Is access to mortgage refinancing enough?

February 25, 2009

“Declines in home values of 2 per cent are costing US households some $370bn [€290bn, £257bn] per month, which helps explain why people are miserable.” (Ian Sheperdson, chief US economist at High Frequency Economics, an independent researcher)

The FT reports today that US home prices are still plumetting at a record rate.  This suggest that access to mortgage refinancing through the Administration’s $75 billion ‘Homeowner Affordability and Stability Plan’ will do little to bolster consumer consumption.  Why?  Because access to refinancing does not challenge the fundamental decline in value of homes. It simply adjusts the loans to the current, depressed, prices.  The plan, therefore, does nothing to help homeowners to recover disappearing bubble equity…

3 Responses to “Is access to mortgage refinancing enough?”

  1. True, but the only thing you could do to get the prices back to 2006 levels is to re-inflate the bubble, and that’s the last thing we need! People need to accept that those are not the real prices anymore, and maybe refinancing will make that a little easier to accept. The refinancing plan is not only meant to stimulate consumer spending, but also to stop people from sending their keys to the lender and abandon their homes. This is unique feature of the US housing market, as homeowners in most other, Western countries cannot just walk away from their home. In those other countries, if the lender can only sell the home for less than the outstanding loan amount, that means the lender can try to get that money from the borrower. This means, non-US borrowers have less of an incentive to walk away from their home. The refinance plan takes away the “walk away” incentive from borrowers/homeowners.

    Somewhat related to this and to be published in the NYT this weekend:

  2. danielbeunza Says:

    Very interesting. I too had observed that “jingle mail” is a specifically American feature. It is certainly problematic in that it aggravates the down cycle, but the advantage is that it forces bank to share in the pain from predatory lending. KInd of both good and bad, I guess…

  3. Yes, it could be good and bad, but the way a lot of predatory lending was “designed” (with the idea of ever increasing RE prices), the lender would benefit from this. Many loans were overpriced to stimulate defaults so the lender could take possession of the house sooner rather than later. Then the house could be sold at a profit by the lender because prices always go up… at least that’s what they thought.

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