There’s a little voice you might have heard, the one which says it’s great that the government is trying to help people facing foreclosure but what about you and me? After all, we’d like lower monthly mortgage payments too.
For instance, in July the typical borrower helped by the Making Home Affordable program was paying $513 less for their mortgage, a 36 percent decline. That’s good, it means there will be fewer foreclosures in the neighborhood and therefore less pressure to force down the price of local homes.
And yet there’s that little voice. As much as I like my fellow citizens, why can’t the government help you and me save some mortgage money each month? In fact, such an idea is now on the table.
They just had a big meeting in Washington to discuss the future of housing finance and there it was suggested that the government should have a program to refinance all mortgages — including those which are performing — down to current rates, about 4.42 percent as this is written.
According to Shahien Nasiripour with the Huffington Post, the suggestion comes from Bill Gross, head of the $239 billion Total Return Fund and a well-respected financial observer.
The government could do this. For example, in 2008 Washington set up the $700 billion TARP rescue plan to assure the stability of the financial system. The government says $194 billion spent under the program has been repaid, $190 billion remains outstanding and $316 billion was never spent. Huge sums remain available under the program, even more if the GM IPO goes through and Uncle Sam gets a fat check from the proceeds.
Higher Home Prices
According to Reuters, a general refinancing such as that proposed by Gross would have the potential to raise home values by 5 to 10 percent. Does anyone see anything else on the immediate horizon which might generate such results?
“A program which would produce a general increase in home values has enormous importance,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com. “Across the country home values have been down more than 12 percent since April 2007 and far more in the major foreclosure areas. It’s hard to imagine a more popular federal effort at this time.”
Higher real estate prices are not only a big deal to homeowners, they’re also important to lenders. Right now we have huge numbers of mortgages on lender books that if valued on the basis of real-world property sales would represent massive losses. To stop this problem the government literally changed the accounting rules to keep up the appearance of higher asset values.
Why? Because the mortgage inventories in most cases are not actually being sold. If they’re valued at today’s discounted levels lenders would have to increase capital reserves and reduce lending. Share values would fall. Higher real estate values would resolve the asset problem without accounting sleight-of-hand.
But wait, there’s more….
The gross domestic product at this time is about $14.5 trillion annually. If interest rates are lowered on millions of home loans consumers will have more money to spend (and more money to pay down household debts).
More than 70 percent of all economic activity ($10.3 trillion) is in the form of personal consumption. By lowering mortgage interest costs, personal income would increase and that’s good because personal consumption is the major engine which powers the economy. The money added to the economy — about $50 to $60 billion according to Reuters — would not be just the dollars saved from lower mortgage rates, it would be more because of what economists call the “multiplier” effect. The result of cutting home mortgage rates would be a magnified economic stimulus, something that would create more jobs, disposable income and tax revenues at precisely the time when they’re needed.
One of the oddities of a general mortgage relief program is that it would increase federal revenues. This would happen because mortgage interest is generally deductible. Lower mortgage rates would create smaller interest costs and that would mean less to write off. Uncle Sam would see bigger tax payments in April, money that could be used to replace TARP funds used for mortgage relief.
The Taking Clause
Let’s imagine that with a wave of the federal wand all mortgages in the US are re-set to 4.45 percent, fixed, for 30 years — or fewer years if individual borrowers prefer.
Unfortunately the government cannot simply order loans to be refinanced. Mortgages are assets owned by institutions, pensions, insurance companies and individuals. Lowering the interest rate means less income to mortgage owners and therefore a reduction in the market value of the loans.
This is where the “taking” clause of the Fifth Amendment comes in. It says private property cannot be taken for public use without just compensation. In other words, the government can take private property — the excess contract interest rate in this case — but only if it pays fair market value for what it grabs. Given the unused portion of the 2008 TARP account this should not be a problem.
The idea of a massive government program to lower mortgage rates nationwide seems unlikely if only because it’s never been done. That said, three or four years ago the idea of a Wall Street Reform Act and the establishment of a federal agency to represent consumers would have been regarded as equally implausible. Perhaps with elections looming someone in Washington will hear a little voice.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.