Over at the Reason Foundation's Out of Control policy blog, Anthony Randazzo examines President Barack Obama's SOTU-announced policy proposal giving "every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks." What would these words mean, translated into policy?
One key phrase in this is "every" responsible homeowner, suggesting that the new plan will cover mortgages that are not backed by Fannie Mae and Freddie Mac. At present, banks only participate in programs like HAMP and HARP (the utterly failed refinance and modification programs started by the administration years ago) on a voluntary basis. While the details of the program are not all out on the table yet, the President suggests he wants Congress to require banks to give easy refinancing.
The other key caveat in the program is that is "responsible homeowners." These refinances will not be available to pretty much anyone struggling to make their mortgage payment or who has fallen behind because refis are only permissible for those who are current on their mortgage (usually meaning you've made at least your last six months payments). So while the President puts his program in context of "lenders who sold mortgages to people who couldn't afford them, and buyers who knew they couldn't afford them" this doesn't address at all borrowers who are facing foreclosure.
The program also does not change life much for those who are underwater on their mortgage. A refinance is not a modification. […]
So what is this program? A stimulus program.
The program aims to put $3,000 in the pocket of every American who is already able to pay their mortgage by a forcible refinance. Since those homeowners won't need the money to pay for their home, they can presumably use it elsewhere in the economy. Stimulus.
The problem is that even if you support the program purely as a stimulus (which many surely do), it doesn't really help the economy on net. The money for the stimulus is going to be taken from financial institutions, mortgage investors, and even grandma's pension fund.
Here is how: Although we don't have the full details for the program we know the President wants to pay for it with "a small fee on the largest financial institutions." […] So the initial funding to pay for the refinancing will come out of the economy through financial institutions and then put back into the economy through consumers—a highly inefficient use of resources compared to those institutions investing directly in small businesses or technology research or whatever is determined to be a good investment idea.
Read the whole thing here. More Randazzo on "The Myth of the Middle Class Mortgage Deduction," the urgency of stopping mortgage investor bailouts, and how there will be no lasting "recovery" until the federal government stops trying to prop up housing prices.