Bill Gross Calls For Massive Taxpayer-Backed Mortgage Refinance (GOOD!!)

[Kurt_and_Hunter]

This is good. (Even if it benefits Bill Gross, it's good.) This sounds like what I wanted done with consumer debt in February 2009.

Interest rates are very low. If people in trouble could reduce interest payments on debt they could buy more stuff, but they cannot refinance because they are in trouble. (The rich are all cleaning up their balance sheets nicely by refinancing all their debt.) The cheapest way (lot of money up front but cheapest as it plays out) for the government to stimulate demand is to refinance existing debt almost automatically. (Doing it case by case takes too long and misses the point.) You don't get it all back, no more than any lender does, but you get most of it back.

IMO, consumer credit would have been better but mortgages are good too.

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Famed Investor Bill Gross Calls For Massive Taxpayer-Backed Mortgage Refinance Initiative

The head of the world's biggest bond fund, bemoaning the slow economic recovery, reignited debate Tuesday by publicly supporting a massive new refinance program currently roiling the mortgage bond market by describing it as a form of fiscal stimulus that wouldn't add to the deficit. Bill Gross, who runs Pacific Investment Management Co.'s $239 billion Total Return Fund, said that policymakers "should quickly re-engineer" a plan that would refinance all non-delinquent mortgages backed by the federal government. The rate on a 30-year fixed-rate mortgage averaged a record-low 4.44 percent in the week ending Aug. 12, according to taxpayer-owned mortgage giant Freddie Mac.

Taxpayers guarantee the mortgages of 37 million households, or two-thirds of all homeowners with a mortgage, according to a July 29 note by David Greenlaw, Morgan Stanley's chief U.S. fixed-income economist. That includes government agencies like the Federal Housing Administration as well as twin behemoths Fannie Mae and Freddie Mac. Greenlaw estimates about 18.5 million taxpayer-backed mortgages are at rates higher than 5.75 percent interest.

By refinancing those mortgages at current, lower rates, Greenlaw believes those homeowners would save $46 billion a year. Gross said the refi scheme would spur some $50-60 billion a year in new consumer spending and raise home prices between 5-10 percent. Forecasters, including Fannie Mae, say home prices are set to decline the rest of the year and into 2011. Former Federal Reserve Chairman Alan Greenspan said this month that a so-called double-dip recession is possible "if home prices go down."

In theory, the proposal would immediately help those homeowners, as they'd save on their monthly mortgage payment, and it could help the broader economy because homeowners could take the savings and spend it, spurring growth. And because homeowners -- particularly those who owe more on their mortgage than their house is worth -- would have more affordable payments, less of them would fall behind and face foreclosure, stabilizing the housing market and leading to an uptick in prices.

http://www.huffingtonpost.com/2010/08/17/bill-gross-mortgage-refi-_n_685228.html

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Krugman:

Gross On Debt

We’ve been scooped! Yesterday Robin and I were talking about the implications of a balance-sheet view of the economy’s troubles, and realized that it makes a strong case for using Fannie and Freddie to bring down homeowners’ debt burdens.

http://krugman.blogs.nytimes.com/2010/08/18/gross-on-debt/