The Obama Mortgage Plan - Feb 19

President Barack Obama was in Arizona recently selling his mortgage relief plan. As stratfor notes, this 'concentrates an unprecedented amount of financial power in government hands'. It also dovetails perfectly with Bible prophecy. If more and more money can be funneled into fewer and fewer hands, then all the money (and all the power) can be bestowed to one man. Lenin (and Jesus) was right! Imperialism is the highest form of capitalism.

Johnny Cash

Summary

U.S. President Barack Obama has announced his mortgage restructuring plan. The Obama plan takes the 2008 Bush mortgage restructuring plan — which concentrated an unprecedented amount of financial power in government hands — a step further in terms of requirements for lenders and the amount of federal monies to be made available.

Analysis

U.S. President Barack Obama on Feb. 18 announced his mortgage restructuring plan, part of an effort to regenerate activity in the housing sector and put a floor under home prices. Overall, the plan works from the basis of the Bush administration plan of late 2008, but takes the Bush plan a step further in terms of requirements for lenders and the amount of federal monies to be made available.

The core idea is to assist those who — whether from subprime mortgages, variable-rate mortgages, job loss or other changes in their financial position beyond their control — cannot make their mortgage payments. The program will benefit only those who own only a single home, who have not made any particularly poor financial decisions in obtaining that home, and who do not have more than 20 percent equity in their property (those with 20 percent equity or greater can already apply for refinancing without the Obama plan). Specific guidelines as to who qualifies are set to be released in two weeks.

The first step of the plan involves Freddie Mac and Fannie Mae, aka “the twins.” These two institutions purchase mortgages, then package them for sale to interested investors. In essence, they serve as a conduit for those who would like to invest in the housing sector but for whatever reason do not want to get involved with any specific property. Roughly 40 percent of the monies that provide for mortgage loans enter the market in this manner.

The twins are currently held in conservatorship by the Treasury Department, meaning the Obama administration can change its policies by fiat without congressional approval. Under the first phase of the Obama plan, any mortgage held by the twins that meets the criteria immediately qualifies for refinancing regardless of the level of equity the homeowner holds.

The second step is not so automatic. In short, it involves pressuring private institutions to implement identical refinancings for the mortgages they hold. The government will be injecting some money — at present an unknown amount — to make this more palatable. Finally, the government will purchase some US$200 billion of the mortgage-backed securities that Freddie and Fannie package to help push mortgage rates down.

There is very little in this plan that is different from the Bush plan announced in December 2008. The Bush bailout involved extending the teaser rates for those subprime borrowers who — as in the Obama plan — always had made a good faith effort to make their mortgage payments. In essence, this is a form of refinancing. The primary difference between the two is that the Bush program was voluntary for the banks, while the Obama program is not.

Stratfor noted last December about the Bush mortgage bailout plan: “The plan potentially damages the integrity of the U.S. housing industry. The U.S. mortgage market is the largest pool of money in the world, not just because Americans are affluent, but also because of the sanctity of both property rights and contracts. … This bailout appears to tinker with the latter. If this proves to be just a one-off, little harm will be done. But if this sets a precedent that other presidents follow, then financial institutions will be forced to add a layer of political risk insurance to future mortgages. That would raise the cost of loans for everyone and retard economic growth on a national scale.”

Remember, these words were written about the Bush plan — which simply encouraged mortgage renegotiation — rather than the Obama plan, which makes such plans contingent upon any federal assistance. Under Bush, mortgage renegotiation was a potential concern; under Obama, it is a reality.

And in fact, our concerns run even deeper than that. In September 2008, the Bush administration launched a $700 billion program for regenerating the banking sector called the Troubled Assets Relief Program (TARP). As part of that program, the Bush administration forced all of the country’s largest banks to take federal money. This aimed to force-feed liquidity into the system and prevent a financial meltdown, but the money did not come for free. In exchange, the government received veto rights over bank decisions. The Bush administration never used this veto to Stratfor’s knowledge, instead simply using the power’s existence to influence bank policy. Wells Fargo — the American bank in the most stable financial position at the time — did not wish to take the funding because of this provision, but was forced to anyway by then-Treasury Secretary Hank Paulson. Paulson argued that if every one of the major banks participated, there would be no stigma placed upon other banks that chose to seek assistance.

But that veto authority remained in the government’s hands in the transition from Bush to Obama. Whereas the Bush administration used this power to persuade banks to participate, Obama made it very clear in his speech Feb. 18 that banks who benefit from TARP assistance will be required to adopt the Obama refinancing plan.

We noted several months ago that the Bush administration’s anti-crisis programs were concentrating an unprecedented amount of financial power in government hands. Under the Obama administration, that power is now being brought to bear.

The Bush-inspired Obama plan may well alleviate — perhaps even solve — the current problems in the housing sector by preventing foreclosures and buoying a badly battered housing market. But there is one final angle to this issue that must be considered.

The plan will require firms to rewrite their mortgage loans, in many cases against their wills, and in some cases for sound firms that did not want federal assistance in the first place. This cannot help but make investors — already nervous about the general economic situation — a bit more leery about extending credit in general, and to the housing market specifically. Should that credit dry up, the cost of borrowing money for a mortgage will go up, not down.