If I was still getting my paper copy of the NYT this article on the Obama administration's plan to allow more refinancing of Fannie and Freddie backed mortgages would have had me tearing it to shreds. The article refers to plans to allow easier refinancing for people who are now underwater or have bad credit. The piece tells us that refinancing could save homeowners lots of money:

"by one estimate, $85 billion a year."

It sure would be nice to see the name of the person who could be hanged with this estimate. According to the piece, Fannie and Freddie back $2.4 trillion in mortgages that have interest rates over 4.5 percent. If all of these mortgages were refinanced and the average saving was 1.5 percent, this would save homeowners $36 billion. This is just over 40 percent of our $85 billion estimate.

In fact, most of these mortgages could already be refinanced today, if the homeowners wanted to do so. Removing the obstacles for underwater homeowners or homeowners with bad credit would be unlikely to allow even one quarter of these mortgages be refinanced, providing a net savings of less than $9 billion.

If we look at the economic impact, we have to also remember that the interest payments were income for some people. The investors on average are certainly much richer than homeowners, but they would still spend some portion of their interest earnings. If we assume a 40 basis points gap in marginal propensities to consume (e.g. homeowners consume 90 percent of their additional income, investors consumer 50 percent) then the net boost to consumption from this measure would be less than $4 billion a year or 0.03 percent of GDP. 

The article discusses concerns that house prices are continuing to fall. Actually we should expect house prices to continue to fall, they are still close to 10 percent above their long-term trend. If there is a reason that we should expect house prices to stay above this trend, the NYT has never bothered to run a piece on it.

Finally, the piece includes comments from Frank E. Nothaft, the chief economist at Freddie Mac. Mr Nothaft made himself famous for repeatedly asserting during the bubble years that nationwide house prices never fall. If he has ever been right about anything connected with the housing market there is no record of it.

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