Friday, December 19, 2008

Remortgage America

Yes, I know I've been blogging about the folly of the bailouts lately. I haven't stopped being a free market economist. But I recently discovered a bailout proposal that actually makes a lot of sense. In a nutshell, the plan is that the US government offers every US citizen a 30-year mortgage at a 1½% fixed rate of interest. How this works and why it makes sense I'll leave up to the author to explain.

Given a choice between no federal intervention in private business or this plan, I'd choose no intervention. But our government is hell bent on spending trillions of taxpayer dollars on financial bailouts in spite of the fact that most Americans oppose it. So if secretary Paulson is going to empty our treasury on bailouts whether we like it or not, I think the Remortgage America plan is far superior to any of Paulson's hair-brained "economic recovery" schemes. Plus, the treasury would get paid back the outlay for the plan with interest.


Anonymous said...

I had my own plan prior to the bailouts and that is to have the Fed Gov be the guarantor of 4%, 30 year mortgages for ALMOST everyone which would free up hundreds of $$$ for homeowners, every month! The one time $300-$600 injection is unlikely to have much impact. American investors can put money into a Mortgage fund, instead of the stock market, and would receive a 2-3% return and they would be happy with the smaller guaranteed return, especially knowing it went to SAVE America! The spread can go to pay the costs of the program. Now the consumers have alot more money EVERY month and they can decide where and how to spend. Of course this needs refinement but the idea is similar to remortgage america with its 1.5%. Bailing out the top executives and thinking it will trickle down to us is a joke. Is anyone in government awake? Is anyone in government asking US what we think? I am an optimist going sour! I'm a former Bush voter but now putting my hopes on Obama.

Dennis Paulaha said...

As the contributing writer for the Remortgage America idea, I would like to give you some follow-up thoughts, based on the responses to the idea.
Thank you,
Dennis Paulaha

The comments posted on the blog are thoughtful, positive, intelligent, and supportive; and because I helped write the article, I want to respond to some of the questions that were raised.

Do the numbers add up?
The numbers do add up. This is not a “stimulus” plan; it is a plan to prevent a depression and change the structure of the US economy in a way that will promote growth and prosperity far into the future.

Who gets bailed out?
This is not a temporary bail-out plan. It is a plan to prevent a depression and secure America’s future.

What do the numbers look like?
There are about 50 million outstanding mortgages in America, with an average value of $225,000. The total value of existing mortgages has been estimated to be between $10 and $11 trillion, but falling market prices have reduced the real market value to maybe $7 to $9 trillion. If 20 million mortgages were initially rewritten, someone would have to come up with about $4.5 trillion. But remember, this is not government spending, it is money used to make loans that will be paid back.

Where would the $4.5 trillion come from?
The best answer is from the Federal Reserve. The Federal Reserve, which is currently lending money to banks at 1% or less, could create new money to make mortgage loans to citizens instead.

What would a huge increase in the money supply do to prices?
This would not be a “normal” increae in the money supply. But it would increase M2 by about 50% and would almost certainly cause prices to increase, which is a good thing.

Why is it not a normal increase in the money supply.
Under this plan, the $4.5 trillion increase in the money supply would not be “spent.” It would be used to finance new or existing mortgages, which means it would go through homeowners and directly into the financial system where it can be used to make new loans.

Why are price increases a good thing?
Because falling prices (deflation), which we now have, is disastrous for a market economy. When everyone expects prices to fall, no one wants to spend money, unless it is absolutely necessary. They wisely wait for lower prices. The result is decreased sales, lower profits, cutbacks in production, and increasing unemployment, which leads to further decreases in spending. It is a downward spiral that, if not stopped, turns into a depression. That is why using an increase in the money supply to finance mortgages not only saves people’s homes and gives them more money to save or spend every month, it also reverses the negative impact of deflation.

How much will spending actually increase?
If the average monthly payment on a $225,000 mortgage falls from $1,497 (at 7%) to $777 (at 1½%), the average mortgage holder will have an extra $720 to save or spend every month. For 20 million mortgages, that is $14.4 billion a month, or $172.8 billion a year—year after year, which is certainly more effective than a one-time stimulus check. But, because the actual increase in saving or spending by the 20 million consumers who refinance their homes is about $173 billlion a year—not $4.5 trillion—the impact on prices would be small. Meanwhile, the $4.5 trillion created by the Federal Reseerve is injected into America’s financial system.

Isn’t this just another way to give money to banks?
This is not a bail-out or hand-out for banks. Instead of giving money to banks, banks get money only because mortgages they hold are paid off.

What about the the payback?
The payback begins immediately, because the government will receive about $15.54 billion a month ($184.8 billion a year) from mortgage payments.

What about tax revenues?
Tax revenues will increase, because as the economy turns around, profits, employment, and wages will increase.

What’s the bottom line?
This plan will require a lot of money. But there is a way to get the money that adds even more benefits to the economy. And before you think that $4.5 trillion sounds like too much money, current plans are already running into the trillions, and more and more experts believe we shoud be spending even more.

Will Washington poiticians get on board?
The real question is: Do we want to save America? If the answer is, “yes,” then the issue is not how much money we are talking about, but how the money is spent. Or, to be as blunt as possible: Does anyone else have a plan to spend money with a real possibility of success?

What does the person who paid for the ad have to gain?
Nothing. Except the opportunity to live in a more prosperous America.

Anonymous said...

I believe that the remortgage america plan is the answer to those of us that have strugled to get ahead in this country. As a Vietnam veteran even with the GI bill I could not afford a mortgage because of all the rules and regulations and exceptions it has. I pay rent because my government does not really take care of the people that have served in the arm forces. As you could see by the number of Gi's that are coming back from war, about 10% or more are without work or living in subhuman conditions. We need to really push this plan and similar others to get us back to our golden age in this country, the 50's thru the 70's, where people did have money to spend and our country was not so involved in giving things away so readilly as we do now to other countries that really do not help us in our economy. Mr. Obama we voted for you because of all the good things you promised this country and yet you only have taken care of the rich banks and their needs. It is our time to shine, please give us this opportunity to turn this country around. We can do it together.

Anonymous said...

If the person who paid for the ad "has nothing to gain" why is s/he or the corporate entity so shy about revealing their identity? It makes me suspicious and untrusting, not the goal of this plan I'm sure.

The Progressive said...

When I consider the additional comments of Dennis Paulaha and the economics, I can't see how anyone would benefit directly except for the American homeowners with their lower mortgage payments. Lenders would benefit by their mortgages that would otherwise be toxic getting paid off but it would be balanced out by the loss of a segment of the home mortgage market. However, I could see all Americans benefiting indirectly by a healthier economy. I really like this idea -- even more so with Paulaha's additional feedback.

The Progressive said...

I found the following message emailed to me by Joseph Klein regarding this post:

"I read with great interest your article published today in South Florida’s local newspaper, The Sun Sentinel. As a homeowner who purchased two blips below the height of the housing bubble ($268K, Nov 2002), I watched as my home soared in value to probably over $700K, than back down to its present value of about what I paid for it—maybe a little more. The difference between my actions, and why the housing market is in its present condition, is that I did the right thing—I made my payments on time; ripped up all the cash out refi letters; and actually refinanced from a 30-yr down to a 15—leaving me with about 9 years left on my mortgage, at 5.8%--a GREAT rate 5 years ago! I’ve struggled to make my payments over the last few years, taking a grand total of 1 vacation in the last five years--with airfare/accommodations paid by my father-in law!"

Too bad there weren't more responsible homeowners like this during the real estate boom in the middle of the last decade.