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Proposal to Refinance Loans for Millions

Posted on | September 7, 2011 | No Comments

President Obama is scheduled to give a speech tomorrow to Congress.  Originally, it had been set for today but Boehner felt it might impede with the previously scheduled Republican Presidential debate.  I guess this is part of the insidious Republican plan to do as little as possible for the millions of people unemployed until Obama is out of office.

I don’t expect that Obama speech will offer anything new.  I expect him to announce aid for the unemployed, continuation of the payroll tax cut, aid to state and local governments and hopefully some much need spending on infrastructure.

What I would like to hear announced though is a mandate for Fannie Mae and Freddie Mac to allow refinancing of loans they own or that they are guaranteeing.  This of course would include my loan.

One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.

“This is the best stimulus out there because it doesn’t increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing,”  said Christopher J. Mayer, an economist at the Columbia Business School. “So I think this is low-hanging fruit.”

You can read the full article here.

Why do I think it is a good idea?

First, Refinancing would remove the liability. As it stands now, my loan is a non-recourse loan also known as a purchase loan.  If I choose to default on it, the bank cannot come after me for the deficiency.  Yet, if it a government backed loan Fannie or Freddie will have to compensate the investor for the loss.  (I’m still researching the details on how exactly this works.)

Second,  refinancing would reduce foreclosures and distress sales.  After a refinance, the loan is no longer a non-recourse loan and I would be liable for the full amount.  If Fannie or Freddie want back the refinanced loan they will just come after home owner for the deficiency so they are covered.  This would give myself and other homeowners a further incentive to continue making payments.  Additionally, at 4% rate a homeowner would hold on to the home and just find a tenant instead of defaulting.

Third, refinancing would give home owners extra money to spend and help kick-start the economy.  As you can see from this graph there are billions of dollars that can be refinanced.  I along with millions of other homeowners would have additional money to spend to further stimulate the economy.  The article states that as much as 85 Billion dollars a year would be freed up.

A mass refinancing plan would spread the benefits of the Federal Reserve’s most important economic policy response, low interest rates, to more people. As of July, an estimated $2.4 trillion in mortgages backed by Fannie and Freddie carried interest rates of 4.5 percent or higher.

Fourth, the investors that fronted the money initially would be repaid.  They would then have to go out and find another investment.  They would be able to extend credit to small business or find other investments further stimulating the economy (or do nothing and earn close to a zero return on that money)!

Fifth, refinancing will keep homeowners paying higher property taxes.  In some states, property taxes are set as a percentage of sale price.  If a home goes back to the bank and gets resold for less the property taxes due are diminished.  Refinancing the loan will not change the property taxes due.  On the other hand, distress sales will cause property taxes to decrease temporarily.  Higher property taxes can be used put teachers back in the classrooms and police back on the streets.

Finally, the Federal government will gain tax revenue.  One of the culprits that contributed to the housing crisis is that our current fiscal policy allows for people to deduct mortgage interest paid on primary and secondary homes.  Everyone I know who has had a mortgage raves about the deduction as if it is a gift.  They pride themselves of getting a tax break as a result of being homeowners.  (I think it just enables prospective homeowners, abetted by realtors, to bid prices that much higher so their is no net benefit.  Without the deduction potential buyers have less disposable income which would mean offers would be lower and ultimately prices wouldn’t not have gotten out of control.)  Remember the $85 Billion a year that current homeowners would save on interest paid to investors/banks/government through MBS purchased?  Homeowners would no longer claim $85 Billion worth of mortgage interest on their taxes.  Let’s for example assume that collectively, the homeowners are in the 25% federal tax bracket.  That equates to about $21 Billion in additional tax revenue for the Federal government!

This is a slam dunk.  President Obama, we need you to make this change!



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