Back to Work - Bill Clinton [51]
2. Let people with government-guaranteed mortgages who aren’t delinquent refinance their mortgages at the current low interest rate. This step would help the economy with a multiyear stimulus that doesn’t cost the taxpayers anything. Home mortgage rates are now down to 4 percent. Fewer than one million people have taken advantage of the government’s Home Affordable Refinance Program (HARP). But there are more than twenty-two million homeowners who are current on government-backed mortgages with an average valuation of $150,000 and an average interest rate of 5.6 percent. There is widespread criticism that refinancing fees for the loans backed by Fannie Mae and Freddie Mac are excessive, especially for borrowers without perfect credit ratings. In some cases the fees may be so significant that they essentially eliminate the benefits. The assumption is that government servicers have instituted the fees because they are against refinancing, which would hurt their cash flow. Professor Glenn Hubbard and his colleagues have suggested creating a simplified process, applying a flat 4⁄10 of 1 percent fee for refinancing any fully performing loan that Fannie or Freddie guarantees. The flat fee is higher than such fees have historically been but less than they are charging currently, and still provides some compensation for the lower income the new loans will generate.
If even half of the twenty-two-plus million homes were refinanced at 4 percent, the average family’s mortgage payment would drop $2,500 a year, putting close to $30 billion a year into the pockets of middle-class families, reducing the rates of foreclosure, and substantially increasing the money families can spend to help get the economy going again. This is a benefit millions of responsible Americans could receive that would help us all. On the other hand, without refinancing, if even one million of the homeowners default—less than 5 percent—the foreclosure costs would be about $90 billion. Shutting them out of the current lower interest rates just doesn’t make sense.
3. The Federal Reserve should give the banks an incentive to lend. Another thing that might increase bank lending is to adopt an idea that is working for Sweden. Currently, because interest rates are low and banks are reluctant to lend, they keep a lot of cash on deposit with the Federal Reserve, at no cost. When the crash occurred, Sweden’s manufacturing sector took a terrible beating. Sweden was in a better position than the United States to deal with it, in part because the government had a large budget surplus of 3.6 percent of GDP. However, like their U.S. counterparts, Swedish banks had plenty of capital but were reluctant to lend and so deposited a lot of the money with the central bank. To encourage bank lending, the central bank began charging Swedish banks a small fee, a quarter of 1 percent, to hold their money. Now Sweden is growing at about 5.5 percent, much faster than the United States. One reason is the more rapid resumption of bank lending. If the Fed imposed even a modest fee of one-fourth of 1 percent on bank deposits it holds, the banks might be more willing to lend so they could make, not lose, money on the cash they have. It’s worth a try.
An investment banker friend suggested what might be a better way to achieve the same goal. He said many banks are doing well by collecting mortgage payments without making loans because they no longer pay interest on deposits. He believes that if the Fed required 1 percent to be paid on deposits by banks with low loan-to-deposit ratios, they’d make more loans, especially to small businesses. One of these ideas is worth a try.
4. Give corporations incentives to bring more money back to the United States. Beyond bank holdings, the only available large concentration of cash is in corporate treasuries. A lot of it is being held overseas. One reason