I haven’t had much to say about yesterday’s future of housing finance summit because I found it to be an academic exercise in the face of a near-term, immediate crisis. The video of Chris Hayes at MSNBC just shows the utter ineptitude of the efforts to protect homeowners and keep them from being kicked out onto the streets, and it seems to me that’s a better subject for summits than how we’re going to replace Fannie and Freddie in five years.
On that subject, Tim Geithner still clearly sees a role for government to provide indirect funding for encouraging home loans, even if it’s smaller than today. Barney Frank would rather abolish the GSEs and instead have the government support rental housing. Through it all, the debate over whether the government should encourage single-family home ownership raged, and it’s a nice debate to have. I don’t support some of the more extreme efforts we’ve seen in this area. I think we should cap the mortgage interest deduction so that we’re not subsidizing McMansions and providing incentives for people to buy bigger homes. I also don’t think we should allow the mortgage interest deduction on vacation homes. And greater awareness of affordable rental housing supports would be extremely helpful: even with their limited reach, policies like Section 8 housing aid helps the overall housing market. Opinions on this and other points about the future of housing finance vary.
The problem is that this debate takes place along the backdrop of 300,000 foreclosures a month and no credible plan to arrest that. It’s like arguing about where to build the bedroom in the renovation of a two-story house while it’s on fire. Policymakers haven’t done the job, simply put. And the only one thinking creatively about solutions to the crisis, or at least solutions to the intersecting jobs crisis, is PIMCO bond investor Bill Gross.
Bill Gross, who runs Pacific Investment Management Co.’s $239 billion Total Return Fund, said that policymakers “should quickly re-engineer” a plan that would refinance all non-delinquent mortgages backed by the federal government. The rate on a 30-year fixed-rate mortgage averaged a record-low 4.44 percent in the week ending Aug. 12, according to taxpayer-owned mortgage giant Freddie Mac.
Taxpayers guarantee the mortgages of 37 million households, or two-thirds of all homeowners with a mortgage, according to a July 29 note by David Greenlaw, Morgan Stanley’s chief U.S. fixed-income economist. That includes government agencies like the Federal Housing Administration as well as twin behemoths Fannie Mae and Freddie Mac. Greenlaw estimates about 18.5 million taxpayer-backed mortgages are at rates higher than 5.75 percent interest.
By refinancing those mortgages at current, lower rates, Greenlaw believes those homeowners would save $46 billion a year. Gross said the refi scheme would spur some $50-60 billion a year in new consumer spending and raise home prices between 5-10 percent. Forecasters, including Fannie Mae, say home prices are set to decline the rest of the year and into 2011. Former Federal Reserve Chairman Alan Greenspan said this month that a so-called double-dip recession is possible “if home prices go down.”
The theory here is that mass refinancing would lower monthly payments, put more money in the pockets of all homeowners, allow a non-trivial amount to afford their homes again and avoid foreclosure, and increase consumer spending and aggregate demand. Because Fannie and Freddie already basically own 90% or more of these mortgages, they could put this together without costing taxpayers a dime and with no further Congressional action.
Why wasn’t this the headline news coming from the summit? It’s beyond sad that Bill Gross is the only one in all of Washington, it seems, talking about real help for working families:
“It’s a question of Wall Street and Main Street — which side do you favor? I’d say that Wall Street has been favored enough over the past year and a half, so let’s give Main Street a chance,” Gross continued. “The administration needs to get back on Main Street and off of Wall Street, and I think this is one big step that they can do.”
But policymakers showed little appetite for the Gross plan, preferring to construct delicate plans for a housing finance apparatus with an implicit government guarantee. I think that may be due to the fact that this plan would reduce profits for investors and the holders of the mortgages, particularly the banks.
But as Gross said, haven’t they been rewarded enough? And won’t the impact of increased consumer spending and economic growth more than offset the haircut on the loans? Indeed, Gross acknowledged his bond fund would take a $3-4 billion dollar hit from the plan. He replied to that by saying, “But I’m here as a public advocate, not as a private [investor].” We need a few more of them.
UPDATE: There is not universal agreement from experts on the matter. Thomas Lawler noted that the government already basically has a program like this in place called HARP: the Home Affordable Refinance Program. And it hasn’t done the job. Only about 350,000 homeowners have benefited from HARP so far, and the Gross/Morgan Stanley analysis asserts that 18.5 million could be eligible for a refi, under their plan. There’s also the issue of up-front transactions costs, which increase the effective interest rate on the loan.
The bigger issue here is that Gross is at least willing to talk about the near-term problem, instead of scribbling about things years into the future.