Jeff Merkley’s HOLC-type plan for mass refinancing of underwater borrowers is not a panacea for this foreclosure crisis, but it certainly would help us prevent the next one, and without the legal implications that could trip up an eminent domain scheme. Ending the persistent problem of underwater borrowers would not only stabilize the housing market but also the economy, by increasing consumer spending, stopping the death spiral of housing prices and negative equity and giving homeowners who through no fault of their own found themselves locked into an underwater home a chance to scrape their way out. It got some notable economist proponents today in an op-ed signed by both Mark Zandi, who has favored mass refinancing for a while, and Joseph Stiglitz. They sadly concede that principal reduction is “no longer an option” after FHFA closed the door on it. So they turn to the Merkley plan as a last best hope.
…Under his plan, called Rebuilding American Homeownership, underwater homeowners who are current on their payments and meet other requirements would have the option to refinance to either lower their monthly payments or pay down their loans and rebuild equity.
A government-financed trust would be used to buy the mortgages of homeowners who had refinanced at an interest rate that was about 2 percentage points more than the record-low Treasury rates at which the government borrows. This would generate enough interest income to cover the costs of any defaults, administration of the trust and other expenses. Families would have three years to refinance; after that, the trust would stop buying loans and eventually wind itself down as homeowners repaid their loans.
Homeowners would see lower mortgage payments and rebuild equity more quickly. Taxpayers would get their money back, with interest, and would gain further as a stronger economy lifted tax revenues. Banks and other mortgage investors would get potentially troubled loans off their books. Some banks won’t like losing the large amounts of interest income they are earning on their current mortgages, but if the refinancing market were working properly these loans would have been refinanced long ago.
If the program was very successful, we envisage that two million outstanding loans could be placed in a Rebuilding American Homeownership trust at its peak.
The alleged risk to the taxpayer (and that two-point spread between cost of borrowing and cost of lending pretty much eliminates that risk), say Zandi and Stiglitz, is far outstripped by the risk of inaction, and allowing another foreclosure crisis to cascade through the system.
Between the high-level economist love and Tim Geithner’s promise to work with Merkley on pilot programs, Merkley’s RAH plan really could become a reality. We can do much better than the status quo. Actually we can do better than RAH, in theory, but in practice we have to take what we can get.