McCain’s Mortgage Refi Plan: Half a Good Idea
The most interesting thing I heard in last night's debate between John McCain and Barack Obama (in fact, the only interesting thing I heard) was McCain's call for a new federal effort to directly refinance residential mortgages into new low-interest loans. The plan got me thinking about a provocative way to pay for it—eliminate the mortgage interest deduction for these new loans.
The idea of government-subsidized refis isn't new. The bailout bill signed into law last week seems to permit them. Hillary Clinton suggested a similar plan during the Democratic primaries. Obama now says he thought of it first. And the scheme is based on the Depression-era Homeowners Loan Corporation. McCain's version seems to follow a plan designed by former top Bush economic aide Glenn Hubbard and Chris Mayer, both at the Columbia Business School.
But this homeowner bailout would cost taxpayers a ton. The McCain campaign says about $300 billion. Hubbard and Mayer say negative equity on owner-occupied houses is nearly $600 billion.
McCain doesn't say how he'd pay for it. This is a presidential campaign, after all. But there are a few ideas worth thinking about. Hubbard and Mayer suggest the government could take an equity stake in any refinanced homes. Thus, it would receive a share of any profits when the home is eventually sold. I think that isn't such a bad idea, although my colleague Len Burman is more skeptical. He argues that people would sell homes quicker than usual rather than share profits with the government.
Another possibility, heretical as it sounds, would be to make a deal with these bailed-out homeowners: The government will cut your interest rate, but you must agree to forego tax deductions on your new low-rate mortgage.
The current deduction doesn't mean very much for low-bracket taxpayers in any event. And even without the tax break, such a taxpayer would still be better off cutting, say, a 7% loan to 5.25%. Upper-income homeowners would not do as well, but do they really need two government subsidies—low mortgage rates and the tax break?
Trading off the tax deduction would help recover some of the expense of yet another bailout. But it is also important for fairness reasons. McCain's plan would reward many who irresponsibly took out mortgages they could not afford. But its cost would be borne by all taxpayers, including both those who played by the rules and borrowed responsibly and those who never purchased homes at all.
The idea of government refis is worth thinking about. But responsibly financing them ought to be an important part of the discussion.