Reuters is reporting that a giant August Surprise is in the works -
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.
http://blogs.reuters.com/...
Stymied by Congress and unable to pass more in the way of stimulus the last two large investment banks are encouraging Treasury to write-down the principal on GSE loans.
Morgan Stanley is pushing a mortgage relief plan directly to Congress. On August 3, a top Morgan Stanley economist recommended to the Senate Budget Committee that Fannie and Freddie ease their lending standards to allow millions of Americans to refinance their mortgages.
And even Goldman Sachs see the logic in such a policy move -
GSE policies are one of a dwindling number of policy levers the administration has left to pull, so it is conceivable that changes could be made, though there is no sign that a policy change is imminent. The Treasury’s essentially unlimited ability to provide financial support to the GSEs creates an interesting situation over the next twelve months: the GSEs could potentially be used to provide additional support for the housing market and, to a lesser extent, the broader economy in 2H 2001.
Not that this would cost Wall Street anything. Their motive may be simply to prevent deflation and bolster economic recovery chances.
The ramifications of such a move are enormous and has Republicans in Congress talking since they would be powerless to prevent such a form of stimulus.
This change begs many questions -
1- How would Treasury bolster capital at the GSE's if required?
2- Would there be a backlash among voters whose mortgages are held by private banks?
3- Would it be perceived as positive by voters? Or simply political pandering?
This could get interesting.