[click to enlarge]Home refinancings have not responded to lower interest rates.
by Alan Boyce, Glenn Hubbard, and Chris Mayer
[excerpt:]
"[T]hese mortgage-market frictions are slowing the economic recovery by limiting the benefits of low interest rates for household spending. Unable to refinance their mortgages the way corporations have been able to refinance their debt, consumers are left with weak balance sheets and mortgage payments often above of the cost of renting, contributing to excessive delinquencies and foreclosures. These constraints on refinancing have a disproportionate impact on middle-class borrowers with origination balances under $200,000 and poorer credit and whose employment opportunities have been hit especially hard by the recession....
[Under our plan] we expect mortgage payments to fall by about $70 billion, benefitting about 25 million borrowers...This plan would function like a long-lasting tax cut for these families. Empirical evidence suggests that consumers spend a larger portion of permanent increases in income than temporary increases....
The housing market benefits in many ways. Lower mortgage payments reduce future defaults, helping to stabilize house prices for all homeowners, whether or not they have a GSE/FHA/VA mortgage. The good new about refinancing may help improve consumer confidence, further benefitting the housing market. House prices may start to go up, leaving fewer borrowers underwater, starting a virtuous cycle."
We see who will benefit, but who will pay? That would be investors in vintage residential mortgage-backed securities (RMBS), who would have to accept massive prepayments of loans made during the height of the housing bubble. But shed no tears for those investors, who, according to Boyce et al., "understood and accepted the callable nature of mortgage interest-rate risk...[and] have received an unanticipated windfall from the extremely slow refinancing rates...at the expense of existing homeowners."
Complete paper viewable here.
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