Allan Sloan wrote an article in the February 6, 2012 Fortune Magazine that I wholly endorse. Allan spoke about Wall Street bailing out Main Street by footing the bill to help millions of Americans pay a lower rate on their mortgages. He wrote about helping borrowers who are current on their payments refinance their higher interest mortgages for which taxpayers are already at risk. This would help some 13 million taxpayers as well as borrowers lower their monthly payments and stimulate the economy and reduce future defaults.
Mass Fannie and Freddie mortgage refinancing could provide billions of dollars of economic stimulus while costing taxpayers nothing. There are 13 million or so families who have played by the rules and kept up their house payments, but haven’t been able to refinance their loans, often because their houses have fallen sharply in value. We need to keep in mind that the American taxpayers are on the hook for these loans. Thus refinancing them creates no risk. A mass refinancing could produce interest savings averaging $3,200 a year per family, based upon the average drop of two percentage points for mortgages averaging $160,000. This refinancing represents $40 billion dollars a year of economic stimulus at no taxpayer cost.
This idea did not originate with Allan Sloan but came from a Glenn Hubbard, a former member of George W. Bush’s Council of Economic Advisors and now dean of the Columbia Business School. Homeowners would be the winners and the Wall Street losers would be the holders of mortgage –backed securities that would be refinanced. Because these mortgage-backed securities pay above market interest rates, these securities trade at a premium price. Wall Street could lose up to $150 billion dollars of lost market value to holders of the securities. However, absent the taxpayer bailout of Fannie and Freddie, those securities would be trading in the toilet. Wall Street owns the vast majority of this high-interest paper. Fannie and Freddie, who also own a ton of these mortgage-backed securities, would be made whole by fees from borrowers and holders such as foreign governments and commercial banks have already been bailed out by U.S. taxpayers, so there is no reason to let them continue to gain from the homeowners’ pain.
I think this is a great idea. The new Fannie and Freddie securities into which the refinanced mortgages would be bundled would yield considerably more than equivalent U.S. securities. They should be grabbed up! President Obama should back mass refinancing – Wall Street pays back Main Street. Even Mitt Romney should back this proposal that costs taxpayers nothing since Glenn Hubbard is one of his economic advisors. This refinancing makes a lot more sense to me that playing games with withholding deductions and stealing from the Social Security Trust Fund to add a few more dollars to a taxpayer’s check each month.
What say you Mr. Obama?