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Home Publications Blogs Beat the Press Housing and Arithmetic: Why Do They Never Appear Together

Housing and Arithmetic: Why Do They Never Appear Together

Thursday, 25 August 2011 09:32
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.

Comments (6)Add Comment
worth a try
written by Peter K., August 25, 2011 11:34
Aren't the Chinese major investors in Fannie and Freddie?

I say give it a try b/c it bypasses Congress which won't pass any more stimulus.

Once the economy is running at capacity, then ease housing prices back down to trend levels.

I'm no expert so maybe Dean is right on this, but as I see it, the problem with the economy is that people need to deleverage their debt in order for demand to pick up. This would help quicken the deleveraging.
written by Bosco, August 25, 2011 12:07
What is the basis for your statement: "In fact, most of these mortgages could already be refinanced today, if the homeowners wanted to do so."

Do you have hard data to back this up?
I've worked with homeowners to help them refinance their mortgages and it's simply not that easy. Based on my experience, banks are not at all cooperative with homeowners wanting to refinance their mortgages. This includes homeowners with solid credit and steady income. The banks request voluminous amounts of paperwork, often losing it multiple times throughout the process, and interrogate homeowners like they are under investigation for fraud. Many homeowners simply give up because the processes is too cumbersome and humiliating.
Mortgage RE-FI Underwater Homeowners
written by Linda, August 25, 2011 2:10
You are dead wrong about most people with underwater mortgages can re-fi!!! The value of their property will not allow them to re-fi...duh? You have to be 125% Loan to Value...most underwater mortgages are way more than this. They need to raise the Loan to value...at least to 175%.
Banks have purposely lost paperwork for modifications. They are being called on the carpet as I write.
I only hope the taxpayers will see that their Congress person did not care enough for the banks to give something back for the HUGE bailout we are paying for...and you want to see Americans go out and spend money??? #1) Raise wages #2) DEMAND that every mortgage be re-financed #3) Term limits #4)Bring our Troops home to re-build OUR OWN INFRASTRUCTURE...they are paid already #5)Stop Bailing out 'other countries' with OUR TAXPAYER DOLLARS!
Three Quarters of mortage holders are above water
written by Dean, August 25, 2011 2:30

all the data I've seen shows about a quarter of mortgage holders are underwater. This means that three quarters are above water. Furthermore, F&F already allow people who are less than 25 percent underwater to refi. That would seem to constitute evidence that most homeowners can refi. Is there some reason to think something is preventing those who are above water or less than 25 percent underwater from refinancing?
written by kharris, August 25, 2011 2:42
OK, first, Dean didn't say that most folks with underwater mortgages can refi. He said most mortgages aren't underwater, so can refi. Bosco pointed out that lots of underwater mortgages can also refi. I would only point out that being underwater is not the only problem in getting a mortgage, and if other qualifying circumstances are relaxed along with the LTV, then it may be that lots more mortgages could be refi'd. All depends on how it's written.

As to Dean's point about one guy's mortgage payment being another guy's income - well yeah, but that sort of misses the point. Some people spend more, some less. If we move money from savers to borrowers, as would happen in a massive refi party, more of that money would be spent. If we have a little old paradox of thrift going on, then moving money from savers to spenders is just what you'd want.
Walk away
written by Alfreda Weiss, August 26, 2011 12:05
On my street in Sacramento we have been underwater for four years. My neighbor's loan required an interest adjustment, but the bank refused, foreclosed and then sold a $400,000 home (top price) for $100,000 probably to a friend. The neighbors said enough. Time to walk away. The banks and their investors will take a hit regardless. Probably the neighbor would have given the bank a better deal than the dump price they got for their foreclosure.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.