The 4% or 4.5% "solution" (to refinance every mortgage in America at 4% or 4.5%) is a stupid suggestion for many reasons, as the WSJ noted. One reason is: Think of the logistics. City & county recorders will be buried under millions of mortgage submissions. In many jurisdictions you need a lawyer to prepare the documents; they'll be swamped by their windfall. Every second lien (HELOC) must also be refinanced (by whom?) or they slide into first place. Will new title policies be issued and new appraisals be prepared? And who will pay NYC & NYS's extortionate mortgage taxes & fees? Will mortgages with 5, 10, or 15 years be refinanced to 30 years or will they too have 4% coupons, and thus must trade at a sizable premium to par. $10 trillion of mortgages and MBS will disappear from bank, insurance, and mutual fund balance sheets creating hundreds of billions in unexpected gains & losses and requiring massive and immediate reinvestment.
There is a simple and sane way to accomplish a similar subsidy (which I've blogged before). Mortgage interest could be made 100% deductible -- essentially a tax credit not just a deduction. The incremental logistics are nil, just file your IRS Form 1040. It's fair, proportionate, and easy. If you don't pay your mortgage you don't get the deduction, so one 'moral hazard' found in all the other proposals is eliminated. The credit could (should) phase out after five years, to avoid long-term distortion of housing markets.
JRB
2/7/09
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