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January 11, 2015

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Posted: 11 Jan 2015 12:06 AM PST

'Borrowers Forgo Billions through Failure to Refinance Mortgages'

Posted: 10 Jan 2015 11:47 AM PST

Why don't more households refinance their mortgages when it would be beneficial to do so?:

Borrowers Forgo Billions through Failure to Refinance Mortgages, by Les Picker, NBER Digest: As of December 2010, approximately 20 percent of households with mortgages could have refinanced profitably but did not do so.
Buying and financing a house is one of the most important financial decisions a household makes. It can have substantial long-term consequences for household wealth accumulation. In the United States, where housing equity makes up almost two thirds of the median household's total wealth, public policies have been crafted to encourage home ownership and to help households finance and refinance home mortgages. The impact of these policies hinges on the decisions that households make.
Households that fail to refinance when interest rates decline can lose out on tens of thousands of dollars in savings. For example, a household with a 30-year, fixed-rate mortgage of $200,000 at an interest rate of 6.5 percent that refinances when rates fall to 4.5 percent will save over $80,000 in interest payments over the life of the loan, even after accounting for typical refinancing costs. With long-term mortgage rates at roughly 3.35 percent, this same household would save roughly $130,000 over the life of the loan by refinancing. But in spite of these potential savings, many households do not refinance when interest rates decline.

In Failure to Refinance (NBER Working Paper No. 20401), Benjamin J. Keys, Devin G. Pope, and Jaren C. Pope provide empirical evidence that many households in the U.S. fail to refinance, and they approximate the magnitude of forgone interest savings. The analysis utilizes a nationally representative sample of approximately one million single-family residential mortgages that were active in December 2010. These data include information about the origination characteristics of each loan, the current balance, second liens, payment history, and interest rate being paid. Given these data, the authors calculate how many households would save money over the life of the loan if they were to refinance their mortgages at the prevailing interest rate while adjusting for tax implications and probability of the household moving.
A key challenge in determining whether households are failing to refinance is knowing whether a household had the option to refinance - especially given the tightening banking standards over this time period. The authors take advantage of the rich data environment to make reasonable assumptions about the ability of individuals to refinance based on various factors (e.g. loan-to-value ratios) and provide evidence of robustness to the assumptions made.
The authors find that, in December of 2010, approximately 20 percent of households that appeared unconstrained to refinance and were in a position in which refinancing would have been beneficial had failed to do so. The median household would have saved $160 per month over the remaining life of the loan, and the total present discounted value of the forgone savings was approximately $11,500. The authors estimate that the total forgone savings of U.S. households was approximately $5.4 billion.
In 2009, the Federal Housing Finance Agency (FHFA) and the Department of the Treasury announced a refinancing program entitled "Home Affordable Refinance Program" (HARP). This program enabled homeowners who were current on their federally guaranteed mortgage and met other conditions of the loan to refinance to a lower interest rate even if they had little or no equity in their homes. When HARP was announced, FHFA and the Treasury estimated that four to five million borrowers whose mortgages were backed by Fannie Mae and Freddie Mac could take advantage of it. By September 2011, however, fewer than a million mortgagors had refinanced under HARP. Although modifications to the program have resulted in more households taking up refinance offers, the overall take-up rate remains low.
These results raise questions about why borrowers do not take advantage of refinancing opportunities that would substantially lower their interest payments. The authors suggest that there may be information barriers regarding potential benefits and costs of refinancing, and that expanding and developing partnerships with certified housing counseling agencies to offer more-targeted and in-depth workshops and counseling surrounding the refinancing decision could alleviate barriers for people in need of financial education.
The authors also suggest that psychological factors, such as procrastination, mistrust, and the inability to understand complex decisions, may be barriers to refinancing.

'Orthodoxy, Heterodoxy, and Ideology'

Posted: 10 Jan 2015 10:53 AM PST

Paul Krugman:

Orthodoxy, Heterodoxy, and Ideology: Many economists responded badly to the economic crisis. And there's a lot wrong with mainstream economic analysis. But how closely are these two assertions related? Not as much as you might think. So I'm very much in accord with Simon Wren-Lewis on the remarkable unhelpfulness of recent heterodox assaults on the field. Not that there's anything wrong with being heterodox in general; but a lot of what we've been seeing misidentifies the problem, and if anything gives aid and comfort to the wrong people.
The point is that standard macroeconomics does NOT justify the attacks on fiscal stimulus and the embrace of austerity. On these issues, people like Simon and myself have been following well-established models and analyses, while the austerians have been making up new stuff and/or rediscovering old fallacies to justify the policies they want. Formal modeling and quantitative analysis doesn't justify the austerian position; on the contrary, austerians had to throw out the models and abandon statistical principles to justify their claims.
Let's look at several examples. ...

See also Chris Dillow: Heterodox economics & the left.

It's remarkable how many people rejected the conclusions of *modern* macroeconomic models (or invented nonsense) in order to oppose fiscal policy. It seemed to have more to do with ideology (the government can't possible help no matter what the model says...) and identification (I'm a serious macroeconomist, don't lump me in with all those old fashioned Keynesian hippie types) than with standard macroeconomic analysis.

On this point, see Simon Wren-Lewis: Faith based macroeconomics.

Policy Uncertainty

Posted: 10 Jan 2015 10:45 AM PST

This is silly (it's from a discussion of the costs of policy uncertainty from the Becker Friedman Institute):

If the Affordable Care Act has taught us anything, it's this: A party in power can push through a major policy initiative in the teeth of strong political opposition, but it probably shouldn't. A better strategy is to secure some support across the political aisle, even at the cost of compromise. Persistent attacks on the Affordable Care Act continue to generate uncertainty about its political durability and raise doubts about what the healthcare delivery landscape will look like in the U.S. for many years to come.

That simply wasn't a choice. Securing support across the political aisle was not an option. No amount of compromise would have mattered. Would the millions who now have health insurance, those who now have the option to change jobs without losing insurance, people with pre-existing conditions, etc., etc. be better off if the law had not passed? Because that was the choice Democrats faced, a highly imperfect bill that would do quite a bit of good even with its imperfections, or no bill at all. Bipartisan support for policy is surely a worthy goal, and sometimes a bit of compromise can bring it about. But other times there is no choice except to ram through legislation that one side believes has the potential to do considerable good.

Interesting that the authors didn't pick tax cuts for the wealthy as their example of policy uncertainty. The future prospects for this policy were just as uncertain under Obama, the policy had a high degree of opposition from the other side of the political aisle, and the tax cuts did far less good than the ACA beyond reducing the tax payments for a group of wealthy individuals who didn't need the help. And unlike the ACA and its documented success (if you look past Fox News), the promised trickle down and economic growth miracle never materialized. If we are looking for a case where the harm from policy uncertainty exceeds the benefits of the policy, this is a much better candidate than the ACA.

I do like some of their other recommendations though, e.g. to use automatic stabilizers:

Automatic stabilizers—unemployment insurance spending that goes up when employment falls, for example—offer some advantages over discretionary measures. The fiscal equivalent of an "advance directive," they kick-in quickly in real time as economic fundamentals change. They don't need to wait for a legislative act. And while every distribution of federal dollars involves some political infighting, a policy response developed in advance of actual need is more likely to be evaluated primarily on its economic rather than political merits. Finally, those bearing the brunt of the shock—wage earners and  businesses—aren't left wondering when or if some help is on the way.


Take some of the politicking out of policymaking. A Congress that indiscriminately exercises its right to debate, amend, and delay can produce excessive tug-of-war policymaking that comes with the cost of heightened uncertainty. Asking Congress to skip the dickering and bind itself to a simple up or down vote, as it already does with military base closures and fast-track trade authority, could minimize the drama—and cost—of indecision.

Though taking the politicking out of policymaking is probably wishful thinking, and it's hard to imagine Republicans going along with any expansion of automatic stabilizers (their proposals are likely to run in the other direction, reducing support for programs such as food stamps).

So long as we have political parties with differing ideological views, there will always be policy uncertainty. One side will always want to undo what the other puts into place. They will rarely agree, and a call for bipartisan support before anything can be done is a call to do nothing. I don't think that's the best approach.

But so long as we are engaged in wishful thinking, let me add to the list. What I'd add is more honesty in evaluating programs after they are put into place. More attention and responsiveness to the empirical evidence. If tax cuts don't trickle down or create growth, if austerity actually makes things worse, if fiscal policy multipliers are non-zero in deep recessions when we are stuck at the zero bound, if the ACA is working to provide health services to millions of people who dearly needed such help, etc., etc., then accept the evidence and adjust policy accordingly. I suppose it's too much to expect politicians to do this, but can we at least get economists to treat these issues honestly (and maybe the media would do better as a consequence)? I'd settle for that.

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