We ought to note an important point on refinancing woes in this NYT piece from over the weekend, and it’s timely given President Obama’s meeting with bankers today. Essentially, we’re talking about a situation now where if you want to refinance to take advantage of screamingly good interest rates, your bank says “no way, Jose! We’re going to keep taking your high interest payments as we finance your mortgage with free money for as long as you’re not willing to let your credit rating get damaged.”
If you’re a loan servicer, you have people paying every month on notes for things that are worth much less than implied by the value of the note. You want that situation to last forever because it means two things: it’s preserves a nice, thick revenue stream at a time when there’s no way you could replace it; and it keeps you from having to take the hit for the loss of the equity in the house. It’s totally unsurprising that banks don’t want to help people out here.
What the government is trying to do, very straightforwardly, is to deny that the housing market has declined in value. And NPR isn’t seeing this clearly, which is why they say “the foreclosure crisis remains one of the biggest threats to the economy.” No, the biggest threat to the economy is that capital is still being misallocated to residential housing, so it’s unavailable for anything else.
If Obama wants to solve the problem as he sees it, it’s easy and cheap: everyone who has a mortgage should get a monthly check from the government. You could play it like an entitlement (everybody gets the same amount); like means-tested welfare; or you could favor racial minorities and people in heavily-Democratic areas.
This socializes the collapse of the mortgage bubble through the front door, rather than the back door, as we’ve been trying to. The economic consequences will be terrible, but no worse than what we’re trying to do now, and they’ll be over sooner.
And Obama probably wishes he could get away with something this straightforward. The whole reason the healthcare legislation is so convoluted is because it’s trying to be single-payer in disguise.
One more thing: what I’m proposing here will leave a nasty political mark, because it’ll make everyone realize that living within one’s means is strictly for suckers. Frankly, that’s what you get when you bail out millions of mortgage payers. Obama’s alternative is to tear off the bandaid and let the market reset at lower levels. That would produce a far better long-term outcome at a high cost in short-term pain.
So the economics are clear enough. Obama’s problem is rather to make a choice among two politically ugly alternatives. Since 48% of the country tries to play by the rules and the rest voted for Obama, his choice ultimately is clear.
