Thanks to low interest rates, home owners are refinancing their home mortgages in sizable numbers, and that’s great for them and for the economy, because it helps free up money that can be put to other uses. A Bloomberg report earlier this week put the refi volume at a projected $932 billion for this year, up from $858 billion in 2011.
It’s a good guess the federal government is taking a strong interest in these numbers. Among all the efforts that the government has undertaken to help resolve the housing crisis and spur economic growth, none has been more central than its efforts to spur refinancing among struggling home owners. The government’s HARP program (Home Affordable Refinance Program) is all about providing incentives to borrowers to refinance their mortgage into something they can more easily handle. Incentives are provided to lenders and investors, too, to let borrowers do that.
To date, the government’s refi efforts have produced modest results, with roughly a million refis over the last few years, far fewer than the 3-4 million that was intended.
Without a doubt, the government should continue to look for ways to work with borrowers, lenders, and investors to spur refinancing. But what the Bloomberg report makes clear is that refis shouldn’t be the government’s only focus for improving the housing picture, especially if one of the government’s goals is to inject money into the economy through these refinancings. That’s because these refinancings, while they can be expected to free up some $2,900 a year for each home owner on average (assuming a typical $200,000 mortgage), exactly how much of that money will make its way into the economy as new spending is unclear. Economists interviewed for the report differ, but several say much of this money will go to shoring up home owners’ savings or paying down other debt, so only over time will the money make it into the economy as new spending.
In other words, even though the refis are important and ultimately beneficial, don’t expect them to jolt the economy with new spending.
The modest immediate benefit of refis shows just how important it is for the government to take a balanced approach to addressing the housing challenges today, and that means thinking long and hard about what we need to spur new purchases of homes. Clearly, rule one should be to do no harm, a refrain that NAR and others have been making for several years now. Doing no harm means taking a reasoned approach to banking regulators’ proposed qualified mortgage (QM) and qualified residential mortgage (QRM) rules. The QM rules will require lenders to make loans only to borrowers who can demonstrate the ability to repay, and the QRM rules will require lenders to hold 5 percent on their books for home loans they securitize and sell to investors, unless the loans meet certain “safe” underwriting standards. Loans that meet the “safe” standard don’t come with the hold-back requirement, making them more affordable to borrowers.
With these rules, the devil is in the details, and NAR has called for QM to give lenders sufficient flexibility so that a wide range of qualified, responsible borrowers can get affordable loans, not just borrowers with gold-plated credit profiles, and has also called for the QRM rules not to include a minimum down payment requirement, among other things, that would make it hard for many households to get a loan.
NAR is also looking closely at proposed bank capital standards in Basel III, the international banking protocol, that could force lenders to hold so much capital for home loans that, again, only borrowers with the best credit risk will be able to get affordable financing.
Other rules and laws that generate concern are being explored, but the point is clear: Although the government is right to look for ways to help troubled borrowers refinance into something more sustainable, the government at the same time must take reasonable steps on the new-purchase side of the equation. Not only is shaping these proposed rules in a reasonable way the right thing to do from a policy standpoint, but we can expect good rule-making to have a boosting effect on the economy as well, because new home purchases are the time-tested way for injecting money into the economy as new owners spend on upgrades, furnishings, and all the other things that make housing such an integral part of the economy. Encouraging refis is only half the equation.