Taxpayers bailed out Wall Street. Now some are calling for Wall Street to return the favour and help struggling homeowners.
What is being proposed is a cheap and simplified way to refinance high fixed-rate mortgages, backed by Fannie Mae and Freddie Mac, which having been bailed out by Uncle Sam in 2008, are now virtually state-owned.
The proposal would be to refinance the home loans of around 13 million people who have kept up repayments on their loans but cannot refinance their loans because their houses have fallen in value.
US taxpayers have already underwritten these loans so refinancing would not add any further risk.
Refinancing Fannie and Freddie home loans, which account for about half of all US mortgages, could provide an economic stimulus of billions of dollars, support house prices and cost US taxpayers nothing.
Refinancing could produce interest savings of around $3,200 a year, based on a 2% drop in rates on the average $160,000 US home loan.
That equates to a possible economic stimulus of $40billion a year at no cost to taxpayers.
Homeowners are the winners.
The losers are those the holders of the mortgage-backed securities that would be refinanced.
These loans pay above market rates and therefore trade at a premium price.
If this was say 108% of face value, they would be repaid at face value and the premium would be lost – about $150 billion to the holders of the securities. However if there had been no taxpayer bailouts of Fannie and Freddie these securities would be worthless anyway.
So is this the beginning of the great income redistribution the world economies so badly need?
