Krugman:
Hope For HARPMost quick reactions to the new Obama housing proposal have been fairly dismissive, arguing that it would provide only a small boost. I don’t have an opinion yet, because I haven’t had time to work through the details — and on this kind of thing, the devil is very much in the details. (Does that make it another 666 plan?)
But lest it be lost in the shuffle,
let me send interested readers, and especially macroeconomists, to Joe Gagnon, someone I take very seriously. And Gagnon thinks that this could be huge, especially if combined with a Fed program of buying mortgage-backed securities. He’s talking maybe 4 million jobs!
This is not an endorsement of his analysis, just saying that this really needs looking at.http://krugman.blogs.nytimes.com/2011/10/24/hope-for-harp/?smid=tw-NytimesKrugman&seid=auto The Last Bulletby Joseph E. Gagnon | October 24th, 2011 | 02:59 pm
US policymakers are running out of options to solve our massive unemployment problem and get the economy growing again. The Administration’s jobs bill faces resistance in Congress. The best option that can be implemented without a vote of Congress is to work through the market that started this mess in the first place—housing. The Administration has made a good start by announcing that it plans to make it easier for underwater mortgagors to refinance and repair their balance sheets, but some of the details to be filled in will be important in determining the ultimate effectiveness of the program. In addition, to boost the overall economy and to maximize the benefits of mortgage refinance, the Federal Reserve should announce new large-scale purchases of agency guaranteed mortgage backed securities (MBS) with the goal of keeping the 30-year mortgage rate between 3 and 3.5 percent through the end of 2012. These purchases would have beneficial spillovers into almost all other financial markets.
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The Administration plans to improve HARP in several dimensions, most notably by removing the 125 percent loan-to-value ceiling, by eliminating the need for a new appraisal in many cases, by lowering fees for borrowers, and by waiving some representations and warranties that lenders are required to make to the housing agencies.
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Macroeconomic Effects
The annual savings to borrowers would be about 0.5 percent of GDP. Because of the long-lasting nature of these savings, the total effect on household spending would be greater than that of an equivalent but temporary tax cut.4 In addition, the availability of record-low mortgage rates for a fixed period of time likely would spur potential new home buyers into the market and boost home building and sales.
Even more important, if the Federal Reserve supported the refinancing boom by purchasing $2 trillion of new MBS, for example, the existing MBS holders would have to find another market in which to invest $2 trillion. This avalanche of money would surely push up stock prices, push down bond yields, support real estate prices, and push up the value of foreign currencies. All of these financial developments would stimulate US economic activity. Based on a recent Fed study (Chung et al 2011) Fed purchases of this magnitude would increase US GDP by more than 2 percent after about two years, creating nearly 3 million additional jobs. This estimate includes only a small part of the effects operating through the mortgage refinance channel discussed above, so that the total effects on the economy would be even larger, perhaps creating 4 million extra jobs or more.
http://www.piie.com/realtime/?p=2456 edit to add - speak of the Fed helping:
New Obama refi plan could get help from Fed
Another Federal Reserve policymaker signaled Monday that the central bank may launch a new round of mortgage-bond purchases to boost the housing market. The comments by New York Fed President Bill Dudley came on the same day that the Obama administration announced a major overhaul of its mortgage-refinancing program for loans owned or backed by Fannie Mae and Freddie Mac.
A new Fed program “would complement the goals of the administration in helping the housing market,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, N.J. Dudley, speaking in New York on the economy, said that the continued weakness in housing was “a serious impediment to a stronger economic recovery. . . . Mortgage rates are at record lows and house prices no longer appear overvalued on affordability measures. But obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption.”
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The Fed bought $1.25 trillion of mortgage-backed bonds in 2009 and 2010, but it has allowed that portfolio to decline to $860 billion as securities have matured.
Yellen and Dudley are allies of Fed Chairman Ben S. Bernanke. But they face opposition from some Fed officials who believe the central bank already has done enough to boost the economy.http://latimesblogs.latimes.com/money_co/2011/10/fed-housing-mortgage-bonds-buying-qe-econom-dudley-yellen.html