The President spoke yesterday in Las Vegas on the Administration’s new refinancing initiative. Just from a public education standpoint, the fact that the President of the United States is telling people they have the opportunity to refinance their mortgage might be as important as the changes to the program, in terms of take-up. What’s key about this from a policy standpoint is how circumspect the President was:

Now, these steps aren’t substitutes for the bold action that we need to create jobs and grow the economy, but they will make a difference. So we’re not going to wait for Congress [...]

So let me just give you an example. If you’ve got a $250,000 mortgage at 6 percent interest rates, but the value of your home has fallen below $200,000, right now you can’t refinance. You’re ineligible. But that’s going to change. If you meet certain requirements, you will have the chance to refinance at lower rates, which could save you hundreds of dollars a month, and thousands of dollars a year on mortgage payments.

This is a unique circumstance, though certainly not in Nevada, where everyone is underwater. We’re talking about homeowners whose loan was acquired by Fannie or Freddie before May 2009, who are underwater on the loan but still current for at least six months, or with only one missed payment in a year. And we’re really talking about the severely underwater, since HARP was already open to those with a 125% loan-to-value ratio.

With that kind of limited scope, it’s hard to agree with Joe Gagnon’s claim that this will create 4 million jobs. But here’s his argument. It’s mainly based on what happens November 15. At that time, the FHFA will announce the “modest fee” associated with the relieving of representations and warranties claims on the loans, something I explained yesterday. There’s substantial question over this; Paul Kiel catches FHFA officials saying that there will be no fee at all. The FHFA’s claim is that loans that were originated over three years ago that made it through the financial crisis and remain current have a very low risk for reps and warranties, and therefore a low value associated with them. Defective loans usually go delinquent much earlier in the process. So they believe they’re not giving up a whole lot with R&W. The banks, of course, do; otherwise they would be refinancing these loans already, and this wouldn’t be a major barrier to refinancing.

Gagnon thinks that when all of this gets factored in, and if FHFA sustains a public education campaign – like writing to every newly eligible borrower to inform them of their options – you would see a surge of refis:

Judging from the pattern of previous refinancing waves, a sustained decline in mortgage rates of 2 to 2.5 percentage points in combination with reform of HARP likely would cause a surge of mortgage originations equal to more than half of the existing stock of agency-backed home mortgages. That would total at least $3 trillion. The median decline in the mortgage interest rate would be more than 2 percentage points, implying an overall reduction in household interest expense of $60 billion to $80 billion per year [...]

The annual savings to borrowers would be about 0.5 percent of GDP. Because of the long-lasting nature of these savings, the total effect on household spending would be greater than that of an equivalent but temporary tax cut. In addition, the availability of record-low mortgage rates for a fixed period of time likely would spur potential new home buyers into the market and boost home building and sales.

Even more important, if the Federal Reserve supported the refinancing boom by purchasing $2 trillion of new MBS, for example, the existing MBS holders would have to find another market in which to invest $2 trillion. This avalanche of money would surely push up stock prices, push down bond yields, support real estate prices, and push up the value of foreign currencies. All of these financial developments would stimulate US economic activity. Based on a recent Fed study (Chung et al 2011) Fed purchases of this magnitude would increase US GDP by more than 2 percent after about two years, creating nearly 3 million additional jobs. This estimate includes only a small part of the effects operating through the mortgage refinance channel discussed above, so that the total effects on the economy would be even larger, perhaps creating 4 million extra jobs or more.

This is a highly speculative analysis, and it seems to rely more on Fed purchases than it does the refi initiative. By contrast, Felix Salmon calls the plan pathetic. He notes the FHFA’s own stats for take-up would mean that the program wouldn’t generate any more refis than it does right now.

“Given current market interest rates, our best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain.”

First, by the end of 2013? Never mind mortgage relief now, we’ll try and get you mortgage relief in two years’ time? [...]

In the 28-month history of HARP, we’ve managed a grand total of 894,000 HARP refinancings, which works out to about 32,000 per month. Interestingly, the chart ends at August 2011, which means it represents exactly half of the total timeframe from the beginning of HARP to the end of 2013.

In other words, the FHFA is projecting that the pace of HARP refinancings won’t increase at all as a result of this plan. We’ll still average out at about 30,000 per month — maybe a bit more, maybe a bit less, but you’re never going to make a dent in the mountain of 11 million underwater mortgages at that rate.

I think the Administration response is that it’s hard to estimate these things (and they’ve been screwed with estimates before so they’re opting on the small side), that 1.9 to 3.1 million more people would be eligible, so maybe you’re talking about take-up on that universe of borrowers alone.  And maybe these HARP benefits for borrowers with high LTV ratios will be applied to people with lower LTV ratios, encouraging more refis. And even if all of this is wrong and Felix is right, they would say that this helps a certain class of people stuck by falling home values through no fault of their own, and paying more in interest on their loan to the banks than they should have to.

However, the take-up issue is going to run into a brick wall, and that brick wall is homeowner cynicism about government mortgage programs.

Across America, despite the hundreds protesting for limited government or more government action, a broad swath of the middle class hit hard by the crash in housing prices is quietly resigned, given up on seeing any relief — particularly from politicians [...]

“Most of the programs have been based on ideas of reducing your monthly payments for a period of time,” said Jay Butler, a professor emeritus at Arizona State University’s W.P. Carey School of Business who has closely tracked the housing and foreclosure crisis in Arizona. “I think a lot of these ideas started in the Bush administration with the idea that was going to be relatively short-lived, one or two years, and things would get back to great and glorious. And none of that has happened.”

And many of those programs, Butler said, are not being used by the people who really need them.

“It’s difficult to understand programs,” he said. “Who do you contact? The loan servicer? The lender? They might not even have the mortgage anymore. Then you have all these scams going on. … It’s sort of like this snowball running down the crest. It just keeps getting bigger and bigger and sooner or later it just runs you over.”

The Administration can brag about all the housing programs they’ve put in place. But the truth is that because of HAMP and the other failures on this front, the link between borrowers and their government has been severed. I’m sure there is a large and growing universe of people who won’t take up this program because they’ve been burned one too many times. Or they’ve heard about a friend or neighbor who was burned. The danger from HAMP to liberal notions of government operating as a helping hand hasn’t been fully understood by the technocrats in Washington.