The Washington Post became famous for relying on David Lereah, the chief economist for the National Association of Realtors, as its main source of the housing market during the bubble. The Post is apparently living up to the standards it set during this period. In a discussion of Freddie Mac's financial situation the Post tells readers that: "the main way that the government is c ausing Freddie to incur losses is by requiring it to play a central role in the Obama administration's Homeowner Affordable and Stability Plan, a $75 billion effort launched this month." How has the Post determined that this program will lead to large losses for Freddie Mac? Requiring Freddie and Fannie to refinance loans at lower interest rates is likely to be a loser, but restructuring mortgages in situations where homeowners can't meet current payments may actually be a net winner. The most obvious reason that Freddie and Fannie will be losing money in the near future is that they continue to make loans with regard to whether the house price is inflated by the bubble. This matters because prices will fall from bubble-inflated levels, leaving homeowners with negative equity. This situation is more likely to lead to foreclosures and short sales. Freddie could easily avoid lending for purchases at bubble-inflated prices by basing appraisals on rental values, which never became inflated, rather than sale prices. If they had applied this method of appraisal during the bubble years, the mortgage giant would not be in conservatorship right now.
--Dean Baker
