The Obama administration is threatening “regulatory arm twisting” to lower interest rates. That is not the way to encourage more loans. Sure, the government can help those who currently need help by getting someone else to pay for it, but what about the future? What about the higher interest rates that new borrowers will face because lenders realize that they face greater risks in making loans?
President Obama needs to understand that he played a role in exacerbating the current real estate mess. During the campaign he advocated that the government step in and rewrite home mortgage contracts - unilaterally reducing the amount that homeowners owe and reducing their interest rates.
How did Mr. Obama’s campaign talk affect banks’ willingness to write new mortgages? If bankers thought that Obama would win, would they want to loan money if a judge could lop off $100,000 from what is owed or cut interest rates? Lenders didn’t even know how much the government might reduce what would be owed. This proposal affected the market before the election. Many lenders simply didn’t want to take such incredible risks.
Mr. Obama’s talk on unilaterally renegotiating mortgages also hurt home sales. When people have a hard time borrowing money, there are fewer buyers and prices fall.
The new threat of “regulatory arm twisting” continues to spook bankers from lending money to new homebuyers. How do lenders who are making decisions know that there won’t be further requests for these types of markdowns later? If Mr. Obama wants to lower borrowers’ monthly mortgage payments, the government should pay for this altruism. Forcing others to pay for Mr. Obama’s helping hand will only further drive down home prices.
Candidate Obama’s other promises also acerbated the current problems. Take his promise to double the capital gains tax. Can anyone argue that a higher capital gains tax doesn’t lower stock prices and doesn’t start lowering them as soon as the policy is announced? The fact that the government could take up to 15 percent of any nominal increase in the price of a house also helped drive the prices of all houses down.
Our advice to Mr. Obama is to avoid the temptation to “fix” things and simply get out of the way. Your “fixes” have already created many of our current problems and will only keep on making the problems worse.