In January of this year, I wrote an article stating that if the government was going to be on the hook for a trillion dollars on behalf of the economy, then the biggest bang for the buck would be to self-refinance underwater mortgages.
Moral hazard notwithstanding, if the government offered 30-year fixed mortgages, at 4% and assumable to any homeowner, the follow would occur: a) banks would be paid off at 100 cents on the dollar, b) homeowners would have a cheaper monthly note and more disposable income, c) home prices would stabilize, and d) the difference between the old mortgage and the new one would be applied to the borrower's income taxes over 30 years.
Now that Fannie Mae and Freddie Mac [(FNM), (FRE)] have unlimited funds for the next three years, this targeted relief would do more good to heal the economy (end quantitative easing), to restore accounting rules (market-to-market), and banking practices (no more modifications) to the system.
This would also have a positive effect on the mortgage market and mortgage rates.
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