Mortgage Stimulus Is No Slam Dunk: The Ticker
The plan, announced Monday, would modify the government's Home Affordable Refinance Program to make refinancing at current low interest rates easier for borrowers who owe more than their houses are worth. In a speech, President Obama said it could save homeowners thousands of dollars a year in mortgage payments.
There are a lot of reasons to doubt it will do much to boost peoples' spending, and hence economic growth. First, not everyone will take advantage of the program. Second, for those that do, a smaller tax deduction will offset part of the interest savings. Third, people won’t necessarily spend all the money they save. Finally, the borrowers' gains translate into less interest income for mortgage investors, a large portion of whom are actual people living in the U.S.
Consultancy Macroeconomic Advisors crunched the numbers and estimated that in a best-case scenario -- a 30 percent take-up rate, spending of every dollar saved and no reduction in investors' consumption -- the refinancing program might boost consumer spending by about $15 billion in the first year. That would add somewhere between 0.1 and 0.2 percentage point to annual economic growth.
In a worst-case scenario, the added spending could amount to only $2.9 billion, a rounding error.
As the Bloomberg View editors have pointed out, if the Obama administration really wants to have an impact on housing and the economy, reducing mortgage principal would be a better idea.
(Mark Whitehouse is a member of the Bloomberg View editorial board.)