the White House as a political response to GOP opposition in Congress, said White House communications director Daniel Pfieffer.
The mortgage announcement “begins an effort [dubbed] ‘We can’t wait,’ where the administration will be taking and highlighting a series of administration actions to show we’re doing everything we can do to get the economy moving,” he said Monday morning.