It depends. Are they refinancing? If that homeowner of the $225,000 house has an 80% LTV mortgage and a 6.5% rate, they'll save about $13K over five years, about the same as they would lose in appreciation in your example, for no overall net gain or loss. Yet the ability to have an extra $200 per month would help a typical family with this type of mortgage significantly.

I'm not an expert, and much of this goes over my head, but my instinctual reaction is one of skepticism unless I see a large consensus amongst economists... but that's hard to come by these days.

-- Cris
My site: Obama Wallpaper Archive

Hmm, so this is for new loans to credit-worthy borrowers and/or refinances to credit-worthy borrowers, all backed by the taxpayers and at no real cost to the banks. Do I have that right?

Starting from the point of view that it's the banks' job to do business more or less as usual and to heck with the ethics, it's not all that bad. But I hope the banks don't expect a medal, because 4.5 seems like about the amount you ought to be able to sell a mortgage for these days anyway.

What this does not do is address the plight of people who can't get out of their bubble mortgages without losing their homes--and far more important, it doesn't address the crushing fear of ending up like them, which is what's making most potential homebuyers drive around the block instead of slapping down earnest money on the home of their choice. Every single person desperately yakking about the "people who made bad decisions" knows deep down that if things get worse it's going to happen to them, too.

So starting from the point of view that our Government (as our agents) ought to actually fix this problem and get to work on a program of fear reduction through genuine risk reduction, the banks' move is pretty lame.

(Because it's so aimed at the "credit-worthy," it seems like this program might also have the unexpected consequence of allowing pre-bubble homeowners to lock in their equity at a low interest rate, while leaving many bubble homeowners out in the cold.)

Someone please do something that will quarantine, treat and cure the bubble mortgages, their owners, and their neighborhoods! Aside from being the right thing to do, it's good business for all of us. What's wrong with bailing out the bubblers? It's pretty certain to work, gets some stimulus to people who will put the money into our economy, and puts us all on a better economic track. Plus, once we do it we won't have to watch the disgusting spectacle of the financial community trying to twist business as usual into something straight out of the last scene of "A Christmas Carol."

Well, whatever they are going to do they should decide soon. No one in the market for a house is going to get a loan today, knowing that they could possibly get a lower interest one tomorrow. This discussion will put a freeze on real estate until a decision is final.

It would be an OK idea if the rate were 2% and every homeowner got a onetime refinancing direct from the federal government. As it stands today, the bailout is still the "Responsible Homeowners' Triple Screwing Act:" once when our house value tanked, twice when we pay taxes to bail out the lender and three times when we still owe the same payments as before.

I think this whole thing is simply not going to work. If the intent is to prop up home prices, the idea is doomed to fail.

Historically, the ratio of the median home price to the median income has been about 3:1. Held steady at that for several decades.

Currently this ratio is about 4.5:1. The median home price is $225k, and the median income is about $50k (that's median household income; median income for a male worker is about $45k, lower for females).

I think this is Dean's point, in his example. If things ever return to "normal", this ratio has to get back down to something like 3:1. That means that the median price needs to fall 33% to ~$150k. (Or the median income needs to rise 50% to ~$75k, or some combination of the two. But with unemployment pushing double digits, wages aren't likely to rise dramatically.)

This program looks like nothing more than temporary support for real estate agents. It might stimulate some short term shuffling. But for anyone who is having trouble making their mortgage payments, they'd have to sell their old house, then buy a new house -- oh yeah, and maintain good credit all the while. Good luck with that.

-- ARG

In my opinion, the lower rates should be across the board.

Why should it only be to those who are presently in trouble?
When the market does recover, those who paid less for the use of the money (lower interest rates) will have paid less in the long term, for the same asset.
Upon recovery in the market, those whose costs were lower will reap a benefit not afforded to all.
Homeowners who paid on time, despite the hardship, will not receive the same gain as those who receive a lower cost.

$200,000.00 @ 8.0% Interest/Only = $16,000,00 Dollars per year, being the cost of the money

$200,000.00 @4.5 % Interest/ Only = $9000.00 Dollars per year

Imagine both homeowners holding the asset for Ten Years, the homeowner who received the lower rate, selling his home after ten years, would realize a substantial profit compared to the homeowner who was unable to refinance or to receive the same intervention benefit.

Dean Baker writes “So, let's imagine that five years from now mortgage interest rates are once again at 7.0 percent, which is still low by historical standards.”

Historic lows? What time period is Dean excluding? What were the rates during Eisenhower? Dean why use numbers that occurred in high inflation periods, as the norm or factored into the average.

Here’s a chart for your consideration
http://en.wikipedia.org/wiki/Image:Federal_Funds_Rate_(effective).svg

Okay, if a 1.0 percentage point drop in mortgage interest rates led to a 5 percent increase in house prices, then a 2.5 percentage point increase in interest rates should lead to at least a 10 percent drop in house prices. That means that the home for which today's buyer paid $236,000 will sell for about $213,000 when she sells it in five years.

Doesn't this formula assume that the value of homes will remain static? If the economy has recovered and interest rates are rising, why would we assume that a home that sold for $236K would not also appreciate? Even if that increased value was seemingly reduced by higher interest rates, that's a pretty big piece of the economic calculus to simply omit.

There is no foundational reason for a recession. Our country has the natural resources, labor force, infrastructure and everything else needed for a robust economy. This recession is totally a man-made problem. The problem is that certain sectors of the economy have too much debt. The debt ridden sectors are not able to fully participate in the economy, and their lack of participation is bringing the whole economy down. The solution is to get rid of the debt. It must be repudiated or hyper-inflated away.

We are currently experiencing deflationary pressures, but surely that is short term. Congress has added a few trillion dollars to the system, all newly printed dollars or, rather, newly created gurantees. Isn't increasing the money supply the classic formula for inflation?

Yes, the American Middle class needs help, but first they have to clean up their act. And to think Obama really wants Rubin on his team?????

When one wants to place the blame on our current state of financial chaos, look no further than the scumbags that were and still are the problem.....

‘PONZI SCHEME’ AT CITI
By PAUL THARP
December 4, 2008

A new Citigroup scandal is engulfing Robert Rubin and his former disciple Chuck Prince for their roles in an alleged Ponzi-style scheme that’s now choking world banking.

Director Rubin and ousted CEO Prince - and their lieutenants over the past five years - are named in a federal lawsuit for an alleged complex cover-up of toxic securities that spread across the globe, wiping out trillions of dollars in their destructive paths.

Investor-plaintiffs in the suit accuse Citi management of overseeing the repackaging of unmarketable collateralized debt obligations (CDOs) that no one wanted - and then reselling them to Citi and hiding the poisonous exposure off the books in shell entities.

The lawsuit said that when the bottom fell out of the shaky assets in the past year, Citi’s stock collapsed, wiping out more than $122 billion of shareholder value.

However, Rubin and other top insiders were able to keep Citi shares afloat until they could cash out more than $150 million for themselves in “suspicious” stock sales “calculated to maximize the personal benefits from undisclosed inside information,” the lawsuit said.

The latest troubles for Rubin, Prince and others emerged in a 500-page investigation by Citigroup investors represented by law firm Kirby McInerney.

The probe was used to amend and add new details to a blanket investor lawsuit filed against Citigroup a year ago. The amended suit called the actions of Citi leaders “a quasi-Ponzi scheme” to hide troubles - and keep Citi stock afloat while insiders unloaded about 3 million shares between Jan. 1, 2004 and Feb. 22, 2008 for huge profits.

In addition to Citigroup, Rubin and Prince, the complaint names Vice Chairman Lewis Kaden, ex-CFO Sallie Krawcheck and her successor CFO Gary Crittenden.

Rubin cleared $30.6 million on his stock sales, while Prince got $26.5 million, former COO Robert Druskin got nearly $32 million and former Global Wealth Management unit chief Todd Thomson got $25.7 million, the suit said.