Government Intervention In Housing: Pros and Cons

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Ask the average person what they think of the government intervening in the mortgage market on behalf of consumers (and in many cases lenders, too), and you could receive a wide ranging number of answers. Many people are upset at the seemingly rampant spending of taxpayer dollars, and voice concerns (a valid one) about the future value and stability of our currency. On the other side there are those that are happy to see the little guy get some assistance during hard economic times. Recent programs have gone a long way in providing assistance to new and existing homeowners alike, but the real question is, ultimately, what will the cost of such help be, and who will take on the burden of paying those costs?

One advantage for homeowners is that rates are incredibly low, and so they’re scrambling to take advantage. It may or may not be worth it to go ahead and try to get a better loan in this market, but the Obama administration has a fix in mind. The new program, which begins as of this month, will allow borrowers whose loans are owned by Freddie or Fannie to be able to refinance for up to 105% of a home’s value. Credit scores, which have thus far prevented many from obtaining refinancing, may not be such a huge hurdle, as refis are an available opportunity for those with credit scores that are as low as 620. It makes me uneasy hearing that (isn’t lending to troubled borrowers what got us here in the first place?) but it isn’t exactly a free lunch. You’ll need to be current on your mortgage, and you’ll also need a solid payment history. Full details can be found at Makinghomeaffordable.gov.

Now yes, this does provide tangible benefits to the average consumers, even to those that aren’t drowning with an underwater house or bit off more than they could chew, but let’s look at the cost. At present, the Federal Reserve is buying hundreds of billions of dollars in these low interest mortgages. Present tab is running $250 billion, but expect that number to grow as time goes on, up to $1.25 trillion.

Running the printing press to pick up these mortgages has problems in and of itself. Inflation (weren’t we just worried about deflation?) is a real risk here. In addition, these buys tip the mortgage purchases balance on the Fed’s balance sheet, which in total could run up to 20% of the country’s GDP. Once Uncle Sam bows out of the buying spree, it seems likely that mortgage rates could rise sharply once again. The question then becomes when exactly should the Fed get out, before investors come to assume that the government will step in if problems arise again in the future.