The Federal Housing Finance Agency says it’s protecting taxpayers in nixing a proposed refinancing plan being pushed by the Obama administration. But its math may not add up.
The Federal Housing Finance Agency said it had concluded after months of study that debt forgiveness might benefit up to half a million homeowners, but that the costs — including the cost to taxpayers — outweighed the potential benefits.
Offering debt forgiveness “would not make a meaningful improvement in reducing foreclosures in a cost-effective way for taxpayers,” the agency’s acting director, Edward J. DeMarco, said in a statement.
“The choices we’ve had to make are hard but they need to be made,” he told reporters.
DeMarco, focusing solely on the cost of mortgage reduction, admitted that lowering debt levels and its impact on economic growth were never considered — a failure that undervalues the administration’s plan and leaves far too many vulnerable to potential default. If that were to happen, it would be a huge additional drag on the economy. Ezra Klein points this out on his Wonkblog:
The key to the refinancing plan DeMarco rejected is the fact that the vast majority of mortgages backed by Fannie and Freddie are paying interest rates above 5 percent, well above current interest rates of about 4 percent. If the mortgages were refinanced, that’s a substantial amount of money that each of the 30 million families with Fannie or Freddie mortgages would save on their payments every month. Hubbard estimates (pdf) that the average borrower would save $2,800, and that the total savings would come to $70 billion.
It would function, effectively, like a $70 billion tax cut, albeit one that actually makes Fannie and Freddie money. Most studies suggest that tax cuts have a stimulative multiplier, meaning the economy would grow by more than $70 billion. Zandi, for instance, estimates that low-income tax cuts (and refinancing would disproportionately help low-income families) have a multiplier of about 1.24, so the total economic impact could be around $86.8 billion. That’s growth of about 0.56 percent, based on the latest GDP data, which translates to about 0.28 percent lower unemployment. That’s not huge, but given the size of the labor force, it’s around 370,000 new jobs.
So why wouldn’t DeMarco do it? He argues that it would lose taxpayers money.
There are two problems with that explanation. One, that isn’t how DeMarco, under the statute creating the FHFA, is supposed to be exercising his authority. He is supposed to protect Fannie and Freddie’s finances, to ensure (pdf) that they are “in sound and solvent condition,” not to prevent net losses of taxpayer money. Two, it’s not even clear he’s correct. As Krugman notes, DeMarco’s analysis fails to take into account the benefits to Fannie and Freddie of the economic growth resulting from the plan, a pretty glaring omission.
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