Sunday, February 15, 2009 9:40:01 AM
Rescue Plans Focus On Gov't Spending, Not Aiding Families
BY JED GRAHAM
Posted 2/13/2009
In the near term at least, the $787 billion stimulus package puts the brunt of the job of economic recovery squarely on government spending programs.
While President Obama's Making Work Pay tax credit is $116 billion over two years, less than $20 billion will be disbursed in fiscal 2009, the Joint Committee on Taxation has projected.
The lowest wage earners will get virtually nothing for another year.
"These credits will not provide much upfront cash for consumers," wrote Morgan Stanley economists Richard Berner and David Greenlaw.
The stimulus is not the only potential vehicle for increasing household cash flow. With some $12 trillion in outstanding mortgage debt, any broad refinancing effort could provide a boost that is far bigger and much longer lasting.
But initial details emerging about the Obama administration's housing plan due out this week suggest that aid will be focused on at-risk borrowers.
"What they're doing is too limited in scope" to have a forceful economic impact, said Daniel Clifton, head of policy research at Strategas Research Partners.
But this week's announcement might not be the last word, says Stanford Group's Jaret Seiberg.
Senate Republicans tried unsuccessfully to insert a measure into the stimulus bill that would have had the government help refinance all mortgages of creditworthy borrowers at a 4% to 4.5% rate.
Seiberg believes that the popularity of such a measure could make it a key to getting congressional approval of more financial-rescue funds, if needed.
Refinance booms helped fuel past economic recoveries as homeowners took advantage of low rates that were driven down by a shift to safe-haven investments.
But while refinancing has arguably never been more critical for the economy after a mortgage debt bubble tied to now-fanciful home values, few homebuyers can take advantage of today's low rates.
Half of mortgage holders are ineligible due to insufficient or negative equity, asset manager Bridgewater Associates has estimated. Others put the figure even higher.
Without directly calling for a mortgage intervention, Bridgewater has said it believes efforts to re-start lending will fail unless policymakers address the fundamental problem that debt service obligations are too large relative to available cash flows.
The Senate GOP idea came from Columbia Business School professors Chris Mayer and Glenn Hubbard, who served as an economic adviser to President Bush.
Last fall, Mayer and Hubbard estimated that providing low-cost refinancing to borrowers with sufficient equity would boost household cash flow by $175 billion a year. If extended to borrowers ineligible for refinancing, the impact would be even more dramatic.
Economists and analysts from across the political spectrum have voiced support for such an idea. But it also has generated broad opposition.
Analysts at the conservative Heritage Foundation see the idea as flawed.
"The truly catastrophic aspect of this proposal is that the $175 billion represents a transfer of income from the badly battered and nearly insolvent financial sector to 25 million relatively untroubled homeowners," Heritage argued. "Raising the purchasing power of individuals and families is sensible to stimulate the economy, but it should be done directly through reductions in marginal tax rates."
With that ship apparently having sailed with passage of the stimulus, refinancing may be the only remaining option for boosting the spending power of households.
Seiberg sees logic in the idea, particularly if it is expanded broadly with no-appraisal refinancings.
Beyond providing a boost to consumer spending, a broad refinancing would help people stay in their homes, reduce banks' losses on mortgages and leave consumers better able to afford their other debt, Seiberg says.
Much argument over the proposal for low rates focuses on its ability to stimulate homebuying. On that score, Clifton believes the stimulus bill was a missed opportunity.
The Senate version included a $15,000 credit for all homebuyers. But the final package whittled that down to $8,000 — and only for first-time buyers.
BY JED GRAHAM
Posted 2/13/2009
In the near term at least, the $787 billion stimulus package puts the brunt of the job of economic recovery squarely on government spending programs.
While President Obama's Making Work Pay tax credit is $116 billion over two years, less than $20 billion will be disbursed in fiscal 2009, the Joint Committee on Taxation has projected.
The lowest wage earners will get virtually nothing for another year.
"These credits will not provide much upfront cash for consumers," wrote Morgan Stanley economists Richard Berner and David Greenlaw.
The stimulus is not the only potential vehicle for increasing household cash flow. With some $12 trillion in outstanding mortgage debt, any broad refinancing effort could provide a boost that is far bigger and much longer lasting.
But initial details emerging about the Obama administration's housing plan due out this week suggest that aid will be focused on at-risk borrowers.
"What they're doing is too limited in scope" to have a forceful economic impact, said Daniel Clifton, head of policy research at Strategas Research Partners.
But this week's announcement might not be the last word, says Stanford Group's Jaret Seiberg.
Senate Republicans tried unsuccessfully to insert a measure into the stimulus bill that would have had the government help refinance all mortgages of creditworthy borrowers at a 4% to 4.5% rate.
Seiberg believes that the popularity of such a measure could make it a key to getting congressional approval of more financial-rescue funds, if needed.
Refinance booms helped fuel past economic recoveries as homeowners took advantage of low rates that were driven down by a shift to safe-haven investments.
But while refinancing has arguably never been more critical for the economy after a mortgage debt bubble tied to now-fanciful home values, few homebuyers can take advantage of today's low rates.
Half of mortgage holders are ineligible due to insufficient or negative equity, asset manager Bridgewater Associates has estimated. Others put the figure even higher.
Without directly calling for a mortgage intervention, Bridgewater has said it believes efforts to re-start lending will fail unless policymakers address the fundamental problem that debt service obligations are too large relative to available cash flows.
The Senate GOP idea came from Columbia Business School professors Chris Mayer and Glenn Hubbard, who served as an economic adviser to President Bush.
Last fall, Mayer and Hubbard estimated that providing low-cost refinancing to borrowers with sufficient equity would boost household cash flow by $175 billion a year. If extended to borrowers ineligible for refinancing, the impact would be even more dramatic.
Economists and analysts from across the political spectrum have voiced support for such an idea. But it also has generated broad opposition.
Analysts at the conservative Heritage Foundation see the idea as flawed.
"The truly catastrophic aspect of this proposal is that the $175 billion represents a transfer of income from the badly battered and nearly insolvent financial sector to 25 million relatively untroubled homeowners," Heritage argued. "Raising the purchasing power of individuals and families is sensible to stimulate the economy, but it should be done directly through reductions in marginal tax rates."
With that ship apparently having sailed with passage of the stimulus, refinancing may be the only remaining option for boosting the spending power of households.
Seiberg sees logic in the idea, particularly if it is expanded broadly with no-appraisal refinancings.
Beyond providing a boost to consumer spending, a broad refinancing would help people stay in their homes, reduce banks' losses on mortgages and leave consumers better able to afford their other debt, Seiberg says.
Much argument over the proposal for low rates focuses on its ability to stimulate homebuying. On that score, Clifton believes the stimulus bill was a missed opportunity.
The Senate version included a $15,000 credit for all homebuyers. But the final package whittled that down to $8,000 — and only for first-time buyers.
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