U.S. should shun hair-of-the-dog housing plan

August 4, 2010

Is it time for another “free” lunch? One Wall Street idea to boost U.S. growth is for the government to loosen rules so millions more Americans can refinance mortgages, thereby freeing up cash for spending. A desperate Washington might be tempted, but should think twice. It’s too reminiscent of how the economy first fell into trouble.

A top Morgan Stanley economist ran the “slam dunk stimulus” plan past the Senate Budget Committee on Tuesday. With the political mood making it almost impossible to contemplate spending more taxpayer money to juice demand, the bank’s economists are suggesting a different route to a stimulus — namely having government-run mortgage lenders loosen the refinancing rules on 37 million mortgages they currently guarantee. That would open the door to many homeowners who haven’t been able to take advantage of the current low interest rates because they owe more than their homes are worth, are unemployed or have low credit scores.

The logic is that with the government already on the hook for these loans, there’s nothing to lose from dispensing with any creditworthiness criteria for refinancing. The median interest rate on the mortgages concerned is 5.75 percent. These loans, the thinking goes, could be refinanced to around 4.5 percent. The 125 basis-point reduction would leave a borrower with a typical $200,000 mortgage better off to the tune of $2,500 a year. If, as Morgan Stanley guesstimates, half the affected homeowners took advantage of this, they would collectively have an extra $46 billion a year burning a hole in their pockets.

One problem is that the government has already tried to streamline the refinancing process with little success. Another is figuring out who would pay any associated fees. But most importantly, the whole idea seems like a deliberate re-creation of the super-cheap credit and lax lending standards that led to the financial crisis in the first place. That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.

Then again, the approach of elections in November means Washington is filled with jittery politicians who might latch onto a “hair of the dog” fix for a sluggish economy. Better they push themselves away from the bar.


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The PTB are getting desperate. The Ponzi scheme is coming to an end. This might be one of their last gasps.

It’s really aimed at saving the banks, not the homeowners. Strategic defaults are increasing. The problems with foreclosures – missing original loan docs and servicer standing – are become more well know. Imagine the trouble that could be made for the banks if people realized they get to stay in their home for free for months if not years? The refinance will be recourse, with debt collection through the IRS, and will waive any previous documentation issues. They might try to get this by with most people not realizing all of this…

Posted by traderjoe10 | Report as abusive

The other problem with this is it would be yet another reward for people who demonstrate irresponsible behavior. While I have great sympathy for those who have lost their job or are underwater on their mortgage due to “collateral” damage in the housing market, this idea would also reward those who purchased homes that were blatantly overvalued or have racked up too much debt living beyond their means.

If the government is going to give out handouts, why don’t they give me a 2% mortgage. The money I save will go right back into the economy, I promise. I’ll also spend within my means and keep my financial house in order. When will it be my turn to be “stimulated”?

Posted by URKiddinRight | Report as abusive

If I was not a victim of Mortgage Fraud, by Bank of America. If I was allowed access to my equity, in October 2008, I would have refinanced with cash out, lowered my mortgage payment, lowered the interest rate, paid more to principal, had cash, and would not have noticed the recession.

I guess only powerful Senators receive special refi deals.
and the rest get pain and suffering.

Posted by Christian73106 | Report as abusive

If done right it would not be a handout. The banks that loaned money on a first and second for the purchase of the house have been collecting high interest payments for years and now that the same house is underwater it gives them the excuse to not refinance to consolidate the loan at current rates. Instead of making these loans to people who are behind they should be doing it for the ones who have continued to meet their obligations on time each month.That break in interest would allow many to keep their homes and continue to pay on the loan until housing starts back up again.Which it has always done

Posted by rebareater | Report as abusive