Is the Government Going to Lower Everyone’s Mortgage Payment?

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(Lucy Nicholson/REUTERS)

It’s been about two weeks since the Obama administration floated the idea of a massive mortgage refinance, and there seems to be little consensus on whether the plan would provide a boost to either the economy or the housing market.

The plan is to allow the millions of homeowners who have government owned mortgages to refinance those home loans at today’s lower interest rates. Lower mortgage payments should make it easier for struggling homeowners to make their payments and stay out of foreclosure. What’s more, a massive refi could also boost the economy. The idea is that if people had to spend less on their mortgage they would spend that money elsewhere, buying cars or shoes or whatever. The problem is a number of economists have come out to say they are not sure how much stimulus this would actually provide.

Massimo Calabresi and I recently wrote about the refinancing plan in our feature story in TIME on how to save the housing market. In today’s WSJ, Nick Timiraos, says, as we did, that the plan, as set out by Columbia Business School professors Glenn Hubbard, Chris Mayer and Alan Boyce, could save borrowers as much as $70 billion a year. But he also pulls out this nice nugget:

They further estimate that most of the savings would go to borrowers with loans of less than $200,000—frequently households that earn less than $70,000 a year. Lowering the rate on a $200,000 mortgage to 4% from 6% yields about $3,000 in annual savings, which means the plan would function “like a long-lasting tax cut,” they wrote in their proposal.

That’s important. Because if this just acted like a tax cut for the wealthy, then it’s not clear the money would be spent, and the extra mortgage savings might not boost the economy.

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Still, a number of economists are giving the plan a thumbs down. The most prominent detractor is Ed Glaeser, an economics professor at Harvard University and a housing market expert. Glaeser says the plan is a poor idea for stimulus because the benefits for homeowners would be spread over 30-years, yet the cost to mortgage investors and banks and taxpayers, which own the loans at what are considered high rates today, would be immediate. That is the opposite of how good stimulus is supposed to work. What’s more, Glaeser says lower mortgage rates are unlikely to boost the housing market or even stem foreclosures. Bank analyst Richard Bove says the plan would be a dud because it really doesn’t boost the money in the economy, just transfers it from banks to borrowers.

And normally, I would agree with Bove. Normally, if borrowers spend money in the Gap, there really shouldn’t be any difference for the economy than if they were sending money to the bank or investors. In fact, the later could be better for the economy because banks or investors could put that money back into the economy in the form of new loans or investments. But that’s not happening right now. Lending has been on a year and a half slide. And investors are running toward Treasuries, and so far those plunging bond yields have done little for the economy. So right now, putting money in consumer’s hands instead of the banks may make sense.

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Like Glaeser, I’m not 100% convinced that giving everyone a lower interest rate will boost the housing market. But I think that misses the point of the plan. Lowering the number of foreclosures will boost the housing market. There may be as many as 15 million borrowers in the U.S. who owe more than their house is worth. Lower their payments, and you are likely to lower the number of foreclosures. Fewer foreclosures should lead to rising housing prices. And rising housing prices should be better for the economy. As we said in our article, the current recovery is unusual not just for its slow pace of job growth, but also because of the lack of a housing recovery. In the past, housing recoveries have always led more general economic recoveries. That’s not happening this time, and it may be the reason the recovery has been so disappointing.

Stephen Gandel is a senior writer at TIME. Find him on Twitter at @stephengandel. You can also continue the discussion on TIME‘s Facebook page and on Twitter at @TIME.