Can mortgage relief become a free-lunch stimulus?

August 5, 2010

And while we are on the topic of mortgages, I wrote this piece for Reuters Breakingviews yesterday:

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 4.50 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. 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.

2 comments

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[...] market until it was shut down by a US Treasury official Thursday. The conjecturing, helped along by Jim Pethokoukis’ Reuters blog, spooked the market for high-coupon loans (at this point, anything 5.25% and above), and could [...]

” . . . spending more taxpayer money to juice demand. . . “

This is the totally untrue “taxpayer money” claim. The U.S. is a monetarily sovereign nation. As such, it has the unlimited power to create dollars, and neither needs nor uses tax money to pay its bills. If taxes (and federal borrowing) were $0, this would not affect, by even one penny, the U.S. government’s ability to spend.
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In short, taxpayers (and their grandchildren) do not pay for federal spending.
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This is different from the situation with the states, counties and cities, which are not monetarily sovereign. I also is different from the situation with Spain, Greece and Italy, which also are not monetarily sovereign.
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I pray that one day the politicians and media will wake up to the fact that federal spending is not constrained by federal taxes or borrowing.
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Rodger Malcolm Mitchell

Posted by rodgermitchell | Report as abusive

I’m afraid you have it all wrong. While developing our farm for our retirement the massive residential building that ensued from Government incentives and wall street thieves, and Black Swan Economic Fools caused us to end up with a development that is now underwater. Also, our home that we have owned for 28 years is now worth less than the mortgage, due to our borrowing a modest amount in order to deal with government policy based problems. Bad decision you say. Poor investment you say. The real estate market will not recover and neither will our economy if we continue to bail out the thieves of wall street who created this problem along with a congress and former administration which aided and abetted the thieves. Main street is where the real economy of the US is based. Steal from main street and give it to the rich, that’s what has been done so far and I guess what you continue to advocate while hiding under the cover of budget deficits created by government and wall street. I worked both in the Marine Corps in Vietnam era and in civil service in their college summer program. My father retired from civil service GS-17. Deep sixing was standard practice when I was in the Military, and the civil service is filled with people who run their own businesses out of their government paid for office. We have a lot of waste, but it is not out here in Main Street. We work for a living. Where is Robin Hood when we need him? Get main street back to work and our taxes will end the deficit.

Posted by onthewaters | Report as abusive