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McConnell/Graham mortgage entitlement would cost at least $200 billion; Reid: “We’re willing to look at it;” price tag between $300 million and $1 trillion

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By Michelle Malkin  •  February 3, 2009 12:29 PM

Scroll for updates…2:39pm Eastern. Reid states at press conference just now: “We’re willing to look at it.”

Nobody else is covering this, so I will continue to bang the drum. Yesterday, I e-mailed Sen. McConnell’s office asking how much his disastrous GOP mortgage entitlement proposal would cost. How much would this amendment add to the price tag of the $1 trillion “stimulus”/spendulus/porkulus/Generational Theft Act of 2009?

No answer yet from McConnell’s office. He’s too busy on the Senate floor decrying the unnecessary, harmful spending proposed by the Democrats.

Well, Sen. Lindsay Graham spilled the beans. He’s one of the drivers behind the government-backed mortgage entitlement — and he said yesterday it would cost an additional $200 billion.

At least.

U.S. Sen. Lindsey Graham supports an economic stimulus bill but said Monday the current version spends in the wrong places.

“The underlying problem of the economy nationally and worldwide is housing,” the Republican said. “We have a lot of people in foreclosure and a lot more people heading toward foreclosure.”

Graham is working on legislation to give all homeowners the chance to refinance their mortgages at 4 percent interest.

That would cost the government nearly $200 billion, he said, but would stabilize the housing market when combined with a larger tax credit for first-time homebuyers.

Yeah, right. The same way all the other trillions we’ve tossed at the problem have “stabilized” the market, eh, Sen. Graham?

Chris Kinnan at FreedomWorks e-mails: “McConnell’s 4 percent mortgage entitlement could easily cost more than the entire stimulus…of course they’ll use budget gimmicks — ‘we’ll only need it for a year or two’ — to hide the costs but this is a dangerous idea. We’re already massively subsidized housing through the mortgage deduction, through the FHA (which was doubled in size just last year and now needs direct govt funding for the first time ever), and through Fannie and Freddie (which have imploded through Congressional mismanagement and have a looming unfunded taxpayer liability). Another government program is not a conservative answer to the problems we face in housing, and ripping scarce capital from the private sector and stuffing it into unproductive housing stock will make the broader credit crunch worse and make us all poorer in the long run.”

Yesterday, McConnell said the Republican Party’s goal “is not to kill” the stimulus.

If Senate Republicans sign on to this guaranteed government mortgage entitlement nightmare, they will permanently kill their already comatose credibility.

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More on the monstrous potential costs of this proposal:

I am not, though, sure how Congress is going to determine a “credit-worthy borrower” if not by a bank’s willingness to lend to him. Fannie and Freddie are supposed to buy the new loans—I’m pretty certain that at this point we can all agree we don’t want to use the federal housing agencies to encourage banks to make unwise loans. Which gets back to the point from earlier today and the question of whether we should be making banks lend.

There’s also the question, raised by my colleague Steve Gandel in December, about how much cheap, government-backed mortgages will ultimately wind up costing taxpayers. Steve concluded that it might be a lot more than it would seem at first pass.

Gandel on the Treasury Department’s similar proposal last December:

The Treasury Department’s latest prescription for the ailing housing market could turn out to be more placebo than cure, and a costly placebo at that. Some economists question whether just lowering interest rates to a historically low 4.5% will be enough to boost housing sales or prices. What’s more, the plan could end up costing $25 billion a year, using up valuable funds needed to fix the housing market and providing no relief to the millions of homeowners now facing foreclosure.

“It’s an unmitigated mistake,” says Edward Glaeser, a Harvard University economics professor. “The amount of help this plan offers is vastly smaller than the problem. It’s just not worth the cost.” (Read Four Steps to Ending the Foreclosure Crisis.)

At the heart of the plan that the Treasury is reportedly considering is the idea that lower mortgage rates will boost home sales and eventually house values. The plan hasn’t been officially announced so it’s not certain exactly what the Treasury would do, but one way it could work would be for the government to offer to directly purchase all newly originated loans by banks and mortgage lenders provided the loans carry rates of 4.5% or less…

…But critics of the plan say that is will do little to boost sales, and could wind up being surprisingly expensive. Here’s their math: In order to get lenders to make the loans at below market rates, the government would have to basically pay banks the difference between the market rate and the 4.5% they would like banks to lend at — currently 1%. That would still leave a profit of 0.8% on every loan the government helped originate through the program.

The government, though, would only be able to pocket that profit if everyone paid back their mortgage in full, which even in good times is not the case. Historically, about 1% of all mortgages end up in foreclosure. That would mean during normal times this program would end up costing the government 0.2% of all the loans it originates. (Read It’s the Housing Market, Stupid.)

But these are not normal times. Right now the foreclosure rate is running at 3%, and it could ratchet higher in the next few years if the recession drags on. The government could mitigate its losses by only lending to people with high credit ratings. But even high quality borrowers will default at higher rates in a down economy. At a 3% default rate, the plan could cost the government as much as $25 billion a year. And that’s only if 10-year Treasury rates remain at 2.7%. A year ago, the government bonds yielded 4%. At those levels, the 4.5% mortgage plan would cost nearly $50 billion a year. Treasury officials declined to comment on these projections.

On another troubling note, some economist question whether the lower mortgage rates would even boost sales or home values. A 2006 study of mortgage rates and New York City housing prices going back to 1975 by Lucas Finco of Quadlet Consulting found no correlation between lower mortgage rates and higher housing prices, or vice versa. “The relationship between mortgage rates and home prices is pretty obscure,” says Jack Guttentag, a professor emeritus of finance at the Wharton School of Business.

***

Light up the phones: Tell Sen. McConnell to Rally Against the Obama Debt Plan!

And via CongressWhip:

These are 7 Senators that are “undecided” (except maybe Brownback )on the stimulus based on calls to their offices:

The 7 are Barrasso (WY) voted no in past but has not stated any opinion now, Bunnining (KY)Has not stated opinion assumes he will vote no, Cochran (MS) working on it no stated decision, Collins (ME), working on it… no decision, Crapo (ID), would imagine he will vote no., Ensign (NV) has been speaking out against but has not decided yes or no, Brownback (KS) no in current form working on it.

***

Update 2:39pm Eastern. Reid asked about GOP mortgage entitlement. States at press conference just now: “We’re willing to look at it.” Estimated cost, he says, is “between $300 million and $1 trillion.”

God. Save. Us. From. Bipartisanship.

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