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

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Photo: Associated Press

Comments

[Mark]

All congress has to do is pass legislation that says house prices can only go up.

And while they are at it they can pass legislation that says stock prices can only go up also.

Voodoo economics! See how easy it is.

[Tim]

Go to Calculated Risk for a good response to the myth that owning is less than renting. If this was widely true sales would be much higher. Hedge funds would be buying up houses like mad. This would also cost the taxpayer trillions to buy the loans and compensate the banks for the loss of income.

[sanity clause]

At the end of the day, proposals like this simply stretch out the pain. If you put money into propping up unsustainable housing prices, there won't be a resale market because people who do not already own will be unable to afford the prices. As current owners have to sell, for whatever reason and not simply for inability to make the payments, price discovery will occur and those prices will be lower.

How about a post about John McCain's idea to buy mortgages and reduce the principal. That seems to be what this blog has been railing against from day one. If you could find out more of the specifics on how McCain wants such a program to work that would be great for discussion.

[Uncle Billy Is Shocked]

Doop-dee-doop-dee-doo.

Refinance everyone at 3%, 4%, 5%, etc.

Nice fixed rate loans. Does that mean that suddenly all those cdo's have a more discoverable value? Think again capitol genii. You've started an avalanche / tsunami / trainwreck / insertyourdisasterhere which means growing unemployment, which means growing numbers of people who will default on any loan. And you don't know how many this will be because you're reading and propogating fictitious statistics.

[jake d.]

You are so right Pete. I'm just waiting for the other shoe to drop. The government appointed liars and henchmen like this guy are only pushing the ideas into the media. Now that 72 y.o. candidate for the most difficult job in the country wants to buy up mortgages. And then what? Keep making payments for all the millions of people who can't afford to? Hopefully none of these plans will come to fruition before the current regime who stole the election TWICE is out of the office. My God, who would have ever thought they would do THIS much damage in 8 years?

[Rational Renter]

HELLO!!!! Even if this ludicrous plan was enacted, and it was followed to the T across the country, it wouldn't stop housing prices from collapsing back to affordable levels. Why? B/c while this would keep people from losing their homes, it doesn't solve the problem of first-time buyers not being able to afford homes. All this would do is draw out the housing collapse for another decade.

[Crash and Burn]

First of all his own observations make his whole plan impotent. He says that the down payments are what prevent people who want to from buying a home, so cheap interest rates would . . . inspire people to start saving?

For those worried that housing prices will not correct, you have not been paying attention lately. The federal government threw 1 trillion at the banking industry, and it didn't do a thing to better corporate asset valuations. For better or worse, for all of our fears of The Great Bailout, all of the power of US government can not make diamond from a turd and can't make a shack into a mansion. They can if they do things effectively (no chance until after the election) give a jump start to an economic sector (or more like a heart defibulator for the markets stopped heart) but the scope of the housing bubble is so massive, there is not a government or corporation on earth that can stop it. Only after housing prices have stabilized would a plan like this have a chance, because people will still be spooked to buy a house even after prices have come back down to reality, and this could be the jump start.

[LA-renter]

I've got a Solution...

but, first, does everyone agree that the current regime --the Republicrats-- can only dig a deeper hole?

How could people, who failed to either appreciate or ameliorate the growing problem a few years ago, be capable of dealing with the problem now. It's unreasonable.

Paulson and investor buddies are doing one of those cheapo remodeling flipper jobs on us, wallpapering over the cracks so that their problems turn into someone else's future liability.

Okay... the Solution: Legalize hard drugs. See, I'm having a hard time with reality and may soon turn to hallucinagens. Being a law abiding citizen, I'd feel more comfortable if the government sanctioned my need.

Think about it: The government could tax it or even be the sole provider. With gambling revenue saturated, this would be a shot in the arm --yes, pun intended-- for the federal and state treasuries. And, bitter renters trying to cope with reality will be provided with much needed medication.

[Steve]

You can see it coming, the morons in Washington are going to do anything to prop up home values. This refi will be implemented along with rates that will be in the low 5s. You will be screwed if you rent at this point, go in debt and buy. Look at the pattern, bottomline the Fed will do anything to support home ownership, if you rent you get nothing. Get real

[Giacomo]

I agree with other conservatives who were disappointed in McCain's take on housing. I still have to vote for him (so as not to vote for a Socialist) but I'm really holding my nose now.

McCain missed his chance to be a real "maverick" by opposing these massive bailouts and supporting the idea of personal responsibility. He was never going to be able to out-pander Obama. Now I'm preparing myself for President Obama and a few years of economic meltdown while he throws public money and programs at the problem --likely to prolong the malaise, ala FDR.

[Tom K]

Idiots all of them, we need to get some people in govt who get it that high homeprices are the problem not the solution. I am so sick of hearing all these clowns who want to reard all this bad behavior and look how well its turned out so far, how well do you think this will work. Oh maybe it fixes things for a year or so and then of course sales dry up becuase there will be no NEW homebuyers and no move up buyers and hey we are right back here again, IDIOTS

[Todd in WeHo]

That "the government seems hellbent on bailing out current homeowners at the expense of future home buyers" is my sentiment exactly. Unless the government is wiling to guarantee that all future buyers (i.e., those of us smart enough to sit on the sideline) can get this rate, prepare for anarchy!

[areles]

"I still have to vote for him (so as not to vote for a Socialist) "

haha.

how are you making the distinction?

[Louis Cabeza]

This is just madness but a fitting coda to a "consevative" President who blew the federal deficit through the roof. Since when is it the federal government's job to put price supports in the housing market? Remember the milk price supports? So, they are saying that it is a higher national priority to subsidize high homeowner property values than to subsidize health insurance or healthcare or national infrastructure? Madness, and the Democratic party is equally to blame at this point.

I think they are going to create a greater problem and squander what little national wealth we have left. So, if they keep property values artificially high, what will that do for sales if no one can afford to buy the properties? People will need to eventually sell, for one reason or another.

[Fourth Generation]

Hey people we are all very angry and upset with all these schemes to continually rip off the taxpayers to cover the irresponsible ones that caused the bubble. But it is not Washington. That is just a city where "our esteemed" representatives and senators are send by all of US when we vote for them. Washington is full of middle America-joe sixpack-folksy guys and gals. If there is some disconnect is the one created by those politicians that bring middle America stupidity to government and who are full of ideology and rhetoric but empty on experience and desire to govern. Because just like the Gipper used to say; "Government is the problem." Good luck!!!!