Meanwhile, the political outlook for actually doing something about it has gotten worse, because the business community and cowardly Democrats failed to rally behind the president’s plan, giving Republicans the political head room to continue peddling their Rotary Club nonsense that what’s holding back the economy is a crushing tax burden, stifling regulations and all-consuming worry over the budget deficit.
Given the almost certain prospect of a continuing political stalemate, the president’s best option is to use the power he’s had all along to deliver tens of billions of dollars in additional stimulus by allowing millions more households to refinance their mortgages at today’s low rates.
I’m not talking about significant modifications to troubled mortgages, which the banks and mortgage bond investors have done a fabulous job of preventing since the last years of the Bush administration.
Nor am I talking about providing taxpayer relief to homeowners who have fallen behind on their payments and are facing foreclosure.
I’m talking about the millions of households that are paid up on mortgages that still have interest rates of more than 5 percent and could use the lower rates engineered by the Federal Reserve to reduce annual payments by an average of $2,500 a year.
Here’s a statistic that tells you pretty much all you need to know:
Back in the recession that began in 2001, roughly 85 percent of households that were eligible to refinance their mortgages did so, with an average decline in interest rates of about 1.3 percentage points. That freed up about $67 billion each year in bond payments that could be spent on other things.
This time, only about 25 to 30 percent of mortgages has been refinanced, despite the lowest interest rates since the Great Depression. The average decline in rates on those refinanced loans has been less than half a percentage point, resulting in $45 billion in overall savings to borrowers.
The biggest reason for this refinancing gap was a decision by Fannie Mae in 2008 to increase the fees it charges to guarantee all new loans, including refinancings. The fee varies by borrower, but is particularly steep for those with low or middling credit scores, those with loans that are 90 to 125 percent of the current market value of the house and those living in areas where home prices declined the most.
Given the shoddy underwriting during the credit bubble, this may have seemed like a reasonable step for Fannie to take as it related to guaranteeing new loans. But in terms of refinancing loans that it already guaranteed, it was rather short-sighted. Refinancing would have lowered the monthly payments and, therefore, the probability that the homeowner would default, which has turned out to be Fannie’s biggest risk and the biggest contributor to its quarterly losses.