Market Overview

Will the Home Affordable Refinance Program Improve the American Economy?


In the latest attempt attempt to improve economic conditions, the Obama administration announced that it will modify the Home Affordable Refinance Program (HARP). HARP is designed to assist particular Americans that are currently having trouble paying off their mortgages. Essentially, certain loans owned or backed by Fannie Mae and Freddie Mac are eligible to be refinanced with loans with extremely low interest rates. This strategy essentially gives homeowners much more leeway in their payments.

Unfortunately, the program was targeted to about 5 million Americans, but less than 10% of them have been able to enjoy the benefits available. In the event every eligible American is able to take advantage of this opportunity, would there be any real boost to the economy? The fact is, the people that need this program are ones who are barely able to make payments on both principal and interest. If they are able to save a few hundred dollars on monthly interest payments, what would they likely do? Some would surely save that extra cash and some may decide to spend it on other things. Ultimately, there will be an even mix of saving and spending.

In bad economies, one of the most important things that can be done to turn things around is to promote consumer spending - this is why high unemployment is exceptionally terrible, people cannot spend nearly as much as they do normally. Consumers who save the money from HARP will not be stimulating the economy in the short-term, while the the consumers who are spending money are negligible. Moreover, those who are spending money right now are digging themselves in deeper holes than they were in.

If HARP has greater outreach, then it would probably have the intended effects on the economy. Many Americans are suffering from complicated mortgage obligations, and if a significant amount had access to cheap refinancing options, the homeostasis between saving and spending Americans could significantly boost economic outlook. If 50 million Americans are spending the money saved on interest payments while 50 million are saving the money, significant headways can be made in various sectors across the economy.

One sector that would definitely benefit is the financial sector. If many people are saving more money, financial institutions could use the added deposits to increase their balance sheets and therefore improve their businesses. The reason this happens is because many public financial institutions are "balance sheet businesses," meaning that interest rates that banks get and the ability to provide financing options to their clients are dependent on the strength of their balance sheets. Moreover, if many people are spending a little extra money, that increases the probability of credit being used, which may benefit financial institutions as well.

Note however, that if credit is being used improperly, spending consumers are simply transferring debt from mortgages to debt from credit cards. This may not be appropriate for consumers, but many are now wary of using credit indiscriminately, especially considering what has happened over the last few years. Ultimately, Obama's economic plans need more outreach.

Critics have been exceptionally harsh about Obama's follow through in his plans for the economy. Frankly, his ideas are not too bad and make sense, but the vast majority simply do not have an effective outreach to be able to tangibly help many Americans.

The Home Affordable Refinance Program may be able to marginally help Americans in the next few years. For the select few that are able to take advantage of the opportunity, it is probably a good idea to further investigate the low interest rates. After all, if it is anything like the big banks' interest rates, it is as if consumers themselves are receiving free money, or at least significant payment relief. Only time will tell if the 5 million Americans will help out the economy, but for quicker, more effective change, the government should implement ideas with greater outreach to the American public.

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