The proposal will have little effect on the economy but could cause more harm than good
Tonight, President Obama will speak to the nation about ways in which he believes Washington can inject some adrenaline into the languishing economic recovery. It isn't hard to figure out why: job growth has been trending down and may have ceased altogether in August. With unemployment still near double digits, that's a big problem.
Some reports indicate that he'll announce one stimulus measure that purports to cost taxpayers nothing. The administration may push Fannie and Freddie to allow more homeowners to refinance at current very low mortgage interest rates. The measure might sound good in theory but will ultimately amount to another failed attempt at healing the housing market and broader economy.
Inside Mortgage Finance reports that the president could announce what it calls a re-worked "Home Affordable Refinance Program" ("HARP 2.0"). The idea is simple enough: push the agencies to allow more borrowers to refinance at very low interest rates, around 4%. For borrowers with mortgage rates at or above 6%, this savings becomes real money that can be spent to stimulate the economy.
How much money are we talking about homeowners saving? It depends on their previous interest rate and mortgage size. For a family that originally had a $250,000 mortgage at 6%, moving to a 4% interest rate would cut their monthly payment by at least $300. If their mortgage payment was initially 35% of their income, then this is like giving their income a 7% boost.