Yes, there will be a preelection surprise, but don't bet on this one

A rumor has gone viral. From journalists to bankers, brokers, and bloggers, the buzz is that the White House is about to spring an August surprise: The Obama administration will order the two government-controlled mortgage lenders, Freddie Mac and Fannie Mae, to forgive mortgage debt owed by millions of American homeowners.

Statistics show that about 20 percent of all US homeowner mortgages are underwater. That is, about 15 million Americans have a mortgage that is greater than the current value of their house. That negative equity totals some $800 million, and the rumor has it that it will be simply waived, thereby bringing each mortgage into line with the underlying home value.

Why would such an amazingly expensive thing be done? First, it is less than 100 days before an election in which Democrats could be massacred, and second, Republicans and some Democrats in Congress refuse to spend more money on ‘stimulus.’ The $800 million presidential gift to 15 million voters would not be subject to congressional review, the same way lots of other things were done by this administration, and it would show that President Obama is “doing something” about the faltering economy.

My take:

I don't believe this rumor. It isn't that I doubt the willingness of government to do something blatantly unfair. It's that I doubt the government's willingness to damage its glimmering chances of staying in power.

Yes, lots of reckless home owners would be grateful for the mortgage bailout. But even some of the beneficiaries would see this as unfair. And there are two other groups of people who could explode in rage - those who have behaved sensibly and do not have underwater mortgages and those who have no mortgages at all.

They would see their tax money handed out to people who have behaved recklessly while they get nothing.

With a portentous election less than three months away, this would not make sense for the Democrats.

By spreading the rumor, however, the Democrats can later announce grandly that, yes, some people had talked about bailing out underwater mortgages, but that wasn't going to happen and there had never been any chance that it would happen.

Among sensible voters, this might even pick up a few votes for the Democrats.