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Home Publications Blogs Beat the Press The NYT Wants Underwater Homeowners to Throw Their Money Away

The NYT Wants Underwater Homeowners to Throw Their Money Away

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Saturday, 09 October 2010 21:21

The NYT argued for having Fannie and Freddie refinance homeowners who are far underwater. It makes the case with bad arithmetic and poor logic.

On the bad arithmetic part it tells readers that "up to eight million" homeowners would be able to refinance if Fannie and Freddie allowed underwater homeowners to refinance. This is true in the sense that 1000 would be "up to eight million." There are roughly 45 million homeowners with mortgages, more than half of whom are with Fannie and Freddie. Let's put it at 24 million. A very high percentage of the F&F mortgages were issued in the last two years at rates that were not very different from the current ones.

F&F are largely the market now. There were roughly 5 million homes purchases each year and a considerably larger number of refinancings, so let's say conservatively that 14 million of their mortgages were issued since January 2009, leaving 10 million older mortgages. All of the pre-2009 mortgages are not underwater, which makes one wonder which planet the 8 million figure came from.

Beyond this point, the NYT tells us that refinancing could free up as much as $24 billion in spending. Really? Suppose someone owes $300,000 on a home that today would rent for $10,000 a year. Let's say the politicians arrange for refinancing so that this homeowner only pays 4.5 percent on their mortgage. Throwing in taxes, insurance, and other ownership related expenses, this person will be paying around $20,000 a year for a house in which they can never plausibly be expected to have equity.

In other words, if the NYT program persuades this person to refinance and stay in their home rather than walk away and rent a comparable unit, it will cost them an extra $10,000 a year. This is money pulled out of the economy. If 1 million people are in this position then this is a formula to pull $10 billion out of the economy. If 2 million people are in this position then persuading people to refinance rather than walk would pull $20 billion out of the economy.

Both the homeowner and the economy would be much better off if this person just walked away. It is incredible that we still cannot get serious discussions of people walking away from homes even when they are heavily underwater.

Comments (3)Add Comment
...
written by izzatzo, October 10, 2010 8:40
Not to worry, Fannie and Freddie, like Bank of America, have found religion and decided to forgive the debt after the CEOs attended a Glenn Beck rally that denounced collectivism over individual freedom to walk away. Foreclosure notices have been replaced with this notice:

Romans 13:8
Let no debt remain outstanding, except the continuing debt to love one another, for he who loves his fellowman has fulfilled the law.
Why do you call that money pulled out of the economy?
written by Aditya Savara, October 12, 2010 8:27
Why do you call that money pulled out of the economy? Either a) it goes to a bank and even more than taht gets loaned out, which effectively "makes" money for the economy according to you, if I understand your position correctly. or b) the money goes to an owner and thus remains in the econoy.

Or am I missing something? Because money certainly does not disappear from the economy when someone pays interest on their loan -- that money goes somewhere.

http://www.excelwatch.com
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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.

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