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Mail
Magazine 24...
Obama’s
mass refinancing plan for mortgages
By James
Pethokoukis, the enterpriseblog
January 12, 2012
This could
be just the beginning. If President Barack Obama’s legally dodgy
appointment of
Richard Cordray to head the consumer finance agency should stick, it
may open
the door to more such actions. Here’s Jaret Seiberg of the Washington
Research
Group:
To us, the
most important takeaway from a recess appointment of Cordray is that
the
President could use this same maneuver to put a housing advocate in
charge of
FHFA.
And why is
that important? The Federal Housing Finance Agency is the regulator and
conservator of Fannie Mae and Freddie Mac. And the FHFA currently has
an acting
director, Edward DeMarco. If Obama replaces him with a “housing
advocate” via
the same recess appointment process, here’s what might happen next,
according
to Seiberg:
That could
lead to a mass refinancing program for agency-backed mortgages that
would go
well beyond the existing HARP program. That could hurt agency MBS
pricing and
result in higher financing costs going forward. Yet it also could be a
big
boost for the economy and housing going into the election.
Indeed, my
sources tell me the Obama administration has been eager to implement
just such
a plan, but needs to have its own man heading the FHFA to make it
happen. The
plan would be modeled after one originally devised by Columbia
University
economists Glenn Hubbard (a campaign adviser to Mitt Romney and AEI
visiting
scholar) and Christopher Mayer. In recent congressional testimony,
Mayer
described how the mass refinancing plan would work:
Under our
plan, every homeowner with a GSE mortgage can refinance his or her
mortgage
with a new mortgage at a current fixed of 4.20 percent or less. … To
qualify,
the homeowner must be current on his or her mortgage or become so for
at least
three months. … Other than being current, we would impose no other
qualification or application, except for the intention to accept the
new rate
(that is, no appraisal, no income verification, no tax returns, etc.).
Mayer
estimates that some $3.7 trillion of mortgages would be refinanced.
That’s
right, this would be the Mother of All Mortgage Refinancing Plans. It
would
help roughly 30 million borrowers save $75 billion to $80 billion a
year. As
Mayer puts it: “This plan would function like a long- lasting tax cut
for these
25 or 30 million American families.”
On his
website, Hubbard says the plan would have an immediate fixed cost to
the
government of $121 billion $242 billion with half that cost split
equally
between the government and lenders. And he calculates the economic
impact as
follows:
We estimate
that 72 percent of owner occupant homeowners would be eligible to
refinance at
no cost to them. Their monthly mortgage payments would fall by an
average of
$355, for a total national fiscal injection $7.1 billion each month.
The typical
borrower would reduce his or her principal and interest payments by
about $350
dollars, a total reduction in mortgage payments of nearly $100 billion
per
year.
The
macroeconomic stimulus effect should also include an additional housing
wealth
effect. At the low end of our estimates, improved mortgage market
operations
would reduce house price declines by 10 percent. With an estimated
aggregate
housing valuation of about $18 trillion, housing wealth would increase
about
$1.8 trillion relative to what it might fall to without this program.
If we
assume a relatively low marginal propensity to consume out of housing
wealth of
3.5 percent, U.S. consumption would rise by $63 billion relative to
what would
otherwise have occurred.
Combining
these estimates gives a total macroeconomic stimulus of as $118 billion
per
year in lower mortgage payments and any new consumer spending due to a
housing
wealth effect. In addition to the direct macroeconomic stimulus,
jump-starting
the stalled housing market will increase employment in a variety of
industries
that depend on housing transactions (mortgage and real estate brokers,
home
supply companies, moving companies, etc.) as well as increase the
efficiency of
the labor market by reducing impediments to households moving to take
another
job.
Bottom
line: Talk about a political and economic game changer in this
presidential
election year. Obama could offer a trillion-dollar stimulus — as
measured over
a decade –that would directly and immediately impact tens of millions
of
Americans suffering from the housing depression. Cash in their pockets.
Imagine
the electoral impact on key states, such as Florida, suffering from
both high
unemployment and devastated housing markets.
And the
beauty part for Obama? He wouldn’t need approval from Congress to do
it. Even
though many Republicans would scream that the plan would reward
irresponsible
homeowners who took on too much leverage — indeed, talk of a housing
bailout is
what launched the Tea Party movement – they probably couldn’t stop it.
And
Hubbard already has an answer to the moral hazard issue: “This proposal
requires borrowers to give up a share of future appreciation in order
to
participate. Lenders must eat a portion of the losses as well. Everyone
gives a
little bit.”
The 2012
battle for the White House is looking razor close. A mass refinancing
plan
might be enough to tip it to Obama.
Read this
article plus the White House response at Mail Magazine 24
Check out
the Mail Magazine 24 website here
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