The corporate media is all a-twitter over Republican opposition to the Obama Administration’s economic stimulus proposals, and Senator John Ensign (R-NV) is calling for support for a GOP version that would amend the package to include government subsidies such that mortgage holders could refinance at 4%, and a second proposal to give first time homebuyers a $15,000 tax credit. [LVRJ]
There’s nothing intrinsically amiss in these suggestions; it’s just that they don’t really fit either the Republican insistence on having an “immediate” impact, or necessarily address the initial problems. Monthly mortgage payments could decrease for homeowners who refinance at lower rates. However, just how long will it take to process the paperwork for all the mortgages issued in this country? If there are some 4 million mortgages currently at risk, and those represent 9% of the total, then some simple arithmetic results in a total of about 44.4 million mortgages issued by various institutions around the country. [wikians] Ensign’s office responds that his suggestion is in “draft form.”
A second question that might be raised about standardizing and decreasing the current mortgages, given that we might be able to renegotiate all 44.4 million of them during this century, is: How long will it take to re-valuate all the securitized asset paper based on previous loan amounts and rates? Remember, those credit default swaps, CDO’s, and other exotic bits of flying paper were supposed have been based on mortgages with defined returns, on which some of these ‘bets’ were made. So, if we renegotiate and re-value all the mortgages, then do we have to go back and re-value all the securitized assets? Perhaps, this is another subject still under consideration in Ensign’s office?
Third, if this is a one-size-fits-all solution, are we going to renegotiate ALL mortgages including those jumbo-loans for MacMansions, second homes, vacation homes, condo properties, and ski chalets? If so, then there’s no small amount of regression inherent in this suggestion. Obviously, a family like the Bush’s which purchases a $3.07 million property in Rich As Sin Estates would see far more returned than the owners of a home in Developer’s Tract House Cul de Sac. Frankly, this sounds quite similar to the GOP tax reduction plans offered in the last campaign season with a bit of something for everyone, but more for the folks at the top.
Fourth, one of the Republicans’ objections to Democratic proposals for bankruptcy reform was that we “didn’t want judges interfering in free market enterprise and upsetting contractual obligations and mortgage terms.” Now, Senator Ensign is proposing that a branch of the federal government not only “interfere” with individual mortgages, but demand re-negotiation of all mortgages from all companies and servicers made to all customers. Senator Ensign’s office might want to give this subject additional consideration as well.
Finally, as to the $15,000 tax break for new home buyers: would this be on top of the deductions homebuyers already receive, or a flat amount? If it’s a top line item, then what would it cost? Granted, there are plenty of homes on the market. Sales of new homes declined to their lowest level on record in December, down to an annual pace of 331,000. During 2008 sales fell a record 38%, the lowest in the previous five years. The obvious conclusion is that this precipitous drop in demand means developers are still building surplus property. [Blmbrg] It does take a while to stop a runaway train.
Given a better explication of the practical aspects of this suggestion, the proposal might be a way to address the current inventory of unsold homes. However, before we get too enthusiastic it might be helpful to take a look at income trends and unemployment statistics, especially the latter. People who have no income don’t buy homes, new, first, second, or previously occupied. Thus the tax break would only assist those who already have the means at hand to purchase homes; the Haves and Have Mores benefit, but what about everyone else? If the purpose of the proposal is to get existing homes off the market then there’s some merit, but if the basic economic problem is defined in terms of existing mortgages going into default, then the proposal comes nowhere near directly addressing the issue.
If the developers are still constructing, and people are still being laid off, and the median prices are still plummeting, then offering a tax break skims the surface of the issue without taking it head on, or even sideways. But, leave it to the GOP in general, and Senator Ensign specifically, to announce that the solution to any and all problems is Yet Another Tax Cut.