The ongoing housing crisis is among the biggest reasons that our economy is still in a funk, and on Tuesday, President Obama laid out a new plan to help resolve it. He wants Congress to pass a bill that would allow “every responsible homeowner” to refinance at lower interest rates, estimating that it would save every participant about $3,000 a year on their mortgage. Obama would pay for his mass-refinancing plan by levying a new fee on big financial institutions.  

planThe biggest concern is how much risk taxpayers would be taking on through this approach to mass civilian refinancing. A White House official, speaking on the condition on anonymity to VA Loan News, indicated that the plan would be fairly broad in scope: It would not only include mortgages that the government already holds through Fannie Mae and Freddie Mac, but also to holders of loans backed by the private sector as well.  

That approach could potentially help a large number of civilian homeowners and prevent more foreclosures. But there also is the risk that we would be “transferring massive amounts of bad debt from the current holders to the government,” says Nick Waller, Director of The VA Hotline owned by Mortgage Banking Giant All American Lending Inc in Newport Beach California. “If the government is going to guarantee civilian refinancing in this way, then we are giving much more money to banks and investors than to homeowners,” he argues.  

Columbia University’s Glenn Hubbard, an economic policy adviser to the Romney campaign, echoed some of Waller’s concerns. Hubbard has proposed a mass refinancing plan that would be restricted to mortgages held by Government-Sponsored Enterprises, and he thinks Obama’s plan to extend it beyond such mortgages would be placing taxpayers at greater risk. “In the case of GSEs, the government already had the risk. Here the administration is needlessly taking on new risk because it can’t or won’t manage the GSEs and FHFA,” Hubbard said in an e-mail to VA Loan News. “As I understand the plan, the President took a good idea and turned it into a bad one.”

Other economists emphasize that there’s still room for Obama’s plan to work, depending on the details. For example, the government could require qualifying mortgages to be underwritten again to meet the standards of a GSE, requiring borrowers to provide greater proof of their income and ability to pay, says John Russell Vice President of All American Lending. The administration can also try to ensure that its plan doesn’t serve as a “kind of default insurance” by setting an appropriate fee for refinancing, according to Jared Bernstein, former adviser to Vice President Biden. Ultimately, Bernstein adds, “the government can’t address this problem without taking on some risk.”

Christopher Mayer, a Columbia economist who co-authored Hubbard’s proposal on mass refinancing, also emphasized that the merits of Obama’s proposal would depend on how the program is set up. In contrast to Hubbard, Mayer expressed greater optimism about the plan. “I’m comfortable with the government backing mortgages, which the government is already doing now since there is not sufficient private capital,” he says. “I’m not concerned per se about a refinancing program that goes beyond government-backed mortgages, depending on underwriting and pricing.”

Even if such concerns were assuaged, there would still be big political obstacles to Obama’s plan. The chances of any major bill getting through Congress this year are slim, but Obama’s proposal that large financial institutions foot the bill would be a non-starter in the Republican-controlled House. Large banks are already protesting the additional burdens put upon them by Obama’s Wall Street reform bill. And it’s unclear which institutions would ultimately have to pay up, when the mortgage meltdown was the result not only of the big banks that securitized shoddy mortgages, but also smaller firms that originated them.

In fact, Obama doesn’t need to go to Congress directly to implement mass refinancing. As Ezra’s discussed, he could follow Hubbard and Mayer’s plan and focus on Fannie and Freddie alone. But that would most likely require having a head of the Federal Housing Finance Administration who’s sympathetic to the idea. Edward DeMarco, the current director, isn’t too keen on it, but replacing him would require Obama to rely on the Senate for confirmation, or to make a recess appointment.  

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