Housing Costs and Mortgage Refinancing
A common view of budgeting and finance is that housing costs should make up no more than 30% of a household’s pre-tax income. Unfortunately, according to the US Census (via the WSJ), there are currently 41.7 million households (36.7% of the total) above this threshold.
Most of the stress is falling on households with lower incomes- households that most need to refinance, but cannot given their low incomes and banks’ tightening of lending standards. Households that are paying higher mortgage rates are at a greater risk of default and then foreclosure and are less likely to spend money in the economy.
Glen Hubbard (Dean of the Columbia Business School) and Chris Mayer (Vice-Dean) argue in the New York Times that the solution is to refinance Fannie Mae and Freddie Mac mortgages at current rates. Their argument:
Consider a family that bought a home in 2006 for $225,000, taking out a $200,000 fixed-rate mortgage at the prevailing 6 percent interest rate with monthly payments of about $1,200. That home is now worth about $175,000. The family still owes $189,000 and thus cannot refinance because they are underwater.
But under our proposal, the family would be offered a new mortgage at today’s prevailing rate of 4.3 percent. The family would see a 15 percent decline in their monthly mortgage payment, saving more than $2,000 per year. This would not only help homeowners through the current crisis, but would be the equivalent of a 26-year tax cut of more than 4 percent of income, assuming the family spends around 30 percent of income on housing.
There are about 37 million outstanding mortgages now guaranteed by the federal government. Analysts at Morgan Stanley and JPMorgan Chase have crunched the numbers on programs like ours, and have estimated that it would save homeowners, most of them middle class, about $50 billion a year in mortgage payments.
Seems like a win-win situation that will decrease foreclosures and help the economy. Would be great to see it enacted.
