Could the government create a backdoor stimulus?

[Roland99]

Could the government create a backdoor stimulus?
Refinance idea could inject cash into economy; but critics worry about costs
http://www.marketwatch.com/story/could-the-government-create-a-backdoor-stimulus-2010-08-04

An idea that could create a massive refinance wave -- and a back-door stimulus program to boost consumer spending -- is generating debate among investment bank analysts in New York and in Washington policy circles.

...

Analysts at the investment bank contend that millions of mortgages backed by the U.S. government could be refinanced without the need for an analysis of a borrower's credit quality because the principle is already backed by the government. Many homeowners who are unemployed, have poor credit or who owe significantly more than their homes are worth currently can't refinance, but would be permitted to use such a program.

Such a sweeping refinance program could boost the economy by injecting cash for spending into the hands of millions of consumers in the form of lower home-loan payments, they argue. It could also help some borrowers avoid foreclosure and help stabilize neighborhoods.

However, critics of the idea argue that the Obama administration would never employ such a backdoor stimulus because the costs to the system are significant and outweigh the benefits.

A stimulus? By helping a small % of Americans that are behind or have their homes in the foreclosure process?

How exactly is that going to pump money into the economy???

It's going to pump money into banks who are sitting on devalued assets in order for them to not lose more money. Of course Morgan Stanley analysts think this is a worthy idea.

[zipplewrath]

1. Lowering their monthly payments

They will be refinancing for a new 30 years, for the remaining principal. They are in effect extending the length of the loan. That allows them to spread the payments over a longer period which CAN reduce monthly payments. Additionally, since current rates are low, they might also be realizing a reduction in interest rates, which can also be reflected as a lower monthly payment. And then there is the scarey part. For those who have enough equity, they could also increase the loan amount, take some cash out, and spend it. All of these things would have a stimulitive effect. Not exactly desireable by any stretch, at least as compared to some cram downs. But it would avoid congress and all.

[Winterblues]

2. What is to stop people from doing that right now?

:shrug:

[Roland99]

3. According to the article, some don't have good enough credit histories.

[Roland99]

4. fair amount of IFs in the scenario.

[zipplewrath]

5. Well, replace it with "for those who"

It's not an "if" in the sense of there aren't people for whom it is true. It is a sizable, if small overall portion, of people out there, and the belief is (backed up by past history) that those are the people who would take that cash straight to a cash register somewhere, as oppose to switching the cash to other debts.

[Roland99]

6. I referring mostly to lowered interest rates

Rates have been low for a few years now. And, if these are mostly people with poorer credit histories, getting lower interest rates is not likely to happen.

Also, if these people are behind in their payments or having to give up other necessities to keep making the payments, lowering them a bit will more than likely just bring them to barely above water, if at all.

Calling this a stimulus is quite disingenuous.



It's saving the banks who have been hoping and waiting for a recovery in the housing market to help them re-capitalize without having to keep more in reserves (more in reserves means less can be loaned out at those 9:1 and above leverage ratios)

[jtuck004]

7. Saving banks, who have mark-to-myth on their balance sheets. Exactly. n/t

[zipplewrath]

8. There are folks this would help

About the only way it helps the banks is that they can covert loans that are in danger of collapse, into guarenteed loans.

The folks it will help have been in their homes long enough to have equity, but who need to refinance and don't otherwise qualify.

There's no doubt that none of this is going to result in the kinds if improvements that some cram downs would have.

[Roland99]

10. The original program is designed for those with better loan-to-value ratios

this new "stimulus" is for those whose home is worth less than the loan, are unemployed, or have low credit scores (the people that don't qualify for the existing program)

[asdjrocky]

9. I'm not making the joke.

I'm not making the joke. I'm not making the joke.