Can mortgage relief become a free-lunch stimulus?
And while we are on the topic of mortgages, I wrote this piece for Reuters Breakingviews yesterday:
Is it time for another â€śfreeâ€ť 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 â€śslam dunk stimulusâ€ť 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 bankâ€™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 havenâ€™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, thereâ€™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 4.50 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. Thatâ€™s counter to the White House message that America needs a â€śnew foundationâ€ť built on fiscal prudence.
Then again, the approach of elections in November means Washington is filled with jittery politicians who might latch onto a â€śhair of the dogâ€ť fix for a sluggish economy. Better they push themselves away from the bar.