Tonight, the president announced that he is sending the Congress a plan to allow for the refinancing of the mortgages of every responsible homeowner. Conventional wisdom in Washington has it that little if any serious legislation will pass this year. But this issue may and should be different. Many of the primary beneficiaries of this streamlined refinance policy are Republican voters in Tea Party districts. Broad based refi represents a market based approach that doesn't require significant taxes or an increase in the deficit, but will strengthen the real estate market. Shouldn't Republicans line up?
This move could save tens of millions of households more than $200 a month in housing costs by giving responsible homeowners who are paying their bills the opportunity to benefit from record low interest rates. Most of these mortgages are already guaranteed by the government; lowering the interest rate will increase the likelihood that they get repaid. A large scale refi program will put money into the economy, prevent unnecessary foreclosures, and help stabilize the real estate market. It has been well and repeatedly argued by many from across the ideological spectrum that this is good economic policy and good for the real estate market.
It is also great for Republican-represented districts. The top ten Congressional Districts that could benefit from refi are all, 100%, Republican represented --- and 40 of the top 50 districts are Republican represented. Newt Gingrich's old district could get 176% the national average number of refis.
In Florida alone a broad refi plan would allow two million households in Florida to lower their annual costs by an average of more than $2,500 this year, strengthening the economy, reducing foreclosures, and building confidence. Nine of the top ten Florida CDs in terms of the numbers of refis are now represented by Republicans. The Florida district that would benefit most - with 112,000 potential refis - is that of Representative (and Republican Senate Candidate) Connie Mack.
Nationwide, districts represented by members of the Tea Party Caucus would get significantly more refis than the national average. Consider the area around St. Cloud, Minnesota, represented by Michele Bachmann. 115,000 households in her District could get an average of just under $200 per month extra in their pockets. There's more than one voter in many of these households. Representative Bachmann won her last election by fewer than 40,000 votes, with a total of 160,000 votes.
And so it is across the nation. 84,000 households in Allen West's district in Florida. 102,000 in Eric Cantor's district in Virginia. If you look at the top 20 districts to benefit from streamlined refi, nearly half of them are represented by Tea Party partisans.
And it is not just the numbers, it's the narrative. We all know that the Tea Party supposedly began with Rick Santelli's CNBC rant against bailing out those who over-bought, over-built, and over-borrowed. Many have drawn the mistaken inference that repairing real estate finance is thus a political loser. Forgiveness of principal paid for by taxpayers aimed at helping people facing foreclosure is a tough sale. But giving homeowners access to borrow from willing lenders at current low market interest rates is an entirely different matter.
There's no complete free lunch here; the gains to tens of millions of households will come largely at the expense of the people and entities that originally lent the money or bought the mortgages later - the banks and bondholders now receiving very much higher than market interest rates. Instead of receiving 6 or 7 percent interest, these bondholders will get paid what they are owed on the loans - and the homeowner will now owe money to someone else, who is perfectly willing to lend it to them for less.
The bondholders were fully aware that there was a risk that interest rates might fall and assumed that homeowners would prepay if interest rates fell. They have been protected from these market forces by poor policy. Starting in late 2008, Fannie and Freddie actively made it harder for responsible homeowners to refi by raising their fees for most borrowers, even when taxpayers already guaranteed the loans. Poorly thought out restrictions on and interpretations of who can be refinanced further limited refis of already government guaranteed loans. This has been bad for the homeowner, bad for the taxpayer, bad for the housing market, and a bonanza for bondholders.
Expanding refis to cover all mortgage holders -- not just those with a guarantee -- will involve some extra risk for the government, but this can be easily paid for by economic fees - leaving the borrower way ahead and the taxpayer no worse off. But existing bondholders will indeed lose their protected, above-market interest rates.
Ask a focus group if people who over-borrowed should be bailed out by the rest of us, and the answer will be a resounding no. But that is not the question at hand. Properly played, the politics here can reflect reality - the streamlined refi proposal is ending a gargantuan regulatory-facilitated subsidy to bondholders that comes at the expense of responsible homeowners who are paying their bills. These families should be able to exercise their right to prepay and refinance - as businesses and others do.
On its economic policy merits, large scale refi should make a fast track through Congress. On political merits, it is hard to see how Congressional Republicans will oppose it, but for the formidable ability of opponents.
For the sake of good policy, let's hope the hardball political calculations are made by members of Congress, and that swift legislation passes to facilitate broad based refinancing of performing mortgages.
[Both tables are from the work of Alan Boyce, R. Glenn Hubbard, Christopher Mayer, and James Witkin. These estimates represent the original version of their proposal, which included a process for streamlined refinancing of non-GSE loans, creating to up to 30 million eligible mortgages. The President's language tonight strongly suggested he will propose such a broad based program.]
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