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Thursday, Jun 20, 2024

No-Cost Stimulus: Reward Virtue With Mortgage Refis


fter spending more than $600 million on a first stimulus program, the Obama administration is telling the nation that we need a second package to help the weak economy and avoid a possible double-dip recession.

However, there is a growing consensus among the public and within Congress that the country cannot afford to continue taking on huge levels of debt and that the stimulus might have little long-term benefit in any event.

Short-term interest rates, which the Federal Reserve controls, already are near zero. But that does not seem sufficient to create growth or bring down unemployment at an acceptable rate.

After the 2000 dot-com crash, interest rates were slashed and we were able to get out of the recession in relatively short order.

This time it is not working.

True, the low interest rates are helping corporate profits and benefiting borrowers who can get financing. But it is not having anything like the effects after the 2000 recession.

The difference in our current situation is that we largely are lacking an “actuator” that translates the lower interest rates into economic activity.

For the 2000 recession and most other recent recessions, the actuator was the housing market. Low interest rates stimulate home building directly. They also tend to create waves of mortgage refinances, which lower people’s monthly payments and provide cash for consumer spending to help the economy to recover.

Mortgage rates now are at their lowest in decades but causing little action. Why are we not having a nationwide refinance boom?

It’s because a sizable percentage of the population does not qualify under today’s lending standards.

What can be done?

The government could instruct Fannie Mae and Freddy Mac, the quasi-government agencies that guarantee close to half of all mortgages in the country, to ease their underwriting requirements. This probably should be done, but would be of only slight help at the margins.

Consider a radical idea. Everyone who has an existing mortgage guaranteed by Freddie or Fanny, and who is current on their payments, is automatically pre-qualified for the guarantee of their mortgage refinance for an amount not to exceed their existing mortgage.

It wouldn’t matter if their house is worth less than the current mortgage, that they don’t meet the normal income requirements, can’t prove their income or meet other standards.

The government is already on the hook with their guarantee if the mortgage defaults. Allowing them to have a new mortgage for the same or lower amount does not increase the government’s risk one iota. In fact, the lower payments associated with the refinance would lower the risk of a future default.

Such a policy would create a refinance boom which would stimulate the economy at little or no net cost to the government. It would have the additional benefit of rewarding those who have had the fortitude to continue making their payments through these tough times.

There are a number of policy changes such as this that could stimulate the economy without creating vast amounts of government debt.

Saunders is a real estate investor and owner of London Coin Galleries Inc. in Newport Beach.

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