The recent overwhelming passage of the JOBS Act proves that when the business community unites behind legislation, even a bitterly divided Congress can act.
So next up on the business agenda should be an issue that’s less obviously a business concern but arguably more beneficial to the economy — pushing to unleash the spending power of millions of US households by clearing away barriers to refinancing for homeowners who are current on their mortgage payments.
That’s the single biggest step Washington can take to kick-start anemic consumer spending and boost businesses’ bottom lines. With mortgage rates finally creeping up from historic lows, the window of opportunity for such a sensible economic policy may be closing.
Despite a recent uptick in consumer spending, the disposable income of households dropped for the first two months of 2012. Without more customers, clothing stores, restaurants, and retailers of all types will have little incentive to expand and hire.
A broad-based refinancing program could allow as many as 25 million households to refinance from interest rates of over 5.5 percent to today’s rates of around 4 percent, according to estimates by Glenn Hubbard, dean of the Columbia Business School and George W. Bush’s former chairman of the Council of Economic Advisers. That would free up a collective $70 billion per year for stronger consumer spending, according to Hubbard and his colleagues.
Making it possible for even a portion of this market to refinance would be a meaningful economic boost. Indeed, the potential annual savings of $2,800 per household is far larger than any middle-class tax cut being debated in Washington.
Hubbard and fellow Columbia professor Chris Mayer first floated a universal refinancing proposal in October 2008. Even conservative economists such as Martin Feldstein have called multiple times for a sensible mortgage-refinancing program as a remedy for the overall economy.
Yet such well-grounded ideas continue to be dismissed as “bailouts” for irresponsible homeowners. The business community should help point out that they are neither: The vast majority of eligible homeowners are ones who invested significant money in their house.
To be sure, there’s no silver policy bullet when it comes to boosting the economy, but clearing away the often technical barriers that prevent the average family from locking in today’s low home mortgage rates can be done more aggressively.
The Obama administration last year revamped its existing Home Affordable Refinance Program to expand the eligibility for refinancing. The rules were modified to let borrowers with loans owned or guaranteed by Fannie Mae or Freddie Mac who hadn’t missed payments save an average $220 per month, which actually reduces the government’s risk on potentially millions of mortgage loans. That’s a step in the right direction, but breaking the refinance logjams will require both congressional action and greater pressure on lenders to accelerate the pace. Neither will happen if the business community fails to weigh in.
One problem is that the HARP program is only available to borrowers with Fannie- or Freddie-backed mortgages, leaving as many as 2.5 million other households who happen to have purely private loans unable to refinance, according to the Federal Reserve. President Obama earlier this year proposed a new program to help these homeowners refinance into new mortgages made by private companies and guaranteed by the Federal Housing Administration, a government-run mortgage insurer. Congress is yet to put that program to a vote, though, and it is even unclear how strongly the administration is still promoting it.
Companies are accustomed to improving their balance sheets and taking advantage of lower interest rates. When households do the same, businesses benefit. That’s why the business community should become a vocal advocate for helping responsible homeowners lower their debt payments.