Tuesday, December 23, 2008
The above is important context for this post. No matter what the final combo of acronymed facilities, stimulus programs and the like it will not be fair to everyone.
First, a slightly more serious point. There has been chatter about refinancing mortgages to 4.5% but then the chatter moved to talk of 3%. This would create a lot of problems, well maybe not the borrower. Lending a bunch of money for 30 years at 3% exposes lenders to interest rate risk. What happens when rates go back to normal? Any bank loaded down with a bunch of 3% debt that is unlikely to refinance away will face a whole new set of writedowns when rates go back to 6 or 7%--or higher. It would seem to me there would be all sorts of problems for banks and other lenders putting out that much money at 3%.
I don't know if securitization is now supposed to now be dead but assuming not how eager are you to collect 3% for ten years, oh wait no I mean 30 years? 3% would seem to be a problem at many stops along the food chain and so I doubt it will happen.
Now for my not so serious idea, scrap all of the acronyms and stimulus plans now in motion or on the drawing board. According to this there are 44 million mortgages out there. Why not structure a program that earmarks every mortgage be reduced by $100,000 and then refinance every mortgage based on the new principal amount at the same interest rate already in place for the specific mortgage?
If you have a $400,000 balance at 7% after implementation of this plan you would have a $300,000 balance at 7%. The borrower would have a payment that was smaller by $665, the bank would have another $100k to strengthen its capital ratios and a loan with an interest rate that is still marketable.
You might be wondering why not give everyone the same percentage of their mortgage, like 20%. You certainly could but that would be as unfair.
The only, ahem, problem is that the cost is off by one decimal place. If I counted zeros correctly, the cost would be $44 trillion. If it worked out to $4.4 trillion it would be in the ball park of what will be spent. Oh well back to the drawing board.