Is Obama about to forgive billions in mortgage principal?

James Pethokoukis hears rumors of an August surprise coming from the White House, one that will attempt to win backs the hearts and minds of voters dismayed at the failing economic policies of the Obama administration.  With the government fully in control of Fannie Mae and Freddie Mac, Barack Obama may issue an order to forgive portions of underwater mortgages processed through the GSEs, where negative equity approaches $800 billion overall.  Some financial houses have begun quietly preparing for the possibility:

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages – one in five – are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

The move, if it happens, would be a stunning political and economic bombshell less than 100 days before a midterm election in which Democrats are currently expected to suffer massive, if not historic losses. The key date to watch is August 17 when the Treasury Department holds a much-hyped meeting on the future of Fannie and Freddie. …

Why?  As Pethokoukis notes, it would be a naked ploy to buy votes … with our money:

Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

The government controls the two GSEs thanks to the bailout demanded by Bush administration, and then made unlimited by the Obama administration.   They are being floated on taxpayer money, but the idea had been that an orderly wind-down of bad loans and securities would eventually rescue the principal in most of the mortgages.  Taxpayers would take a bath, but eventually we’d see something approaching a wash in the long run.  Government seizure was supposed to allow for renegotiation of terms with borrowers to rescue the loans.

A massive write-down of principal in underwater mortgages would cost us additional tens of billions of dollars, if not $100 billion or more, in order to get these mortgages to market level.  That money won’t come out of thin air, either.  Either it will take taxpayer dollars to make up the difference, or the sudden and arbitrary writedown will make Fannie/Freddie investors a whole lot more poor than they were before.  The Obama administration can’t afford to send Wall Street reeling with that kind of shock, especially this close to an election and with the economy already sinking, so it would almost certainly require massive taxpayer subsidies to accomplish, on top of what’s already been spent on TARP bailouts.

In other words, it’s exactly the same kind of Obamanomics that we have seen for the last eighteen months — spend what we don’t have now, run up debt like crazy, and hope that a momentary spike will translate into political success.  Unfortunately, that has also been the formula for long-term economic failure.

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