Could this be a game changer? A president facing an election calamity has just executed a brilliant play. With one simple move he has ingratiated himself to over a million middle-class voters who had written him off as an economic villain. With one deft step, he has maneuvered around a disobliging Republican House leadership. Ostensibly, he has done all this without intensifying the highly-charged tax and spend debate.
On Monday, Barack Obama announced that government-run Fannie Mae and Freddie Mac can rewrite mortgage loans for all up to date borrowers who are suffering from negative equity.
Forget what the White House says about this new initiative stimulating the housing market. It won’t. But lower interest rates for a key tranche of borrowers is more likely to provide a jolt to consumer spending than any phony “jobs plan”. As the President said: “It gets those families spending again.”
The macroeconomic impact will be that of a narrowed down middle class tax cut. Relabeled and repackaged for sure, but this boils down to a sampling of Reagan supply-side economics. If John Boehner had presented such a proposal, he would have been slammed by the left for wanting to give handouts to the wealthy.
Of course, the left will be attracted by the greater dysfunctionality this move brings to the much maligned banking sector. Consideration of job security and repayment history had already been removed from lending decisions in the name of fairness. Now the President has brushed aside requirements on equity. Any semblance of logic to consumer lending has been removed. A cornerstone of capitalism has been further weakened.
The tragedy, of course, is that Democrats created the equity trap in the first place. They introduced and passed the disastrous easy lending legislation that created the housing bubble, leaving many borrowers owing more than the value of their homes.
To make matters worse, last year Democrats established new restrictions on private lenders that have produced erratic and inconsistent home property valuations. These have made loans much more difficult to rewrite, tying borrowers to their homes and mortgages even as interest rates have remained at record low levels.
But while they have tightened regulations in the private sector, Democrats have removed them in the state sector. Fannie and Freddie are exempt from these rules and the president has now given them an even more unfair edge over private lenders. Consumers will inevitably turn to the cheaper government deals, leaving Wall Street ever more dependent on political decisions made in Washington, DC.
Someone might ask where in the Constitution the government is given the power to provide mortgages and the President to determine the terms of lending.
By picking winners the President can appeal to different blocks of voters and there can be little doubt that with this particular selection Barack Obama has improved his re-election chances. But the big question is whether enough of these newly-favored consumers will spend their bonanza after years of retrenchment. The economic and political payoff for Barack Obama could be small if the extra cash is used instead to pay down mortgage balances or reduce other household debt.
Appropriately, all this was announced in Las Vegas. Would anyone like to wager against the President expanding the handout to all government-backed borrowers before Election Day? After all, what could sound more fair?