Mark Calabria

In his State of the Union address, President Obama let us know that he will be "sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates."

What he failed to tell us is that such a push would do nothing to turn around either the housing market or the broader economy. In fact, by continuing his trend of confusing redistribution of wealth with its creation, the effort will likely hurt both the economy and the housing market.

Let's start with the impact on the economy at large. The logic is that when you lower mortgage rates for thousands of families, reducing their monthly payments, you thereby increase disposable income and spending. That spending then increases demand and helps turn around the economy.

In other words, it's a no-cost stimulus.

"Continued efforts to delay foreclosures only prolong the inevitable adjustment of the housing market."

The error in this logic is that it looks only at one side of the balance sheet. A mortgage is one person's liability, but it is also another's asset. Lowering rates may cut monthly payments, but it also drives down payments on mortgages and mortgage-backed securities. Since you will have made mortgage investors poorer, they will, by the same logic, reduce their spending, lowering demand.

At best, the impact on spending will be zero. But then, that's what you get when you redistribute income.

The President wants you to believe that even if he is taking from citizen A and giving to citizen B, the latter is more deserving. But for government-owned or guaranteed mortgages, about half of those outstanding, the taxpayer is the one taking the hit. Because homeowners are wealthier than taxpayers in general, the President's proposed redistribution is regressive.

For the remainder, the investor is often a pension or mutual fund. Why retirees should pay to benefit younger homeowners is far from clear.

The President implies his plan is free because it will be paid for by a tax on the largest banks. But again, nothing is free; for every economic action, there's an equal and opposite reaction. The tax would reduce bank equity, thereby reducing new lending. In effect, it would punish potential borrowers by reducing the availability of credit while also increasing its costs, simply to benefit existing borrowers.


Mark Calabria

Mark A. Calabria, is director of financial regulation studies at the Cato Institute.
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