The Politics of Four Percent Mortgages
In the midst of the recent stimulus debate, an innovative Republican proposal emerged that would allow banks to refinance mortgage loans at fixed interest rates as low as 4%. But if you missed it, it’s understandable. It was immediately killed by the Democratic majority and essentially ignored by the mainstream media. However, since late December, the Federal Reserve has been pushing mortgage rates lower, both through the purchase of mortgage-backed securities and by providing more capital to Freddie Mac and Fannie Mae. Rates for qualified borrowers fell from 6% to 5% in barely three weeks and have remained at that low level.
So will mortgage rates fall to 4%? And should they? And why exactly was that Republican proposal defeated?
First, let’s be clear as to how much money falling mortgage rates can put in consumers’ pockets. The average home price is about $200,000, and let’s assume that entire amount is financed with a 6% mortgage. A reduction to 4% would save the homeowner $4,000 in interest costs every year. Multiply that by the 85 million homes in America and we get $340 billion in interest savings.
And this isn’t a one-time economic stimulus. That $4,000 is a permanent reduction in household expenses that the borrower can rely upon, as long as they continue to make their mortgage payment. Imagine the boost that could provide to the economy and the pressure it could take off America’s cash-strapped families. It may even jump-start the new home sales market.
If a straightforward mortgage rate reduction that puts $340 billion in homeowners’ pockets every year and could slow or stop further housing declines sounds like a simpler and better alternative than the $787 billion of phony tax rebates and pork barrel spending that was just passed by the Democratic Congress, then you’re probably starting to understand why this Republican alternative wasn’t widely debated.
What’s even more egregious is that as the massive spending bill was being written in marathon backroom deal-making sessions, President Barack Obama continued to make the false claim that Republicans wanted to do nothing in the face of the crisis. This proposal for lowering home mortgage rates was just one of many alternatives that was introduced by the Republicans, including Senator Lindsey Graham’s package of personal and corporate tax cuts.
The mortgage rate reduction proposal was killed, not because Democrats didn’t agree with it, but precisely because it was a reasonable alternative that could have sparked intelligent discussion on the best way to improve the economy. When you’re trying to push an $800 billion spending spree through Congress in the dead of night, the last thing you want is an intelligent discussion. But the fear mongering and false choices worked and the stimulus bill was passed. Where does that leave interest rates? Falling quickly most likely. Now the Democrats need the economy to recover to ensure a 2010 reelection, and the easiest way to do that is to keep interest rates and mortgage rates as low as possible.
However, the Democrats have a problem. Lower interest rates don’t help everyone equally. If you have a million dollar mortgage, then a 2% mortgage rate drop will save you $20,000 per year. But if you only have a $100,000 mortgage, then the savings is just $2,000. And you only receive the reduction in mortgage rates if you are able to refinance your loan. If your credit is bad, or you have no equity in your home or cash to bring to the table, then you’re out of luck. Your only hope is that someone else with good credit may be able to use that 4% mortgage rate to buy your home and take it off your hands at a reasonable price.
Thus, the availability of lower mortgage rates is a benefit that encourages and rewards financial responsibility and helps wealthier borrowers the most. What’s wrong with that? If you’re a liberal, everything. Free markets are unfair, we’re all victims of evil corporations, America’s racist, etc. This ideology leads directly to the latest mortgage relief plan, a well-intentioned mess that encourages borrowers to cry poverty to their lenders and then understate their income in order to get the largest government subsidy.
But while we scratch our heads and wonder why the so-called intelligentsia can’t understand basic concepts like financial responsibility and incentives, the good news is that as the mortgage relief package stands now, 90% of homeowners won’t be eligible to take advantage of it. So let’s get back to lower mortgage rates.
The Wall Street Journal has published two Republican op-eds on the subject recently, one titled “Low-Interest Mortgage Are the Answer,” by R. Glenn Hubbard and Christopher J. Mayer, and a second titled “The GOP Has a Dumb Mortgage Idea,” by Ed Glaeser. Just from the titles you may have guessed that we don’t quite have a consensus.
Hubbard and Mayer’s viewpoint is pragmatic. Now that U.S. treasury rates are at historic lows, why not use some of this capital to benefit U.S. homeowners? They argue that lowering rates will help stabilize falling home prices and put more money into consumers’ pockets, and also provide a nice boost to the mortgage industry. This is most likely the route that the Federal Reserve and the Obama administration will take: giving Americans mortgage rates of 4.5% or perhaps even 4.0% later this year.
Ed Glaeser’s argument is that government intervention helped create this mortgage mess and we shouldn’t expect more intervention to get us out. That’s a principled criticism, but if you take that line of thinking too far, you’re arguing against the Federal Reserve and its ability to set key interest rates and manage the money supply to regulate inflation and fight recessions.
Still, his piece does raise important questions as to whether politicians can be trusted to have their hands on the controls on the $10+ trillion mortgage market, especially given their failures with regulating Freddie Mac and Fannie Mae. There’s no indication that they’ve learned any lessons and certainly no admission of responsibility.
Refinancing mortgages to 4% is only effective if the new loans make economic sense. If, instead, we just put more people in houses they can’t afford using taxpayer subsidies and guarantees, we will have squandered one of our best tools to lead a recovery and merely exchanged one crisis for another.
What gets me is not that it got killed, nor that the MSM didn’t cover it. What gets me is that the Pubs never marketed it. In their usual feckless manner, they made no noise. How about staging a Congressional Republican march on the Whitehoouse in protest and demanding Obama put on pressure to make it happen? Just the same bunch of over-the-hill, unadaptable guys who cannot think in any new ways.
Democrats have become Socialists, and Republicans have become Democrats. They’re crooks and senile old men. I hate all the Congresscritters.
Re-financing to lower mortgage requires an re-appraisal of the home. If you have a $200k mortgage on a house that will only appraise at $150k (or lower, as is the case in some areas of FL, CA, NV, AZ….) then you can’t refinance unless you bring the missing $$ to the table, or the bank forgoes it– which would be a form of cramdown. Either way it’s a haircut for the lender.
Did the Republican plan allow for refinancing without re-appraisal? If so, then existing mortgages could be rewritten on the principal balance at a lower rate– keeping more people in their houses with more money in their pockets. However, they’re still paying down a price that exceeds what the property is worth- more than what they (or the bank) would get selling it. Unless housing prices recover, as best all you’re doing is delaying the day of reckoning.
There is nothing in a 4% mortgage for the democrats. There is nothing in it for folks that refuse to pay on their mortgage.
The spread is very strong.
Sigh…once again it is manifestly apparent that our system is set up solely to reward middlemen.
If you give a bum $20.00, he gets $20.00.
If you give a guy $20.00 to give to a bum, you can expect him to keep half of it, so now the bum only gets ten bucks.
A guy who can pull double sawbucks voluntarily from complete strangers has himself a valuable skill, so it makes sense for him to circulate among people with surplus twenties, and sub-contract the disbursement to people who hobnob with bums.
So the guy you gave twenty to keeps 10, hands the remaining ten off to the bum collector, and that guy keeps half, and the bum now only gets $5.00.
The point is that if the Fed thinks it is desirable to lower interest rates and subsidize real estate property values,then why don’t they just do it directly themselves, and tell the mortgage companies and investment banks to go piss up a rope?
Let the Fed get directly into the mortgage underwriting business.
If I’m giving twenty, I want the bum to get the twenty.
And if I’m a bum and I know some guy has forked over twenty for me, I don’t want to see $15.00 of it disappear.
I want that twenty.
Seven is right, but LwC is only partially correct. In the immediate picture that is true, but there is a way out of it. When Zero turns us into Zimbabwe and the inflation goes up and the dollar value goes down, those losses will be recouped albeit with devalued dollars. The answer is to continue the difference at the current rate so that the $200K mortgage becomes 150K at 4% and 50K at 6% with all principal payments going to the 6% mortgage. If the house is sold then the owner might need to come up with dollars, but as long as they are in it and making payments they will do fine awaiting Zero’s inflation.
MARC MALONE
#1
Spot on,brother !
1. Marc Malone:
Feb 28, 2009 – 2:23 am
That nails it. I knew I could not stand the repubs any longer – that’s why. They have an occasional good ideas, but no idea how let the American public know their ideas. Idiots all of them.
The direct stimulus would be less, because of the foregone mortgage interest deduction on taxes (which, of course, also reduces the cost to the feds).
Sounds good to me.
As to the ‘Pubs not marketing it – how do they do that in this hostile media environment?
Democrats will kill any idea that is good for the private sector. They are all about total control of you and yours.
They are in full lock down America mode……..
It’s a tremendously stupid idea and everyone knows it (except for innumerate PJM article writers and their dittohead brigade of unthinking ungulates.)
The problem isn’t mortgage rates except for those who got tricked into rapacious ARMs. The real problem is that housing values are less than what far too many people owe on current mortgages. The bailout deal was a way to try to keep these people from walking.
#2 LwC is correct. Solve the housing value problem, not the symptom.
Forcing interest rate artificially down to 4% is a repeat of the mistake that the Fed made earlier in the decade. They would effectively be printing money to push down the rates. That will just reflate the housing bubble. Let the market set the interest rate and not central planners in DC.
G. Alston is an ignoramous who wants to repeat the New Deal mistake of using government action to prevent the market from clearing. The problem with housing prices isn’t that they are falling but they were out-of-line with economic reality to begin with. Let the price fall so more people can afford to own a home without resorting to risky finance deals. And G, nobody forced anybody to take out an ARM. ARM loans were used by greed consumrers who wanted to buy a big house that they couldn’t afford and by speculators hoping to flip the house. Both were playing the lesser fool game where they would be able either sell or refinance on ever increasing prices.
There are many good ideas out there that are not getting the lights of day. Such as “Who the Mortgage Rescue Plan Won’t Help and Why That Stinks for the Economy” — http://www.associatedcontent.com/article/1518722/a_surfers_take_who_the_mortgage_rescue.html?cat=9
#11 — G. Alston is an ignoramous who wants to repeat the New Deal mistake of using government action to prevent the market from clearing.
Reading comprehension isn’t your strong suit, is it, zippy? I’m typing this really s-l-o-w for you: Understanding the intent of a bailout isn’t endorsement.
What I said was that 4% loans don’t solve the problem. I didn’t say that a bailout would. I said that a 4% loan wouldn’t. Face it, third graders read better than you do.
“And G, nobody forced anybody to take out an ARM. ARM loans were used by greed consumrers who wanted to buy a big house that they couldn’t afford and by speculators hoping to flip the house.”
ARMs weren’t the big problem and never were. But you keep repeating that and maybe it will come true.
Does mommy know you’re on her laptop?
One wonders if we can establish which came first…the easy credit or the real estate value bubble.
And let’s be honest, the prime motivation in any home purchase is how far one can afford to get from the ghetto/projects/slums/trailer parks.
Which leads me to recall the Housing voucher program of the early and mid-90′s.
I recall when the Dep’t of Slumlords decided to implode the high-rise “LBJ Vertical Memorial Ghettoes” in downtown Baltimore onthe I-83 corridor.
The Dep’t of Slumlords came in and gave every resident of those projects a housing voucher equal to what the working class could afford to spend on housing.
Result?
Many of the hoi-polloi moved out to Columbia, Maryland, (a late ’60′s-early ’70′s “planned community”)…and now “Old Town” Columbia is a less-than-desirable zip code in which to reside.
It bears thinking about…
Does anyone else have 4-1-1 about the effects of similar impacts of the Housing Voucher Programsin their own local metropolitan areas?
G. Alston:
Perhaps you should re-read your own words:
“The problem isn’t mortgage rates except for those who got tricked into rapacious ARMs.”
My comment on ARMs is directed at your claim that ARMs were foisted on poor little borrowers.
You didn’t say the bailout would? Let’s feed some more words back to you.
“The real problem is that housing values are less than what far too many people owe on current mortgages. The bailout deal was a way to try to keep these people from walking.”
Sounds like at least a weak endorsement to me. Perhaps you are unable to comprehend the meaning of your own words. If you did not want to give the impression that you were endorsing the bailout then perhaps you should have said that the “intent of the bailout…” and you thought that it was a bad deal. By contrasting the bailout to the 4% as written you gave impression of endorsing one over the other..
The purpose of the 4% deal is not to help people who can’t pay their mortgages and/or are underwater. It is designed to increase disposable income. If you read my comment closely you would see that I opposed having the Fed set artificially low interest rates.
Seems like you are projecting your own lifestyle on to others.