In U.S. News & World Report, Steve Fischman explains how helping homeowners refinance would stimulate the economy and why the business community should push for federal measures to facilitate refinancing by more Americans.
Obama's proposal to expand the Home Affordable Refinance Program would boost the economy
The recent overwhelming passage of the JOBS Act proves that when the business community unites behind legislation, even a bitterly divided Congress can join hands and act.
So next up on the business agenda should be something less obviously a business issue but arguably more beneficial to the economy—pushing to unleash the spending power of millions of U.S. households by clearing away barriers to refinancing for homeowners current on their mortgage payments.
That's the single biggest step Washington can take to kick-start anemic consumer spending and boost businesses' bottom lines. With mortgage rates finally creeping up from historic lows the window of opportunity for such a sensible economic policy may be closing.
Despite a recent uptick in consumer spending, the disposable income of households dropped for the first two months of 2012. Without more customers, clothing stores, restaurants, supermarkets, and retailers of all types will have little incentive to expand and bring on more employees. The fragile recovery could stall, and that's not good for anyone.
A broad-based refinancing program could allow as many as 25 million households to refinance from over 5.5 percent interest rates to today's rates of around 4 percent, according to estimates by Glenn Hubbard, Columbia Business School dean and George W. Bush's former chair of the Council of Economic Advisors. That would free up a collective $70 billion per year for stronger consumer spending, according to Hubbard and his colleagues.
Making it possible for even a portion of this market to refinance would be a meaningful economic boost. Indeed, the potential annual savings of $2,800 per household is far larger than any tax cut proposal for the middle class being debated in Washington.
Hubbard and fellow Columbia professor Chris Mayer first floated a universal refinancing proposal in October 2008. Even conservative economists such as Martin Feldstein have called multiple times for a sensible mortgage refinancing program as a remedy for the overall economy.
Yet such well-grounded ideas continue to falter in the political arena when dismissed as being "bailouts" for irresponsible homeowners or "big government." This is where the business community can help point out more vocally that they are neither: The vast majority of eligible homeowners are ones who invested significant money in their house and weren't "underwater" when they borrowed.
To be sure, there's no silver policy bullet to boosting a stronger economy, but clearing away the often technical barriers that are preventing the average family from locking in today's historically low home mortgage rates can be done more aggressively.
The Obama administration last year revamped its existing Home Affordable Refinance Program to expand the eligibility for refinancing. The rules were modified to let borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac who hadn't missed higher payments save an average $220 per month, which actually reduces the government's risk on potentially millions of mortgage loans. That's a step in the right direction, but breaking the refinance logjams will require both congressional action and greater pressure on lenders to accelerate the pace. Neither will happen if the business community fails to weigh in.
One problem is that the program is only available to borrowers with Fannie- or Freddie-backed mortgages, leaving as many as two-and-a-half million other households who happen to have purely private loans unable to refinance, according to the Federal Reserve. President Obama earlier this year proposed a new program to help these homeowners refinance into new mortgages made by private companies and guaranteed by the Federal Housing Administration, a government-run mortgage insurer. Congress is yet to put that program to a vote, though, and it is even unclear how strongly the administration is still promoting it.
Business would be natural advocates for such policies. Companies are accustomed to improving their balance sheets and taking advantage of lower interest rates. And when households do the same, businesses benefit. The business community would be well served to become vocal with members of Congress about how helping responsible homeowners lower their debt payments is critical for the economy.
Steven S. Fischman is the president and COO of Massachusetts-based New England Development, a nationally known retail development company. David M. Abromowitz is a senior fellow at the Center for American Progress.