Cut mortgage rates to build economy
TEXT OF COMMENTARY
BOB MOON: North Dakota Democrat Kent Conrad is the chairman of the Senate Budget Committee. The lawmakers who've been drafting that bill agreed last night to hand home buyers a tax break of up to $15,000. The cost of that add-on pushes the Senate version of the stimulus package to well above $900 billion.
Commentator R. Glenn Hubbard would like to see them go even further, with a plan he's been pushing to have the government subsidize mortgage rates. Mr. Hubbard argues that since housing is what got us into this mess, it just may be the most effective way to turn things around.
GLENN HUBBARD: President Obama is right to stress the need for a stimulus package to build a foundation for economic recovery. But the biggest bang for the buck lies in housing, the epicenter of the financial crisis.
The government can increase housing demand, house prices and consumer spending with one policy change -- by lowering mortgage rates. And it can do so with little cost to taxpayers. Here's how:
Remember that the government controls the mortgage market through its conservatorship of Fannie Mae and Freddie Mac. So the Treasury could issue bonds and fund the housing agencies. Their lower costs of funds would enable lower mortgage rates. How much lower? Say, 4 percent on a 30-year fixed-rate mortgage. A lower rate would still allow an ample spread to compensate for default risk, prepayment risk, and underwriting costs.
Current futures markets suggest that house prices will fall by at least 12 percent in the next 18 months. But lower mortgage rates would put a floor under falling house prices by increasing housing demand and raising house values.
Since Americans spend about 5 percent of home equity on consumer goods and services each year, increasing housing values by as little as 10 percent could raise consumer spending by about $100 billion per year.
And, if refinancings at the new lower rate were permitted, millions of middle-income Americans would receive a tax cut averaging $400 per month. Unlike a one-time rebate, this reduction in mortgage payments would be permanent, and a much greater spur to consumption.
This raises a bigger question: Given the chaos of the recent past, wouldn't a return to simple, long-term fixed-rate mortgages with a low rate be right for the long-term future? Such simplicity could limit the chance of a future mortgage crisis.
Certainly for now, the best foundation for stimulus and recovery is a house -- or at least a new mortgage.
MOON: R. Glenn Hubbard is dean of the Graduate School of Business at Columbia University.