Mass refinancing: The ‘biggest thing’ Obama can do without Congress
From 2001 to 2003, Glenn Hubbard served as President George W. Bush’s chief economist. Today, he’s dean of Columbia University’s School of Business and one of Mitt Romney’s top economic advisers. But right now, the candidate who could most benefit from his advice is President Obama.
Hubbard is an advocate for using Fannie Mae and Freddie Mac to set off a nationwide wave of mortgage refinancing. In a paper co-authored with Columbia economist Christopher Mayer, Hubbard estimates that more than 75 percent of the homeowners with 30-year mortgages backed by Fannie or Freddie are paying interest rates higher than 5 percent. But for the past two years, interest rates have been closer to 4 percent. That means tens of millions of Americans are paying more than they need to every single month.
Some of these homeowners have good reason to resist refinancing. They plan to move soon, or they lied on their initial mortgage application, or they can’t afford the up-front costs. Some have been scared off of new financial products by the events of the past few years. But many simply don’t follow the month-to-month gyrations of interest rates. Others are deterred by conditions set down by Fannie and Freddie — although those have been substantially eased over the past few months, albeit with little fanfare.
Those homeowners represent one of the president’s few remaining opportunities to help a substantial number of Americans. That’s because a major push on refinancing is one of the few policies the Obama administration could accomplish without the help of Congress.
In recent months, the White House has come to an overdue realization: Republicans in Congress will not, and arguably cannot, work with them on anything big. They won’t partner with the president on infrastructure spending. They won’t join him to expand the payroll tax cut. They won’t strike a deficit deal that includes taxes.
This has led to the “we can’t wait” campaign, in which the president maximizes his executive authority to make changes that congressional Republicans are resisting. The most concrete example of the White House’s newly muscular approach is the decision to recess-appoint a new director of the Consumer Finance Protection Bureau and three new members of the National Labor Relations Board over Republican objections.
But those appointments will do little for the larger economy. A more promising avenue for an impatient administration is to recess-appoint a new director of the Federal Housing Finance Authority — the body that oversees Fannie Mae and Freddie Mac.
The FHFA is led by Edward DeMarco, a career civil servant who became acting director when James Lockhart, Bush’s pick, stepped down early in Obama’s term. DeMarco is respected by both sides of the aisle, but he has opposed many of the Obama administration’s efforts to use Fannie and Freddie to help the ailing housing system.
The Obama administration waited until late 2010 to nominate its own candidate to lead Fannie and Freddie, but by that point, Democrats had lost their 60-vote majority in the Senate and Republicans blocked the Obama administration’s choice.
Since then, the Obama administration has worked to move DeMarco in its direction, and achieved some notable successes. But in a white paper released last week, the Federal Reserve echoed the consensus of many housing experts in finding that much could still be done if the authority could be convinced to interpret its mandate more broadly. “Actions that cause greater losses to be sustained by [Fannie and Freddie] in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery,” the Fed wrote.
Here’s one example: If the White House recess-appointed a friendlier director, the agency could write the rules so that anyone with a loan backed by Fannie and Freddie and current on their payments for six months would be automatically approved for refinancing. Then — and this is crucial — the president could make Americans aware of this fact during the State of the Union and in subsequent public addresses. Fannie and Freddie could send a letter to every eligible homeowner. The combination of easier rules and vastly better publicity would lead many millions of Americans to refinance their loans.
The effect on the economy would be twofold: First, the refinancings would act like a high-powered tax cut for those homeowners who took advantage of them. As Hubbard and Mayer write, “Empirical evidence suggests that consumers spend a larger portion of permanent increases in income than temporary increases.“ And as these refinancings would lower payments, they’re as permanent as you can get in government policy. Second, it would make the Fed’s efforts to keep interest rates low more effective in stimulating the economy.
There would be drawbacks. A wave of refinancings would hurt investors who hold housing-backed securities. David Stevens, president of the Mortgage Banker’s Association, warns that “it will limit willingness of these same investors to buy MBS in the future.” And as many of these investors are pension funds and 401(k)s, some ordinary investors will take the hit, too.
Further, the scope of the policy would be limited: An optimistic estimate is that it would reach 10 million Americans and provide tens of billions of dollars of relief. That’s a help, but not a game-changer. Nevertheless, says Joe Gagnon, a senior fellow at the Peterson Institute for International Economics, “this is the single biggest thing the president can do without a vote in Congress. It’s a no-brainer. It’s been a no-brainer for years.”
So isn’t it time to stop waiting?