Published for www.economics21.org, February 6, 2012

Last week, President Obama gave a speech highlighting his administration’s response to the ongoing crisis in the housing market. The speech material can be broken down into two broad categories: 1) a review of existing government programs (including some modest programmatic tweaks) to boost mortgage modification and refinancing opportunities; and 2) a new refinancing proposal meant to help more struggling, or at-risk, families not currently eligible for the government’s signature programs.

Before diving into these two categories, it’s important to acknowledge the broader economic and political backdrop. The collapse in home values over the past five years helped spark a financial crisis, which then morphed into a broader recession with a historic number of job losses and massive declines in wealth. Today, the U.S. government finds itself either owning or guaranteeing about 72% of all outstanding (first lien) mortgages. The Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac cover roughly 56% of the market by themselves, with the third leg of the government’s housing stool – the Federal Housing Administration – responsible for about 16% (including VA loans). Banks and other private mortgage investors are responsible for remainder. In raw numbers, the government stands behind 40 million first liens, with the private sector covering around 13 million.

Category One: Obama’s “Current” Housing Programs

When Obama took office three years ago, he decided that his Administration would start spending significant taxpayer resources to try and fix the housing market. He tapped TARP and allocated $50 billion to create the Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP).

HAMP is the government’s main mortgage modification program. It uses taxpayer dollars to pay or incentivize banks, lenders, and servicers to help up to three to four million at-risk homeowners avoid foreclosure. This program is open for all borrowers regardless of whether the mortgage is owned by the government or by a private institution, as long as the borrower meets some basic underwriting requirements. By almost all accounts, HAMP’s record over the past three years has been one of disappointment. The program has helped only a small fraction of its original target, and more than half of those that did receive help are re-defaulting on their HAMP modified mortgage.

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