“Little gremlins” have proposed a massive government-sponsored mortgage refinancing program for struggling homeowners that is doomed to fail, analyst Dick Bove said.
In a scathing note and subsequent CNBC appearance, the Rochdale Securities vice president of equity research said the Obama Administration’s plans will foist new costs on both taxpayers and the banking industry.
Under the plan, homeowners suffering under previously negotiated high rates will be able to refinance under the current rock-bottom rates near 4 percent. The plan comes as about 1 in 4 homeowners owe more than their homes are worth. Advocates believe the plan could help ease the underwater mortgage problem and help generate consumer spending by lowering mortgage payments
But Bove said the $85 billion in estimated savings for homeowners would translate to costs for taxpayers who subsidize government-sponsored agencies such as Fannie Mae, and to banks which will lose that much revenue with the refinancing. The estimate comes from a New York Times report on the program that cited sources familiar with the plan.
“The point that neither the administration, the Treasury nor the Fed can seem to understand is that they have strangled bank lending with their capital and liquidity rules and their price fixing requirements,” he wrote. “This was a core reason why bank lending did not open up to facilitate a refinancing boom.”
Indeed, historically low rates have done little to stimulate the housing market, where sales and price trends are mired at Depression-era levels.
One of the reasons most often cited is an unwillingness to lend on the part of banks that face higher capital constraints and have raised their credit requirements. The changes came in the wake of the subprime mortgage fiasco when millions of homeowners with poor credit and little or no cash received mortgages for homes they could not afford.
Bove has been a frequent critic of the new rules, saying they are cutting off capital to an economy teetering on recession.
“It is a classic example of how badly the people who are supposed to understand banking do not have a clue as to how it works,” he said. “They love to pass laws and new regulations but they do not care nor do they understand what these regulations will do. Then they get frustrated when the simplistic monetary theories they put in place do not work.”
But the plan is generating some support.
“This is the best stimulus out there because it doesn’t increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing,” Christopher J. Mayer, an economist at the Columbia Business School, told the Times. “So I think this is low-hanging fruit.”
Bove, though, said a simple relaxing of capital requirements for banks and allowing rates to drift higher would accomplish the same thing at no cost.
“The biggest failure is that these people are still working on consumption rather than production programs,” he said. “Until they figure out that more production is what is required we will continue to take money out of one pocket and put it into another and assume that we have accomplished something.”
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