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A stimulus idea that doesn't need 60 votes

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Bill Gross, director of PIMCO, the world's largest bond fund, has an idea for "the last real big thing that [the] administration can do ...that doesn't increase the deficit and that doesn't require legislation." Shahien Nasiripour lays it out:

Gross, who runs Pacific Investment Management Co.'s $239 billion Total Return Fund, said that policymakers "should quickly re-engineer" a plan that would refinance all non-delinquent mortgages backed by the federal government. The rate on a 30-year fixed-rate mortgage averaged a record-low 4.44 percent in the week ending Aug. 12, according to taxpayer-owned mortgage giant Freddie Mac.

Taxpayers guarantee the mortgages of 37 million households, or two-thirds of all homeowners with a mortgage, according to a July 29 note by David Greenlaw, Morgan Stanley's chief U.S. fixed-income economist. That includes government agencies like the Federal Housing Administration as well as twin behemoths Fannie Mae and Freddie Mac. Greenlaw estimates about 18.5 million taxpayer-backed mortgages are at rates higher than 5.75 percent interest.

By refinancing those mortgages at current, lower rates, Greenlaw believes those homeowners would save $46 billion a year. Gross said the refi scheme would spur some $50-60 billion a year in new consumer spending and raise home prices between 5-10 percent. Forecasters, including Fannie Mae, say home prices are set to decline the rest of the year and into 2011.

The politics of this plan are interesting: The difficulty with most housing interventions is that they help the family that took on too much housing debt, and that makes their neighbors -- who didn't take on too much housing debt -- angry. This plan, by contrast, helps the people who aren't behind on their mortgages. It helps the people who've been doing everything right, but are nevertheless stuck in a crummy economy.

Photo credit: The Washington Post

By Ezra Klein  |  August 19, 2010; 11:35 AM ET
Categories:  Housing Crisis  
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Comments

I am not sure the plan would address mortgages which are not behind but not ensured by GSEs. There are many such loans for example in Bay Area (including my own) which originally did not go for GSE since limits were exceeded. Pretty much everything exceeded limit then in Bay Area and even if you are in limit today (I think around $729K) if equity is insufficient % wise; even these GSE's cost lot of money (around $20K or so for the limit value). So such liquid and current mortgage holders are likely to be left dry too.

Meanwhile on a side note, I am surprised that you did not take the call of Rep. Frank's call to close down 'Fannie Mae and Freddie Mac' whereas Bill Gross actually wants to full 'nationalization'!

You see Market wants cover of 'tax payers' whereas honest Politicians are trying to reduce potential liability of 'tax payers'. We need more details and discussions about this natural demands from both sides. With Gross, he has benefited from tax payer covers of mortgages and I suspect he will benefit more by nationalization.

Posted by: umesh409 | August 19, 2010 11:48 AM | Report abuse

As a renter, this still sounds fishy and unfair to me. We can't all leverage our secure employment with a leading media outlet into homeownership, is all I'm saying.

Posted by: rusty_spatula | August 19, 2010 12:09 PM | Report abuse

Note that Gross is clear that this is not cost free, but will in fact hurt investors who backed the mortgages at the original rates, including PIMCO:

"But it's more than just a Wall Street versus Main Street issue. Investors in mortgage-backed securities -- like pension funds, unions and retail investors -- would be hurt by the program. And over the long term, so could homeowners.

Mortgage refinancings involve paying off an old mortgage and taking on a new one with better terms, like a lower rate. Investors who own bonds backed by home loans with 7 percent interest, for example, would essentially lose out on that extra income. Also, wiping out those higher-rate mortgages that back bonds that are trading above par -- meaning their current price is above face value -- would rob investors of that additional gain.

Banks that own those securities would also lose out on that income, as would asset managers and other large investors in mortgage-backed bonds, like the Chinese government, Gross said. Fannie and Freddie, which have tens of billions of dollars in mortgage holdings in their portfolio, would also suffer from that loss of income. PIMCO, too, Gross said.

"At PIMCO, we'd be affected by $3 or $4 billion in terms of a refunding loss," Gross said. "But I'm here as a public advocate, not as a private [investor]. When I go back to Newport I'll be back to managing that portfolio." PIMCO is based in Newport Beach, Calif."

So this proposal will have winners and losers. Mortgage holders (i.e. homeowners) will benefit, but investors (including perhaps pension funds) will lose. I'd be interested to see an analysis of what the expected shortfall to state pension funds would be as a result of this.

Posted by: jnc4p | August 19, 2010 12:15 PM | Report abuse

Ezra you are a disgrace to journalism.

YOU SHOULD BE FIRED

Posted by: ravioliman6666 | August 19, 2010 12:20 PM | Report abuse

What about someone who loses their job, gets behind on the rent and gets evicted? Who helps them?

Another criticism of Gross' plan is that as it was explained elsewhere, the people holding the securitized bonds get the original interest rate (7-8%) and the taxpayers fill the slack. If this is indeed the idea, even though I have some money in PIMCO Total Return Fund I think it is very unfair to the taxpayers and kind of a Goldman bailout for a somewhat larger group.

I think we need to rethink all of our policies on housing.

(1) does it really make sense for taxpayers to encourage homeownership when we have clearly found it retards mobility in the job market and ends up a trap for many people?

(2) If taxpayers are to continue to subsidize home ownership, there should be definite top limits on the interest deduction and the size of taxpayer-assisted mortgages, and we should prohibit cash-out refis on government-subsidized mortgages.

(3) We also need to greatly limit securitization of loans and require the originators to retain a large, like 30%, stake in the loan. We also need to prohibit institutions from being on both sides of any refinancing or second mortgages.

But fundamentally we need to greatly reduce taxpayer assistance for homeownership. It was just one more good idea that in the end was exploited by the unscrupulous for outsized gains to the detriment of the rest of us.

Posted by: Mimikatz | August 19, 2010 12:23 PM | Report abuse

Good choice of a post for your insightful comment, ravioliman6666! Ezra contributed about 20% of the content of this post on top of a large quote. But it's the player to works as hard for the easy play as he does for the hard play that you want on your team. Good effort!

Posted by: MosBen | August 19, 2010 12:25 PM | Report abuse

"It helps the people who've been doing everything right, but are nevertheless stuck in a crummy economy."

By definition, virtually all renters have been doing everthing right, and the system has made them subsidize home mortgage interest through the tax code for homeowners and the real estate industry (lenders, really) who may or may not have done anything right.

As difficult as a collapsed housing market may be for the prospects of fast recovery, the fact remains that there is currently a glut of properties, and it makes little sense to try and re-inflate prices until the glut is reduced and the normal laws of supply and demand kick in, resulting in stabilized values.

Posted by: Patrick_M | August 19, 2010 12:27 PM | Report abuse

What exactly is stopping all these homeowners from refinancing themselves? Closing costs can be rolled into the overall loan; so what are the obstacles to refinancing without the assistance of the federal government?

Posted by: tmana | August 19, 2010 12:39 PM | Report abuse

All this would do is reinflate the housing bubble. Let prices drop another 15 - 20 % and housing will correct themselves.

Posted by: obrier2 | August 19, 2010 12:44 PM | Report abuse

@tmana,

A decent credit score? Lenders have rightfully gotten stingier in who they lend to. I'm in the process of moving now and they're driving me nuts and my mortgage broker gave me details of how much stricter they're getting. Its a little late and I'm sure there are still people out there getting no money down mortgages but its a good start. If you lived within your means, were lucky enough not to lose your job in this recession and are going to be in your house for a little while you should absolutely look into refinancing.

Posted by: visionbrkr | August 19, 2010 1:26 PM | Report abuse

Having just refinanced myself, I fully support this initiative.

I'm tired of watching businesses close down in my neighborhood. And since I just invested in it even more, anything that stimulates demand in this economy will be worth it to me.

No more vacant store fronts!

Posted by: slag | August 19, 2010 2:00 PM | Report abuse

Because of the fall in housing prices, and the fact that mortgage payments go overwhelmingly to interest in the first years of the loan, many people have little or no equity in their homes. They didn't pay off enough principal to offset the decline in housing prices. With no equity, they can't refinance.

To have built up substantial equity, one would have had to have a 15-year mortgage one had paid on for 10 years. So anyone who bought in the 21st century with a 30-year mortgage, or worse, one of those option ARMs or loans where no payments went to principal, has insufficient equity to refinance at today's prices. That's why walking away makes so much sense, even if it does ruin your credit for awhile. And why letting people stay in their home as renters makes more sense.

Many people bought believing that house prices would keep going up, and they got caught when prices went down farther than most people thought possible. But there's no bailout for people whose stocks went down, let alone for renters.

Posted by: Mimikatz | August 19, 2010 2:12 PM | Report abuse

"Bill Gross, director of PIMCO, the world's largest bond fund,"


i just returned from visiting someone in a world-class hospital, and they were in a building, donated by bill and susan gross.
it is an absolutely fantastic pavillion, that offers the best care and technology available.
so if bill gross happens to read this,
thank you very much.
that gesture of philanthropy saves so many lives each day.

Posted by: jkaren | August 19, 2010 2:23 PM | Report abuse

tmana: My problem is even though GSE loans roll over the cost into the loan, it is increasing the total debt whereas my goal needs to be at least not increase the goal. Also if you calculate the saving you get by reduced payment to pay off the increase in the debt; it is many years in future. So I am not sure financially it is a wise refinancing just because it reduces monthly payment, which however we all want.

visionbrkr: Yes financier, both public and private, have become quite stringent about credit score. But I am talking about folks for which this is not an issue since they have lived within the limits.

We really need Ezra to do some good posting on this whole issue with sufficient details and all core facts on the table.

Posted by: umesh409 | August 19, 2010 3:02 PM | Report abuse

It might sound appealing, but this is a REALLY dumb idea. Bill McBride (w/ the contribution of housing economist Tom Lawler) have discussed this so-called stimulus plan in detail. Here's the link:

http://www.calculatedriskblog.com/2010/07/slam-dunk-stimulus-ms-missing-something.html

Posted by: novalifter | August 19, 2010 3:43 PM | Report abuse

Thanks for shining your spotlight on this idea, Ezra.

As a landlady, I think and read a lot about real estate. I believe a good deal of the economic "uncertainty" we hear about now is due to our actually knowing that banks are insolvent due to the huge number of underwater mortgages.

I can't imagine any solution is going to be a good solution, but failing to address this and pretending it will go away, people will somehow pay, is pretty unintelligent.

Posted by: lroberts1 | August 19, 2010 3:57 PM | Report abuse

It's not so strange that PIMCO thinks of giant plans using the Federal Government's credit rating to help its own financial position. Obviously being a bond house has its risks when you hold so many securities tied to the solvency of the mortgage market as PIMCO does.

If the housing market (and all the zombie finance outfits) were "allowed" to find the natural bottom, PIMCO would take a bath...a giant red bath. And that goes strangely unmentioned by Mr. Klein as a possible motivator for such schemes on PIMCO's part, though not strangely unmentioned by Mr. Gross. Mr. Klein shouldn't be so naive even when he finds the scheme agreeable.

Also, as a renter myself I am tired of getting shaken upside down by the ankles for every shekel of both my taxes and taxes in the future (Fed borrowing) to subsidize other people's bad financial decisions. I am considered to poor and too much of a rube - by law - to participate in hedge funds. Yet, I am considered perfectly fine to subsidize hedge fund losses in the mortgage market. That is a rip-off that I wish Mr. Klein would comment on.

Posted by: HAL-9000 | August 19, 2010 4:17 PM | Report abuse

"It's not so strange that PIMCO thinks of giant plans using the Federal Government's credit rating to help its own financial position. Obviously being a bond house has its risks when you hold so many securities tied to the solvency of the mortgage market as PIMCO does."

Refunding risk. Read the Huffington Post article linked to the blog post. Gross said that PIMCO would "be affected by $3 or $4 billion in terms of a refunding loss" because the higher mortgage interest rate debt would be paid off under that plan. Bond holders would lose the income stream and any unrealized capital gains on the bonds would be erased (long term rates have fallen meaning bond prices are higher). It doesn't have a chance of being implemented but he probably shook up the mortgage bankers' mindset for a while. Even the MSM is showing interest in bonds and bond prices, something usually viewed as exciting as watching paint dry.

Posted by: tuber | August 19, 2010 4:36 PM | Report abuse

Yes! Yes! Yes! This refinance plan should be instituted immediately and should cover ALL current mortgage holders, not only those who have government-backed mortgages. I, too, have a home in an area, Los Angeles, which, like the Bay Area and New York, whose mortgages mostly exceed the FHA conforming limit. I have an 800+ credit score, equity in my home, but because I'm self-employed and don't have W2 income, have been unable to qualify to refinance a loan, which would save me about $500 a month - money I could, and would, pump back into the economy. This is the only plan that has the immediate potential to help consumer spending. I don't think it will make home prices rise, but it will definitely boost spending.

Posted by: terrigross | August 19, 2010 7:19 PM | Report abuse

I don't really get this. If you are current on your mortgage and are still paying a high interest rate, there is a reason. Otherwise you would have re-financed on your own. If the reason is that you are jobless, this scheme just postpones the inevitable a little bit.

Posted by: invention13 | August 19, 2010 8:25 PM | Report abuse

THIS WOULD BE SUCH A BLESSING !!! I was downsized from my company almost a year ago and Citimortgage will not modify my mortgage from a 10yr to a 30yr loan. I am up to date on my mortgage but we(my family)are struggling to pay the 10yr term. We also have to eat...

PLEASE PRESIDENT OBAMA.....HELP !!!

Posted by: kagies | August 19, 2010 8:54 PM | Report abuse

Years ago, I bought a car at what was then a good rate, 10%, for that sort of loan. Within a year, rates had fallen to 7%. Had I got the loan with a commercial bank, they would have said "Yay! Free money for us!"

But I didn't. I financed it through my credit union.

One day I got a letter in the mail from my credit union. It said "We've been looking over our accounts and noticed you have a 10% loan that is of a type we now offer for 7%. We've gone ahead and refinanced it for you at the lower rate. There's no charge for this service. Just sign and return the enclosed papers where indicated."

I've had the warm fuzzies for credit unions ever since.

I wonder what would happen if 37 million people got a similar letter signed "Your Federal Government?"

Posted by: pj_camp | August 19, 2010 10:05 PM | Report abuse

Ezra Klein:

Change your name, get plastic surgery, and maybe you can hide the fact you're a journOlist.

Posted by: RomeoHotel | August 20, 2010 12:30 PM | Report abuse

How about those people who were responsible, saved their money and stayed out of the overheated housing market for the past decade and want to buy a house now? Perhaps the government should refinance and guarantee ALL personal debt.

Posted by: kingstu01 | August 20, 2010 6:20 PM | Report abuse

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