The Stimulus Package of Refinancing, the Link between Underwater and Unemployed Places and the Failures of HARP. Also with bonus “Texas Miracle” content.

Richard Fisher, President and CEO of the Federal Reserve Bank of Dallas, drops the logic for his dissent:  “…Texas, like all states, is subject to the same monetary policy as all the rest: We have the same interest rates and access to capital as the residents of any of the other 49 states, for the Federal Reserve conducts monetary policy and regulates financial institutions under its purview for the nation at large. From this, I draw the conclusion that private sector capital and jobs will go to where taxes and spending and regulatory policy are most conducive to growth.”

His speech goes on about how he wants to help the job creators come out of their groundhog burrow, but every time job creators peek out they see the shadow of Obama and the Democrats and run back to hide.

Joking, only a little.  But his dissent does reflect a specific argument that access to capital is the same across all states.  Is that accurate?  Does monetary policy hit every state equally?

Here’s a headline for today: Mortgage Rates Hit 50-Year Low. “The average rate on a 30-year fixed-rate loan fell to 4.15 percent, with borrowers paying an average point of 0.7 percent.” (h/t Barry.)

The refinancing that could come with these low rates would help consumers rebuild their balance sheets by reducing their monthly payments .  It would put more money into the economy.  But it’s hard to refinance to take advantages of those rates if you are underwater on your mortgage. This in turn blunts the efficiency of QE and monetary policy. As QE advocate Joe Gagnon pointed out in a Roosevelt Institute presentation:

one of the biggest goals of QEI was to push down the mortgage rate to spark a refinancing boom to encourage households and enable households to reduce their expenditures and repair their balance sheets and be able to spend again. That worked not quite as well as we hoped because the administration’s program for getting underwater borrowers to borrow didn’t work and I think that’s a true disaster that has no excuse. I have nothing but incredible, there’s just, the blame the administration on not doing this is just incredible. This could have been a huge success. We got the lowest 30-year mortgage rates in history and we couldn’t take advantage of them to the extent that we could. We got about a trillion dollars in refinancing when we should have gotten two or three trillion dollars in refinancing.

So places where there is a lot of underwaterness are places that can’t take advantage of the rates that QE brings into existence.  I wonder if there’s a correlation between underwaterness and unemployment, or underwaterness and places that most need balance-sheets fixed and a burst of spending and demand?  Underwater data from Corelogic, state unemployment from BLS:

Texas is in red, just to keep the miracle in context.

For bonus fun, here it is with the 50 CBSA with the most negative equity versus MSA unemployment (same sources, Corelogic and BLS):

Once again, for fun, Texas is in red.  (This graph is marked tentative because I’m not 100% sure on the subtleties of comparing CBSA and MSA that have the same or similar titles and that’s not getting figured out today.  Reader help?)

Did you know the Obama administration created a program to deal with this?  I had forgotten.

Remember in history class when you had to memorize all those acronyms from the New Deal?  Luckily, the Obama administration’s refinancing program HARP (Home Affordable Refinance Program) has the same initials and logic as HAMP (Home Affordable Modification Program), making it easy to for kids in 2050 to memorize.  And when you had to memorize a lot of things, did you ever do the game where you created short rhymes with a factoid to help remember them?   Kids in 2050 will pull that off as well: “H A blank P / what utter failures they turned out to be!”

In what is becoming a housing economic reporting genre all its own, here’s an excellent big Bloomberg story on HARP from two days ago featured the genre staples: “far short of the administration’s goal….I don’t think by most measures that it’s a success… which services their loan, refused to qualify them…success is vital because it’s one of only a few lifelines for responsible borrowers…”  Evidently nudging the servicers isn’t working.

Everyone in that article points out that refinancing mortgages is key to getting cash in the hands of people who most need it.  Columbia Business School’s Chris Mayer mentions that if “we’re successful in doing a mass refi, it could reduce payments for 25 million households. It’s like a permanent tax reduction with a minimal impact on the deficit.” I doubt the tax reduction logic, though sound economics, will fly with the Right.

It’s great for the economy and I also think that mass-refinancing is beyond fair – indeed not doing it is unfair.  People underwater who can’t refinance are paying for a level of interest expectations that don’t exist, transferring from distressed communities to rentiers and owners of capital.  The most desperate parts of our country getting locked out of the capital markets because of the housing market swinging wildly is an injustice that needs to be changed immediately; it’ll also have the added bonus of saving the economy too.  Put the GSEs into motion, and let’s do it now.

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9 Responses to The Stimulus Package of Refinancing, the Link between Underwater and Unemployed Places and the Failures of HARP. Also with bonus “Texas Miracle” content.

  1. klhoughton says:

    After Ritholtz posted about it, I finally called the bank officially holding of my primary loan about consolidating everything. Without getting the best rates by any stretch, and without going into details, upfront savings would be about 7-9% of our Gross Earnings. Which is a nice chunk of after-tax monies that could be generating AD.

    But the restrictions are so high, the only people who will get it will be those who don’t need it. It’s a pity the Obama Administration didn’t think to do anything about jobs or housing when they “saved the economy.”

  2. steveroth says:

    >it’s hard to refinance to take advantages of those rates if you are underwater on your mortgage. This in turn blunts the efficiency of QE and monetary policy.

    Trader’s Crucible puts this nicely: “monetary policy sucks,” because it works primarily through the mortgage channel.

    “Corporations don’t need to borrow – they are sitting on a record horde of cash (they have more today). So the only channel left for monetary policy to work is through real estate.”

    http://traderscrucible.com/2011/08/03/monetary-policy-sucks-part-iv-what-do-you-do-during-a-real-estate-crash/

  3. Ellen1910 says:

    Water over the dam?

    The time to have done this (refinancing mortgages without reference to anything but market rates) was 1) at the time the GSEs were put into conservatorship when GSE bondholders could have been given a haircut to contribute to the cost and 2) when the banks were being bailed out back in 2008-9. Now, formerly profligate mortgagors would be bailed out by taxpayers who are neither rentiers nor owners of capital.

    How does one make that bailout appear just?

  4. Neildsmith says:

    Oh how I wish this idea would just die. As a renter who could use cash too, where is my help? I’m always underwater on my real estate investment. Propping up housing prices with these schemes doesn’t help those of us who had the foresight to stay out of the market. Thanks for trying to make housing more expensive for us.

    The damage is done and there isn’t enough money in the world to fix it. Can we just move on? If this is the sum total of the progressive agenda, I’m voting for republicans next year. Shame on you.

  5. mort_fin says:

    Everyone talks about “put the GSEs in motion” but conveniently skips over the inconvenient details, like ‘how’ and ‘who pays?’ The big stumbling blocks to HARP refinancing are 3.

    1) Refinanced mortgages with loan to value ratios over 125 are illiquid. SIFMA won’t let them go into generic pools, so they will either pay substantial liquidity premiums, or the GSEs would have to hold them in portfolio. The former destroys a lot of the incentive and benefit from refinancing, and the latter would mean undoing the explicit regulatory policy of shrinking their balance sheets. who is volunteering to take on that fight?

    2) Servicer liability. If the first mortgage was improperly underwritten, the GSEs have the right to put it back to the seller. If you refinance that mortgage, you can do it with one of two conditions. Either a) the new originator takes on the risk that the original loan was improperly underwritten, or b) the right to putback a poorly originated loan is lost. Under possibility a), lenders won’t do the refis with the proverbial 10 foot pool. Under possibility b) the GSEs take on extra credit risk and losses, which mean the taxpayers are subsidizing the transaction implicitly, and the conservator is not following its statutory mandate to conserve assets. 2b) could be handled if the treasury wants to explicitly subsidize the transaction, and formally take on the credit risk for the taxpayers. is that a good idea?

    3) Mortgage Insurer liability. If the original loan has mortgage insurance, and the refinance loan that replaces it does not, you have exposed the GSEs to increased risk and credit losses, just like in 2). Unless the new loan also has MI. Once again, a new MI wouldn’t touch these loans with the proverbial 10 foot pole. The MI company on the hook for the original loan has every incentive to transfer the certificate to the new loan, but can gain by being a holdout and demanding some lagniappe in return for approving the transfer. And some state regulators have dragged their feet on appproving these transfers at all. So are the advocates of a super-HARP suggesting some mechanism to force MI companies to transfer insurance (in some cases over the objections of their state regulators) or are they suggesting that these transactions be implicitly subsidized by losing the MI coverage on the refinanced loans, or are they suggesting an explicit subsidy from the treasury in order to refinance the loans and drop the MI coverage?

  6. Pingback: FT Alphaville » Further reading

  7. Pingback: On The Housing Market as a Driver of Stimulus | Rortybomb

  8. Sam says:

    Data help:

    CBSA is “core-based statistical area”, which is just the the generic form for the two types of CBSAs: ‘metropolitan statistical area” and “non-metropolitan statistical area.” To display all the urban CBSAs would be exactly the same as taking all the MSAs. So your chart has no error, there.

  9. Pingback: A Quick Note on the Distributional Consequences of a Lack of Refinancing Options | Rortybomb

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