Policy Brief: How to Boost the Economy by Helping Homeowners

By / 6.18.2012

The disappointing May jobs report raises the question: what’s slamming the brakes on economic recovery? For one answer, look to the sector where the economic crisis started in the first place – housing. U.S. housing markets are still broken, and we can’t expect a full recovery until they are fixed.

That’s why Congress and the administration should act promptly to pass a major home refinancing initiative. Taking advantage of historically low interest rates, it would reduce mortgage payments and give millions of middle class families more money to spend. The idea is to stimulate economic demand while helping responsible homeowners hold onto their homes.

With 33 percent of homeowners still underwater (meaning they owe more than their house is worth), a massive wave of refinancing would allow borrowers who are current on their mortgages to lower their mortgage rate. Cutting their payments by thousands of dollars a year would help them pay down debt and put money back into the economy. The good news is that the benefits far outweigh any small costs the programs would incur. A bill that would allow 12 million borrowers with GSE loans to refinance would provide $2,600 in annual savings to these households. Approximately $1.83 trillion in refinanced mortgages would lower American mortgage payments by $31 billion a year. The GSEs would even see between $11 to $18 billion in new revenues from upfront costs.

Congress has been offered a raft of proposals that would streamline the process of refinancing home loans for a number of borrowers. These bills are aimed at loans backed by government guarantees from Fannie Mae and Freddie Mac, the mortgage giants currently in conservatorship by the Federal Government. By virtue of having bailed Fannie and Freddie out, taxpayers already “own” the risk of default on these loans. Why not allow refinancing that would reduce the number of home foreclosures?

Download the brief.