White House/Pete Souza
- A more effective stimulus policy would encourage the private sector to add 280,000 new jobs, adding $28 billion to the GDP.
- Despite stimulus efforts, economic recovery has been the slowest since at least WWII.
- Refinancing stimulus is not free – every dollar going to a borrower is income taken from a saver.
The Federal Reserve continues its efforts to lower interest rates and the administration keeps expanding mortgage refinance programs, all in an effort to promote more lending. One result has been 14 million residential refinances since 2009.
Despite these efforts, the economic recovery has been the slowest since at least World War II. Given the underwhelming impact of taxpayer-funded stimulus, refinances have become the stimulus of choice. This approach, however, will not address the problems facing our economy or the housing market.
Refinancing stimulus is not free. Every dollar going to a borrower is income taken from a saver. Savings come from retirees, pension funds and families saving for college. To paraphrase Winston Churchill, to create prosperity by redistributing wealth is like standing in a bucket trying to lift oneself up by the handle. What's more, most borrowers are left with mortgages that will still be underwater for many years.
Jobs create demand for housing, not the other way around. While the 14 million refinances have saved borrowers about $28 billion a year, the stimulus effect is weak because income is being redistributed. A more effective policy would be encouraging the private sector to add 280,000 new jobs, resulting in a $28 billion addition to GDP. Better yet, set a goal of 1 million new jobs per year. Start with a revenue neutral reduction in our corporate income tax rate (currently the highest among developed countries), allow the use of our own and Canada's energy resources, and repeal Obamacare.
With respect to severely underwater borrowers who have been paying on their mortgages, a narrowly targeted approach that addresses the underwater problem makes sense. There are 1.5 million such Fannie Mae and Freddie Mac borrowers. These borrowers have already been paying their mortgage for an average of five years. Fannie and Freddie should unilaterally modify these loans from their current rate of about 6% to today's rate of 3.25%.
Rather than reduce the monthly payment, the savings from the lower rate would go to pay down the loan, thereby addressing the underwater problem. This approach could be done quickly on a mass basis with little or no borrower fees. Losses would be reduced for Fannie and Freddie (i.e., the taxpayers). It is fair to bond holders who benefited from a taxpayer bailout. These loans are in mortgage backed securities issued before the bailout.
Edward Pinto is a resident fellow at the American Enterprise Institute.