Moneybox

Obama’s Mass Refinancing Plan Could Boost the Economy

Has the Obama administration finally hit on a job-creation idea that could be a game-changer? It’s not clear how big an overall impact it would have, but the new proposal on mortgage refinancing could—if implemented—break a long-standing deadlock in the housing finance market and provide a significant boost to a “recovery winter” scenario.

One major channel through which the kind of low interest rates prevailing today normally help spur economic recovery is that people refinance their mortgages which increases the amount of money they have free to direct toward other things. Indeed, I myself am currently going through the process of refinancing my mortgage. It should end up saving me a few hundred bucks a month plus reducing the life of the loan by a year. Unfortunately, many people currently can’t refinance their loans because their mortgage is “underwater.” What they owe is more than what the house is worth. This becomes a bit of a recursive issue. Unless economic activity (and therefore incomes) revive, it’s difficult for house prices to do anything other than go down. But the low house prices are impeding refinancing—one of the main tools we rely on to boost economic activity. The good news, however, is that Fannie Mae and Freddie Mac are now officially instruments of the U. S. government meaning that in principle the regulatory agency that oversees them could just order them to go ahead with a plan for large-scale refinancing of underwater mortgages. The bad news is that Edward DeMarco, acting director of the Federal Housing Finance Agency, has chosen to take a very literal view of his statutory mandate such that his job is to make money for Fannie and Freddie rather than serve the broad public interest. 

Thus, Obama’s plan which is basically to sweeten the pot:

The proposal, which the president mentioned in his recent State of the Union address, is likely to spur debate over how aggressively the government should intervene in the flagginghousing market. Also at issue: how to fund the effort’s estimated $5 billion to $10 billion price tag. The White House is proposing a tax on large banks—something Republicans have said they oppose.

The president is expected to set out the proposal Wednesday at a community center in Fairfax, Va., a Washington suburb.

Raising this rather piddling sum through a bank fee is a fine idea on the merits. Then again, so would raising this rather piddling sum by borrowing more money. The real interest rate on 10-year bonds is negative 0.28 percent so it’s not as if we’re up against some hard borrowing constraint. But politics dictates the White House pay fealty to deficit concerns and jam-up the Republicans with a pay-for that they’ll block. It seems like smart politics—House Republicans are standing in the way of you refinancing your home out of fealty to the interests of the bankers who broke the economy—but I’d love to see the GOP do the unexpected and just agree to do this. Here’s Glenn Hubbard, conservative Republican in good standing, along with some co-authors (PDF) touting the macroeconomic benefits of refinancing.