HARP The Bank Bailout Continues

by Eric Shierman

Well before Obamacare, the Tea Party was primarily a reaction to the bailout. TARP made people angry, HARP put them in the streets. As local news reporters put microphones in Obama supporters’ faces on Election Day and Inauguration Day, an all too common response was something like this:

Obama supporters were responding to an Obama campaign proposal for reducing mortgage debt that was so expensive, even the 111th Congress under Democratic control would not support it in 2009, fearing it would take money away from stimulus package patronage projects. Before Congress parried it aside, Obama’s proposal provided the trigger for this sudden outburst by CNBC reporter Rick Santelli on a trading floor at the Chicago Mercantile Exchange that is largely credited for kick-starting the Tea Party movement:

In the summer of 2009, the Federal Housing Finance Agency (FHFA) came up with a very limited refinancing plan called the Housing Affordable Refinance Program (HARP). The Obama Administration jumped in front of this independent agency, claiming credit for following through with his campaign promise, because Obama claimed tens of millions of Americans could now refinance their underwater mortgages. Until now, only 894,000 have used the program because it involved four restrictions. One, applicants had to be current on their payments (no late payments in the last 6 months, only one late payment in the last 12 months). Two, banks were subject to a mandatory buy back if any underwriting flaws were discovered. Three, there was a 125% loan-to-value cap. And four, it required a new appraisal.

After months of outside speculation, the FHFA released the details of HARP Phase II on Monday. Obama, always looking for a way to campaign on the taxpayers’ dime, used this as an excuse for a campaign event in Las Vegas whose policy fig leaf saves his well financed campaign a lot of money.

Over the past year, the Obama Administration has been doing all they can to pressure what is supposed to be an independent agency. Its acting head, Edward DeMarco, has heroically stood his ground. By enacting a scaled down version of Obama’s agenda, DeMarco has preempted a fleecing of taxpayers that an eventual political appointee would have pursued. By insisting that homeowners in default remain excluded from the program, it will be more difficult for banks to dump all their toxic assets on to the GSEs (Fannie Mae and Freddie Mac) and thus the US Treasury.

HARP Phase II still provides ample room for mischief by lowering lending standards below even that of the crazy days that led to our present problems. Before, the GSEs could only refinance up to 80% of the home’s market value. In 2009 HARP raised that to 125%. Now they have completely removed the cap. This is crazy! Before, banks were subject to a buy back provision that allowed the GSEs to return fraudulently underwritten Ninja loans. In 2009 HARP retained buy backs, now it has eliminated them – unbelievable.  Before, the GSEs required a new assessment before refinancing. Now this is being waved in favor of the fudgeable methodology of an “automated valuation model.” Without buy backs, should we expect anything other than fuzzy math in those models? Without a loan-to-value cap, who cares? The banks won’t, but taxpayers should!

This is nothing short of a new bail out for banks at the expense of adding more bad debt to the taxpayer owned GSEs. After symbolically complaining that Bank of America has raised their debit card fees to $5 a month, Obama then gives banks a more lucrative revenue stream: a new refinancing boom with lower lending standards. Of course banks are trying to find ways to make payroll after having to pay for costly Dodd-Frank regulatory compliance, but I’m thinking that this is a trade they were more than happy to make. Indeed I’ll bet their lobbyists made this trade in Chris Dodd and Barney Frank’s offices. Where is the outrage?

Eric Shierman is a partner at Creative Destruction Investment Partners, writes for the Oregonian under the pen name “Portland Aristotle” on the My Oregon blog, and is the author of the forthcoming book: A Brief History of Political Cultural Change. His articles can be read at: http://connect.oregonlive.com/user/PortlandAristotle/posts.html