Forget about moral hazard. The White House’s budding guaranteed-refi plan, floated last week in the New York Times, wouldn’t even achieve its two key goals: stimulating the economy and reviving the housing market, says Harvard’s Edward Glaeser:
What about the program’s benefits? Refinancing makes little sense as stimulus, whose goal is to provide a temporary benefit that induces more spending today. Instead, state-supported refinancing is a benefit that pays off year after year for as long as three decades. As the loss to investors is experienced immediately, while the benefit to credit-constrained borrowers is spread over time, the net effect on the economy may well be negative.
It’s also hard to see why housing markets would be significantly strengthened by lowering the interest payments for existing homeowners. My work suggests that the link between interest rates and housing market is relatively modest, and this refinancing effort won’t do anything to reduce borrowing costs for new buyers.
So bondholders would take an immediate hit, in return for a benefit to favored consumers that will take years to pay out. That sounds like the opposite of brilliant. . . . Remember, too-and Glaeser points this out-many of the delinquent borrowers who stand to receive the refi subsidies (which would be funded by the taxpayer, via the GSEs) never should have gotten their loans in the first place. What makes them so special? The guaranteed-refi scheme is shaping up to be cash-for-clunkers on steroids: an expensive intervention that wouldn’t solve the problem, and only make things worse. In fixing the housing mess, federal government should just let the market takes its course. . . .