January 10, 2012
Every few months there is a mini-frenzy around the idea of allowing more people to refinance their mortgages. Today Ezra Klein picks up the cause in his Post column. This is a good idea, but the notion that this is going to provide some major boost to the economy is just silly.
The main reason is that there just are not that many homeowners tied into high cost mortgages who are going to be induced to take advantage of a refinancing opportunity. The story is that we have millions of homeowners who are badly underwater and therefore will not be able to meet normal refinancing criteria. However, the numbers who are being precluded from refinancing for this reason are likely relatively few at this point.
Fannie Mae and Freddie Mac had a policy for several years of allowing people to refinance who had mortgages that were up to 125 percent of their home value. This probably accounts for close to half of the 12 million or so underwater homeowners. Of the roughly 50 percent of mortgages insured by Fannie and Freddie, it is likely that a greater share are in the under 125 percent group, since they generally did not get the worst mortgages.
In September, President Obama persuaded the Federal House Finance Administration to remove this cap, allowing anyone with a Fannie or Freddie backed mortgage to refinance no matter how much they are underwater. Undoubtedly many people are taking advantage of this opportunity as refinancing has been very strong through the fall months. (Mortgage refis tend to run around 700k to 800k a month.)
Suppose that there were 3 million homeowners with Fannie and Freddie loans that were too underwater to be able to refinance before the change in policy in September (half of the roughly 6 million mortgages that were more than 125 percent underwater). Suppose roughly a quarter of the monthly refis over the fall were from this group, which would mean that 800k have already refinanced leaving another 2.2 million.
Of this group, some number may have plans to sell their homes or for other reasons not be interested in refinancing their mortgages. Of course some would refinance even with no change in policy, but they just have not gotten around to it. Anyhow, let’s suppose that that full court press gets 2 million of these people to refinance over the next 4 months. If we assume an average mortgage of $250k (the average house price is around $225k and the median is a bit over $160k), and we assume average savings of 2 percentage points on the new mortgage, this frees up $10 billion a year.
If homeowners spend 90 percent of this freed up money, that adds $9 billion a year or 0.06 percent to demand. And, that is before deducting any reduced spending on the part of the mortgage holders who are now getting less interest. It also doesn’t take into account that many of these mortgages would have been refinanced in any case, just somewhat later in the year.
In short, Obama should do everything he can to try to make it easy for underwater homeowners to get into lower cost loans. But the reason is that it will help these homeowners, it will not have a noticeable impact on the economy.
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