Why not lower all mortgage rates to lowest level, help consumers and pump prime economy all at once?

This comes from a blog post last fall, that I never saw, but it’s just as topical today.  Why doesn’t the President just mandate that every home mortgage in the country be reduced to the lowest rate available, freeing up hundreds, if not thousands, of dollar a month for most homeowners?

And let the GOP complain.  Let them tell some couple that they’re not going to save $1000 a month on their mortgage because the Republican party is owned by the banks.  I don’t know the feasibility of actually being able to pull this off, but it’s the very definition of “bold” and “change”:

There actually is a solution to the foreclosure mess which would go a long way to solving the underlying mortgage mess, increase consumer spending, cut tens of billions from the deficit and in all probability be the ultimate October Surprise that retains Democratic control of Congress and probably would reelect the President in 2012. It could be done with the combined power and authority of the Executive Branch in conjunction with the Federal Reserve.

It is the automatic refinancing of all outstanding mortgages to the currently available interest rates. The Fed has pushed down interest rates as low as they can – to almost zero between banks and to 4.25% for 30 year loans as of today. That should be resulting in a vast wave of refinancing – people bringing their 6%, 7% or 8% loans down to 4.25% — unleashing a large effective increase in consumer spending.

Doing this automatic mortgage interest rate reset would actually be a great help to the Federal Budget. The Mortgage Home Interest Deduction is by far the largest itemized deduction on personal income taxes. The Urban Institute calculates it as $131 billion in forgone revenue a year. So if home interest was suddenly 40% less overall, the Treasury would take in additional $40 billion per year.

The foreclosure document crisis could be used as the carrot and stick to get the banks to reduce these interest charges. Refinancing everyone would produce a set of good clean documents, that hopefully the financial institutions could keep track of going forward. The President could also use his Pardon Power to free those who agree to these terms from the threat of civil or criminal prosecution. Finally for those who don’t agree, in addition to the threat of criminal prosecution, they could be cut off from future sale of their mortgages to Fannie and Freddie, which puts them effectively out of the mortgage business. And if that isn’t enough, the Fed can shut their access to the zero percent money window.

All of this can be done without Congressional action. It simply requires the act of will on the part of the Administration and to a lesser extent the Bernanke and the Federal Reserve (which is looking for new ways to help the economy now that interest rates can’t decline any further.)

Although, of course, the jolt it would give the economy and the help on the deficit are the most important things. But consider the political impact – after a day of high level meetings with Bernanke and various agency heads and perhaps bank heads – Obama announces this program from the Oval Office in a prime time address. And with those words, every homeowner would know that this President had significantly reduced their mortgage payments. (Someone owing $400K with a 7.25% mortgage would save a thousand dollars a month). Let the Republicans rail against it and call it an Election stunt. This would be the change that we could believe in.


Follow me on Twitter: @aravosis | @americablog | @americabloggay | Facebook | Instagram | Google+ | LinkedIn. John Aravosis is the Executive Editor of AMERICAblog, which he founded in 2004. He has a joint law degree (JD) and masters in Foreign Service from Georgetown; and has worked in the US Senate, World Bank, Children's Defense Fund, the United Nations Development Programme, and as a stringer for the Economist. He is a frequent TV pundit, having appeared on the O'Reilly Factor, Hardball, World News Tonight, Nightline, AM Joy & Reliable Sources, among others. John lives in Washington, DC. .

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