Too Little Too Late on Housing?

With the news that the president will announce a plan to make it easier for homeowners to refinance their underwater mortgages and a Larry Summers article boosting the idea in the Washington Post it is clear that the Obama administration is "doing something" about the housing meltdown.

Just how much it will help is a good question.  After all, if the government lets underwater borrowers refinance at lower rates then it is forcing the bankrupt GSEs like Fannie Mae and Freddie Mac back to subsidizing high-risk debt.  The only way that we will finally get out of the mess is when the market clears and the foreclosed homes are no longer hanging over the market and home prices start to climb.

Larry Summers, at least, has a good idea.  It is nonsensical for the government's conservators at Fannie and Freddie to stiffen their lending requirements at the bottom of the business cycle.

[C]redit standards for those seeking to buy homes are too high and too rigorous. The characteristics of the average successful applicant in 2004 would make that applicant among the most risky today. The pattern should be the opposite, given that the odds of a further 35 percent decline in house prices are much lower than they were at past bubble valuations.

That is a universal problem.   People are wildly optimistic at the top of the business cycle and pessimistic at the bottom of the cycle.  The risks to lenders are highest when asset prices are high after a strong run-up, and lowest after a substantial decline.  If government has a role to play in credit, it should be to lower credit standards at the bottom of the cycle and raise them as a bubble develops.  If home prices increase by 20 percent in a couple of years, then lenders should stop offering 80 percent mortgages and crank back to 75 percent or 70 percent.  But try telling that to geniuses like the Sen. Dodds and Rep. Franks of the world.

The administration's moves seem to have moved the homebuilder stocks a little.  But I wonder if it isn't all too little too late for the president and his reelection.  Even with these efforts at tweaking the housing market the economy is hardly likely to be a barn burner by next summer.  If Obama wanted to run on the economy, he should have had the economy in good shape by summer 2011 at the latest.

The president and his party are paying for the mistakes of 2009.  They thought back then that it was first and ten, and they could fix the economy and enact the liberal agenda at the same time.  They were wrong; it was first and twenty on the five yard line, and now they are reduced to a Hail Mary on fourth down with a quarterback not known for his strong arm.