The best proposal I’ve seen comes from Glenn Hubbard, a former economic adviser in the Bush White House, Chris Mayer, his colleague at Columbia Business School, and Alan Boyce, a trader in mortgage bonds. The trio’s idea is to order Fannie and Freddie to reduce its fee to a flat 4
10 of a percent for refinancing any fully paid-up loan that it already guarantees. The process would be streamlined, eliminating appraisals and income verification. The fee would be lower than now, but higher than it has been in normal times, and sufficient to offset the reduced monthly cash flow from refinanced borrowers.
As for the banks, those that accept a lower refinancing fee of 3
10 of one percent would be granted immunity from lawsuits stemming from loans issued during the bubble — a huge cloud that hangs over the big banks. Those who refuse the arrangement would lose their ability to sell their mortgages to Fannie and Freddie, which are pretty much the only games in town since the housing bust began.
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
The big losers would be the private holders of mortgage bonds — mostly pension funds, hedge funds and other money managers, along with foreign governments — who might take solace in the fact that they have enjoyed three more years of interest payments at the old, higher rates than they would have if the Fed’s monetary stimulus had been allowed to pass through to homeowners. And because of the salutary effect of lower mortgage rates on the economy, bondholders eventually would recoup a fair portion of their “lost” income through reduced foreclosures.
Hubbard, Mayer and Boyce estimate that their plan could allow as many as 25 million households to refinance mortgages and have an extra $70 billion every year to spend and invest — the equivalent of a $70 billion-a-year tax cut that can be had at no cost to taxpayers.
A new wave of mortgage refinancing is not an economic silver bullet, but it is a positive step that everyone can agree on conceptually and can be implemented quickly within existing law. What’s been missing so far has been the cooperation of Fannie and Freddie’s regulator and a determination on the part of the White House and the Treasury to get over all their technical objections and political qualms and just get it done.