Former Bush aide: Refinance everybody at 5.25%

Former White House economic advisor Glenn Hubbard -- that's him pictured just to the left of the president -- is proposing a sweeping plan to boost housing prices by offering across-the-board, government-backed 5.25% refinancing to all American homeowners. Here's what Hubbard and Chris Mayer wrote in the Wall Street Journal last week:

We propose that the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac. Investors and speculators should not be allowed to qualify.

What's the point? To drive up housing prices. Yes, to drive housing prices higher -- to put value back in mortgage-backed securities, to end the credit crisis. Seriously:

... the cost of buying a house is now 10% to 15% below the cost of renting across most of the country. Rising mortgage spreads and down-payment requirements are what's still driving down housing prices. We need to stop this decline.

He's saying housing is too cheap and we need to use the government to make it more expensive. I'm not making this up. This guy, Glenn Hubbard, was chairman of the Council of Economic Advisers under the current president.

Ideas like this one explain why I'm not certain housing prices will continue to decline back to historical levels in relation to income. In short, I'm not sure the government is willing to stand by while air rushes out of the housing bubble.

It's true, housing prices in much of America are too high relative to income, which means they should continue to decline. But further declines in housing prices will cause more economic pain for many homeowners, and the government seems hellbent on bailing out current homeowners at the expense of future home buyers.

-- Peter Viles

Your thoughts? Comments? E-mail story tips to Peter Viles
Photo: Associated Press

Comments

[E]

Look at all the EMPTY homes and condos currently for sale.

No homeowners to be helped there.

Prices will still fall hard.

NEXT!

[TC]

I wish they would quit looking at housing as everyone's asset. My biggest financial liability is my house, my biggest financial asset is my job.

Start looking into a way to keep jobs, otherwise there absolutely will be a depression. Let the rotten housing market self correct and the buyers will return because they still have jobs and money saved.

Why are stucco boxes with grass farming tenants worth anything?? Affordability in housing is crucial, right after employment.

[Frugal Saver]

My questions are these:

1. Will enough people be able to afford their current mortgage at a fully amortized 5.25% rate?

2. Even if they can afford it, would they be willing to stay on the hook for a home that is worth significantly less than they owe?

For the record, my husband and I are the stupid minority who have been waiting on the sidelines and renting throughout this entire bubble. We're waiting until we find something woth the price being asked. So far, it hasn't happened. And yes, we plan to put at least 20% down.

[MyLessThanPrimeBeef]

This all started with parents sending innocent kids to 'good schools.'

They ended up advising our presidents and Wall Street bankers.

And now we have one BIG CRUNCH created by all thes smart guys and gals.

I think Harvard and Yale own Americans a big apology. They graduated way too many people un-qualified to lead.

[150 multiple choice questions]

What an ass. And these are the people who not only got us here but continue to give advice... the major reason the USA is going even deeper into the toilet as the country that not only celebrates the criminal, the liar, the stupid and the illiquid. We pay them! And we do it while penalizing the hard working and responsible.

Anyway, Hubbard, please show some examples where trying to artificially support asset prices has worked. (You can't. It has NEVER worked except for very short periods of time) This is the crux of the problem as the unbelievably stupid sheep in Washington continue to try and throw more money that was caused by too much money and failure to manage expectations for growth and income.

Also, current homeowners are not where prices are set. In order for this idiots plan to work, you need to have those rates or lower FOREVER! Is this too difficult for these clowns to understand? I think there needs to be a 6th grade math test for everyone in Washington and I have a good idea who wont pass. (the majority)

And keeping people in houses there underwater on does not help the homeowner, it helps the banks who continue to get paid on an asset for more that it's worth. INTEREST RATES MATTER VERY LITTLE, IT'S PRICE THAT MATTERS!

But he is right about one thing. Rents are too high!

[QuestionMan]

Forgive my economic ignorance, but what would this proposal mean for banks or credit unions who depend on having outstanding home loan payments to pay interest on deposits?

[OverIt]

Economic fundamentals have been pretty much ignored for the past decade or so - why change now? Beyond that, this kind of short sightedness is exactly what landed us here in the first place. Who cares - save Wall Street at any cost!

When and if this proposal is adopted, it's time to look outside of California (and possibly outside the U.S.) for an affordable home. I guess the Realtor's may actually turn out to be right about "buy now or be priced out forever". Whodathunk?

[samuel]

do you have his contact information ?

I would like to call him and meet up with him and punch him in the face for such a stupid retarded idea that only a trust fund spoiled rich brat who needs to get a gun stuck up his ass would come up with

will he please take over my house ?

it is only 5MM and my payments are 70k a month

of course I overpaid, come to find out that it is only worth 1 MM

I am currently suing for the difference

[fred]

didnt it occur to you that unless these are perpetual, assumable mortgages it will have minimal impact on house prices because no one will be able to buy the dam house from you if he has to pay a market rate of interest on the acquisition debt?

you could think this through before you write, you know.

the only result would be a minimal decrease in foreclosures and concomitant price contagion.

[Nelcisco]

which proves my point Primebeef that education doesn't mean leadership skills, just look at the Forbes list of the top billionaires and look at their education, alot of them are dropouts.

[socalinvestor]

This is astounding. The WSJ actually published this. This proposal sounds like something a high school student thought of in an Economics 101 class in its utter simplicity. The author didn't even caution about the possible consequences such a move would have.

What a sad state our capitalistic society has stooped to. Regulation upon regulation, bill upon bill. Everyone needs to realize that the hot-air needs to be let out of the bubble one way or another. Its a natural consequence of what just happened for the last 5 years.

[GimmeABreak]

This is ridiculous. Most of the people in trouble now cannot afford even a low rate such as this proposed one...remember, the only way for financially irresponsible people to get into a house back in the day was by lying about their finances and/or by getting a teaser rate of 1 or 2 percent. Instead of reading the actual paperwork they signed, they relied on an agent or broker telling them not to worry about when that rate went up, since prices would go up forever and they could refinance...

Why should these people get the benefit of a good rate now to reward their stupid behavior?!? Idiots--homeowners, lenders, government talking heads---idiots, all of them.

[Dan]

This is the disgusting legacy of the "conservative" Bush administration: spend spend spend, more government, more government, more government.

Stop interfering, let the prices fall so that they're in line with household income, and everything will settle.

Why should I be punished for sitting on the sidelines, renting responsibly, until the dust clears?

This proposal literally takes money from my family and funnels it to the irresponsible folks who bought homes they couldn't afford.

Sheer insanity.

[TrojanDLA]

IDIOT with a capital " i "

Unbelievable. It's as if they don't have a clue about "free market" economics.

[sunsetbeachguy]

Pete:

I guess that you just missed CR's post on this topic.

CR is usually pretty reserved, but he was sharply critical of the analysis as flawed.

Paul Krugman commented on the analysis as well and noted CR sharp tone debunking the study.

It is more partisan junk economics, facts be damned, we make our own reality wishful thinking of the Bush Administration.

I guess it really is true that reality & facts have a liberal bias.

[MyLessThanPrimeBeef]

Correction: make that 'owe' and not 'own.'

Also, I would like to add that while I did not include UCLA, it was not because they didn't try. They did. It's just that they weren't as good at graduating unqualified people as Harvard and Yale.

It reminds us of the Democrats claiming how corrupt the Republicans are, or vice versa, pointing out how much money the opposite side has taken in, when in fact, they are just as currupt and desirous of bribes, but often just aren't as good at it. But somehow that emboldens them into decrying about their corrupt or destructive opponents.

Unfortunately, I take the cynical view that if one party is destroying the country, the other party is only able to claim a clean hand because it hasn't gotten the chance yet.

[Michael Snyder]

What is this, a "Ship of Fools"? With all of Paulson's "brilliant" manipulation of the market the only thing climbing is the LIBOR.

Glen Hubbard seems to have the typical Bush Administration disconnect with reality. Somehow he seems to think he can wave the "magic wand" of legislation at an issue and it will succumb to "the will of the people". Right. Just like Congress listened to their constituents last week.

Hank Paulson made a fatal error when he held his "midnight meeting" and spooked the herd. Cattle don't care much about thunder, but set to creeping around the edge of the herd and look out. I don't think he can ride well enough to turn that herd either.

Now Hank got his billions, but he let the whole world know the train's been out of control for a while. If he'd read this Blog a year age he'd have known those "poor people who have no idea what's at stake" actually have been on to him & his for some time.

"Un-leveraging is a polite term for forcing the American taxpayer to bear the cost of the multi trillion Ponzi scheme dubbed the "Financial Derivatives Market". Basically we've all just signed on for the Neg.ARM from the Bush constituency of the wealthiest 400. Personally I'd rather deal with the Devil

In spite of all the billions of dollars and hundreds of pages of legislative hyperbole not a single paragraph has addressed the fundamental issue of transparency. Neither have either of the front running Presidential candidates; demonstrating once again it's business as usual in DC.

[Moopheus]

Gosh, yes, many people are being foreclosed on because they can't really afford the homes they want, so let's make sure prices stay high so that buyers in the future won't be able to afford them either (anybody seen any wage growth lately? Expect any soon?). That way, those buyers will get foreclosed on too, but at least realtors and brokers will still make commissions. Jeez, what an idiot (in 2005, Hubbard & Mayer said there was no bubble). Price supports for housing are a bad idea, but politicians only hear from people who are being foreclosed on now, not people who will be foreclosed on in the future.

[CompaJD]

"the cost of buying a house is now 10% to 15% below the cost of renting across most of the country"
Yeah in Detroit.
These guys in Washington just don't get it. Prices need to come down to be in line with historic fundamentals in order to restore faith in our financial system. These bubtabulistic ideas are not going to work.

[Laker]

Mr. Mayer: "Americans, on average, spend about 5% of the equity of their homes on consumer goods and services. So if home prices increased 10% above where they would have been without government intervention, we estimate consumers will have an additional $100 billion annually to spend"

I say, let's inflate the house prices 200%, then American would have an additional $2 Trillion dollars to spend on LCD, RVs, Boats, granite counter tops and other crap.
WHAT KIND OF BS IS THAT? This is a professor of economics??? This is A MORON.
I bet he is heavily invested in Real Estate...and crying out load seeing his houses fall in value...

Mr Smart Economist: "the cost of buying a house is now 10% to 15% below the cost of renting across most of the country..."

I say this guy is nuts! California, Nevada, Florida, Michigan, Ohio, and even New York, are more than 50% of US housing. Yet at all these places rents are LESS than cost of buying. Most of the country my ***.

This is shocking that such a person with education can speak so much non-sense and we are then amazed how the average Joe 6pack can't understand his mortgage docs....
I'm sure this professor understand everything very well, he is just greedy and have vast interest in seeing his houses stop returning to their fundamental value.

[Laker]

I just finished watching the presidential debate. I'm a republican, but i'm very disappointed from McCain. His solution to buy all the bad mortgages and KEEP the people that (pick you choice) over extended, deadbeats, fraudsters, liars, at these houses instead of sending them down RENTING and allowing deserving / credit worthy / prudent / honest / law abiding / first time home buyers to buy these houses at market price!!!

I'm amazed how McCain Nor Obama failed to recognize that housing prices are correcting (and not falling) back to fundamentals. The idea behind putting a floor will only work if people are handed CASH to buy these over inflated houses.
I wish Ron Paul could be on the ticket.

[what bubble?]

I'm not an expert on real estate nor the economy but...isn't it inevitable that prices will have to come down to meet affordability? Because if people can't afford to buy...then they won't buy and the market will be stagnant, right?

I think any measures to prop up housing prices will prolong the psychology of the bubble, but in the end it all comes back to the fundamentals doesn't it?

And with all forms of easy lending gone, how will people sell homes if they refuse to meet what the market can afford? Am I being too simplistic here, what am I not understanding?

[It All Happens on the Margin]

These schemes to price risk (ie interest rates) at a government-sponsored floor artificially props up home prices.

If the bulls are right and housing will have a soft landing ("Westside will never go down"), why is this even necessary?

[Giacomo]

".. the cost of buying a house is now 10% to 15% below the cost of renting across most of the country. "

No, it's not. If that were true, plenty of people would be buying - to SAVE money on their housing.

"Rising mortgage spreads and down-payment requirements are what's still driving down housing prices."

No, it's not. Prices are still to high for people to afford with traditional mortgages, and it's still cheaper to rent."

"We need to stop this decline."

You won't be able to.

[Another frugal and priced-out renter]

Pretty darn depressing; I really don't understand the wholescale bubble denial by so many in the political class. What he claims is certainly not true in my area (Santa Barbara), where it would cost us more than twice as much to buy as it does to rent. But that's because things are still ridiculously overpriced: places that sold in the 200Ks in the late 1990s are now on the market in the 700K-800Ks. Who can afford to buy at these prices? Certainly not even upper middle class me. So I don't see how even this plan will keep prices afloat: people do have to to sell, sometime---and at these prices, they won't find buyers.