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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Good job of rumor-mongering, but the practical realities argue against anything of the sort suggested here.

Bailing out five million people underwater would create a bureaucratic nightmare. While it is easy, from the birds-eye view to wave the hand and solve the problem, those familiar with the worms-eye view know the realities.

First regulations to deal with the specific details would be required. Then, for each of the five million mortgages, a new assessment would be necessary. With a shortage of assessors, backlogs would appear immediately. Lawyers, refinancing fees, and a dozen more problems would block rapid action (recall that 5 million were to be helped by the original HARP, but it took all of 2009 to help less than 5% of that number.

So, if Obama’s team really hopes to win an election on this, they would be banking on ignorance and rhetoric, not actual help — or perhaps on the contributions made to Democrats by real estate investors getting bailed out before the post-election closing of the door. After all, investors (who are covered by HARP) would be first to handle the paperwork — the typical underwater homeowner would be last. Investors would want low-ball assessments and would know how to get them — “waste and abuse” thy name is GOVERNMENT.

As for the effect on the value of housing, my guess is it would be more likely to drive prices further south — after all, assessments would go down, down, down — and sale prices might reasonably be expected to follow.

Another rumor — perhaps provided by the wishful-thinkers (and professional propagandists) of the financing business.

Don’t bet your house on it.

Posted by fredricwilliams | Report as abusive

“That’s counter to the White House message that America needs a “new foundation” built on fiscal prudence.”

That’s not the foundation. Obama, in 2009, outlined the five pillars (not of Islam and not the seven pillars of wisdom from the Book of Proverbs in the Hebrew Bible).

Obama’s pillars are (1) regulate Wall Street while rewarding financial “innovations” (I guess he missed the role of such innovations in the Panic of 2008), (2) more government spending on education, (3) more government spending on technology and subsidies to support otherwise uneconomic sources of energy, (4) more government spending on health care, and — amazingly enough — (5) less government spending.

Nothing here suggests anything even vaguely resembling fiscal prudence.

Posted by fredricwilliams | Report as abusive