Yesterday the President announced an expansion of a program to help some homeowners who are underwater on their mortgages. The President announced his new policy in Nevada, one of the four “sand states” where the housing bubble grew biggest. The others are California, Arizona, and Florida.
Yesterday I wrote:
Mortgage refinancing policies are quite hard to do at scale. If recent history is a guide, this program may help a few tens of thousands of homeowners. That’s a trivial macroeconomic impact. Even if it does help 900,000 homeowners, the effects will be small enough that they won’t show up on most macro forecasts. Its greater benefit may be political: it creates another talking point for the President.
The President can contrast his action with a Congress that is blocking his broader legislative proposal. The developing Beltway conventional wisdom seems to be that while the policy benefits of this new proposal are at best small, this is unquestionably a useful political weapon for the President.
The specific policy action he is taking, however, also carries downside political risk for the President that may not be obvious at first glance.
Many elected officials have a bias toward government action: they see a problem and ask “What can we do to fix it?” The solutions they embrace often arise from an iterative process in which advisors compare the problems that exist with the policy tools available to address them and make the best possible match.
These matches are almost always highly imperfect, especially when you’re working on housing. Let’s look at two key attributes of the President’s new policy:
- It will subsidize only a small share of homeowners. For each newly subsidized underwater homeowner there will be many more who are, or feel like they are, in a similarly deserving situation and yet will not received subsidized aid. If we give the President maximum credit for helping “up to” 900,000 homeowners, that’s about 1 in 80 homeowners, of which there are about 75 million in total. The actual ratio will likely be much worse.
- Since assistance will be targeted by a set of rules, some of those who receive aid will be those whom, upon closer examination, most would deem “undeserving.” This program helps those with a high loan-to-value ratio, which can occur either because the house’s value has declined, or because the homeowner took out or refinanced into a particularly big mortgage. While we may have sympathy for those in the first category, the homeowner who at the peak of a regional housing bubble withdrew equity from his mortgage to buy a big boat and was then hit by a housing price decline evokes far less sympathy. And if he now receives taxpayer subsidies, his neighbors are going to be ticked.
These policy features create political risk that the President’s team may be discounting or even ignoring. It is fairly easy to focus press attention on the hard luck case of a responsible homeowner who, through no fault of his own, was hit by regional housing price declines and is now locked into an underwater mortgage.
But government action to help that sympathetic homeowner will leave many more without similar aid, and if past experience is a guide, some of them will be angry at the inequities created (real or perceived). If the expanded program also results in high visibility cases of subsidized big spenders who gambled on the housing bubble by withdrawing equity, a backlash could grow.
Whatever your views on the policy merits of placing additional taxpayer funds at risk to subsidize underwater homeowners, it is a political mistake to pay attention only to the one homeowner you’re helping, and to ignore possible pushback from the 79 or more homeowners you’re not helping, as well as from the taxpaying renters.
I am not predicting a major political backlash on the President’s new policy announcement. I think it’s too small to have either a large policy or political effect, positive or negative. I want simply to remind you that a program like this is not all political upside for the President. Don’t forget that the original February 2009 Rick Santelli explosion, which launched the Tea Party, was a reaction to an Obama Administration proposal to use taxpayer funds to subsidize targeted mortgage relief.