Government Handouts Always Followed by Takeaways

Published November 22, 2011

President Barack Obama apparently does not understand basic economics or even simple math. Such as: There are two sides to every equation.

In just the past few days the president has announced a new program to help mortgage borrowers refinance their homes, and another to help college students reduce their loan amounts.

The new mortgage program is a reworking of the Home Affordable Refinance Program, which the administration rolled out in 2009 with the expectation that up to five million borrowers would benefit. Instead it has reached only 822,000 borrowers, less than one-tenth of whom were significantly “underwater” on their mortgages.

The original HARP limited participation to borrowers who owed up to 25 percent more than their properties were worth. The new program puts no cap on how much a borrower may owe relative to the value of the property.

Certain risked-based fees charged by Fannie Mae and Freddie Mac also will be waived for most refinancers, cutting some costs that raise the price of refinancing.

So on one side of the equation we’ll have potentially millions of borrowers able to save money with new mortgages. On the other side of the equation we’ll have lenders whose loans will earn less than they expected. As a result, future borrowers can expect lenders to be stingier with their money as they seek to compensate for the unexpected losses.

The president followed that scheme with an executive order to rework the government’s student loan program to allow borrowers to pay no more than 10 percent of their “discretionary income” against the loan and receive forgiveness of the debt entirely after 20 years. The 10 percent cap comes two years earlier, and the debt forgiveness five years earlier, than lawmakers had approved.

If billions of dollars of government-backed student loans will not be paid back, taxpayers can expect to be forced to cover the losses in the future. Future college students can expect to have a harder time obtaining loans.

Two sides of the equation: handout now, takeaway later.

President Obama apparently does not understand this or does not care.

It’s probably just a coincidence that the handouts come as the presidential election season warms up, and the takeaways will come after the election is over.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute in Chicago.