We’re from the Government, and We’re Here to Help You Buy a House

There has been some good analysis of this week’s much-hyped agreement between the U.S. Treasury Department – which facilitated the meeting, we are told, but didn’t use any form of coercion – and mortgage lenders to bail out assist homeowners in danger of being slammed with a much higher monthly payment on their subprime mortgage come January. But there are some elements of the deal that haven’t been greeted with much skepticism – or, indeed, haven’t been reported much at all.

For starters, Treasury secretary Henry Paulson insists the agreement won’t cost taxpayers money. What he really should have said is that it won’t cost federal taxpayers money. But it might cost state taxpayers money. The White House will push Congress to let state governments issue tax-free bonds to fund programs that help homeowners refinance their mortgage. Those bonds have to be paid off by taxpayers some day. I usually like federalism, but this is not the sort I’ve grown to love.

Another part of the deal is to allow the Federal Housing Administration to expand its programs and help refinance 200,000 mortgages. As Paulson reminded reporters, the administration is asking Congress to increase the ceiling on the amount of FHA loans and lower the down-payment requirements to below the current rate of 3% of the home price. And here I was thinking big loans that were handed out with little or no money down were part of what got us into this problem in the first place. Silly me.

Nor is it really clear that the administration’s approach here won’t actually cost federal taxpayers money, either. The proposal allows the FHA to charge loan insurance premiums based on risk, like private lenders do. Currently, all FHA mortgage holders – at a high-risk of default or not – are charged the same amount.  You realize this is a much-needed change when you discover that currently the FHA is running deficit of $143 million because so many of its loans have gone bad and the premiums it collects from all loans isn’t enough to cover the losses. But, as Bloomberg News reports, the post-refinancing default rate of the subprime loans that the White House now wants the FHA to play with could be between 40 to 60 percent.  Taxpayers might get stuck paying for these loans after all.

The implicit theme of these proposals is that Uncle Sam might just be better at this mortgage business thing than the private sector. I guess it might be tiresome to insert a joke here about the U.S. Postal Service, eh?