Opposing view: Don't rely on refinancing

White House/Pete Souza

President Barack Obama walks with Valerie and Paul Keller to their home to discuss the economy and mortgage refinancing, in Reno, Nev., May 11, 2012.

Article Highlights

  • A more effective stimulus policy would encourage the private sector to add 280,000 new jobs, adding $28 billion to the GDP.

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  • Despite stimulus efforts, economic recovery has been the slowest since at least WWII.

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  • Refinancing stimulus is not free – every dollar going to a borrower is income taken from a saver.

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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.

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About the Author

 

Edward J.
Pinto
  • American Enterprise Institute (AEI) resident fellow Edward J. Pinto is the codirector of AEI’s International Center on Housing Risk. He is currently researching policy options for rebuilding the US housing finance sector and specializes in the effect of government housing policies on mortgages, foreclosures, and on the availability of affordable housing for working-class families. Pinto writes AEI’s monthly Housing Risk Watch, which has replaced AEI’s FHA Watch. Along with AEI resident scholar Stephen Oliner, Pinto is the creator and developer of the AEI Pinto-Oliner Mortgage Risk, Collateral Risk, and Capital Adequacy Indexes.


    An executive vice president and chief credit officer for Fannie Mae until the late 1980s, Pinto has done groundbreaking research on the role of federal housing policy in the 2008 mortgage and financial crisis. Pinto’s work on the Government Mortgage Complex includes seminal research papers submitted to the Financial Crisis Inquiry Commission: “Government Housing Policies in the Lead-up to the Financial Crisis” and “Triggers of the Financial Crisis.” In December 2012, he completed a study of 2.4 million Federal Housing Administration (FHA)–insured loans and found that FHA policies have resulted in a high proportion of working-class families losing their homes.

    Pinto has a J.D. from Indiana University Maurer School of Law and a B.A. from the University of Illinois at Urbana-Champaign.

  • Phone: 240-423-2848
    Email: edward.pinto@aei.org
  • Assistant Info

    Name: Emily Rapp
    Phone: 202-419-5212
    Email: emily.rapp@aei.org

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