“EXCUSE ME, SANDY, BUT IF I KILL ALL THE GOLFERS, THEY’RE GONNA LOCK ME UP AND THROW AWAY THE KEY.”

9/6/11

Today’s “The Outlook” section in the Wall Street Journal (9/6/11, page A2) reported on

“One idea that sounds easy enough: Stimulate consumer spending and stem further carnage in the housing market by allowing more homeowners to refinance.”

The article, just the latest edition of this argument, then goes on to outline some of the barriers to large scale refinancings, such as Fannie and Freddie’s “buy back” policy’s chilling effect on home lending, Fannie and Freddie’s higher fees on riskier buyers (i.e., the buyers who would comprise most of the refinancees under such a program), and the claims of second mortgagees. But the article concludes, as do most other article on this subject, that refinancing would be a terrific, painless way to give the economy a shot in the arm.

Excuse my ignorance on this issue, but I have a question: What about the incomes and purchasing power of the people who are currently receiving the payments on the mortgages that will be refinanced? When these loans are refinanced at lower rates, won’t these investors be receiving less income and thus have their potential spending (more on this later) impaired? Wholesale refinancing is not the financial equivalent of dumping pixie dust on the economy, anointing winners while creating on losers. Borrowers will win, lenders will lose.

One must have to assume that the mortgages are held by those evil banks to think that refinancing will be the elixir that its proponents would have us believe it will be. But the despicable banks’ holding the lion’s share of this paper is highly unlikely; these mortgages have been packaged into mortgage backed securities (“MBS”s) that serve as the collateral for collateralized mortgage obligations (“CMO”s). These CMOs are held by a whole range of investors either directly or, more likely, indirectly through mutual funds, pension funds, hedge funds, or any number of investment vehicles more or less widely available to individual and institutional investors. When the mortgages are refinanced, these investors must accept even lower yields on their investments. These are people who spend money, or invest money, too; will not their reduced incomes have an impact on the economy? To the extent that such investors are retirees living on their nest eggs, this latest impairment of incomes and purchasing power, coming on top of the virtual robbery of such fixed income investors being conducted by the Bush/Obama administration and its henchmen, Obsequious Ben and the Washingtonians, will be just another step toward having to survive on subsistence incomes.

Perhaps those who promote massive refinancings as an economic elixir are counting on all the paper into which these mortgages have been sliced and diced being held overseas, perhaps by our latest all purpose bete noir, those evil Chinese (See, inter alia, my 8/24/11 post, “EGAD…IT’S LON CHANEY, JR.!”) It is a logical supposition that some, perhaps a large chunk, of such paper is held overseas, but taking this supposition too far is dangerous given the traditional risk aversion of overseas public investors, especially, perhaps, Chinese and other Asian public investors. Further, the argument that refinancing will help the economy because those whose monthly payments are being reduced are more likely to spend the money than are those whose incomes are being reduced (The second supposition is dubious but maybe plausible if these investors are the domestic elderly or the domestic anybody and reasonable if the investors are overseas, at least as far as spending in this country goes.) rests on the very questionable proposition that the way to solve a problem born of too much spending and too much debt is to encourage more spending and more debt. Unfortunately, the Bush/Obama administration, Obsequious Ben and the Washingtonians, 99% of Congress, 95% of the punditry, maybe 90% of the economics profession, and, say, 85% of the “investment community” buys into such nonsense. So, one way or the other, we will see programs designed to foster massive refinancings of home mortgage loans in order to “put more money into the pockets of consumers.” Then we will wonder why no one wants to save money in this country.