How Would Forgiving Mortgage Debt Affect Obama and the Midterms?

The Internet has been abuzz today with rumors of a plan by the Obama administration to order Fannie and Freddie to forgive some debt on underwater mortgages (in which homeowners owe more than the value of their homes), reported--meaning the Wall Street rumor of which was reported--by Reuters' James Pethokoukis.

Given that we're in the territory of rumors, it's time for some rumor-based speculation. The question on which to speculate is obvious. How would all this affect the midterm elections?

The first time President Obama lent a hand to struggling homeowners, he and his party endured enormous political backlash.

In February 2009, Obama announced his mortgage-relief plan, the crux of which was to 1) allow the holders of underwater mortgages backed by Fannie and Freddie to refinance those mortgages at lower rates and 2) incentivize banks to let homeowners refinance under a set of guidelines the banks would have to follow if they were to receive government assistance.

In response to that plan, CNBC's Rick Santelli politely suggested that he didn't want to pay for his "loser" neighbors' mortgages, and that bad mortgages should be tossed into lake Michigan, a la the Boston...Tea Party. I've typed the words "tea party" enough times since February '09 that I won't belabor the consequences of that rant, but I will say this: that mortgage plan was the straw that broke disgruntled conservatives' backs, following the Bush/Paulson-led TARP bailout, Obama's stimulus, and the multi-step auto bailout that began in 2008. It catalyzed and gave form to a movement that probably would have happened anyway, but it catalyzed and gave form to it nonetheless.

So we know how measures to help mortgage-holders, banks, and automakers play with voters in this era. Those efforts are appreciated by the left, and they are scorned with fire and brimstone by their more enthusiastic critics.

Giving people free money is usually a good way to win an election. President Bush promised everyone a modest, $300 tax rebate if they voted for him in 2000. It worked. But now, perhaps more than ever, free money is criticized quite loudly.

Obama's approval rating now sits at 44.5%, vs. 51.5% who disapprove, on average. That approval rating was forged through the difficult process of writing and passing a massive health care law, not through the early days of the stimulus, mortgage plan, and auto bailouts, when the new president remained wildly popular.

So it may not change his approval, and it probably won't change the difficulty of going to swing districts where he isn't popular, to campaign for his fellow partisans. In close House races, it will probably be labeled another "bailout" by Republican candidates and generate some noisy opposition, while Democrats support it as a sensible measure to help working people.

It will resurrect a debate from early 2009, but its net effect may be zero.