COMMENTARY | The Associated Press is reporting that President Barack Obama is planning to push for legislation that would allow millions of homeowners with government-backed mortgages to refinance their loans to take advantage of the historically low interest rate.
In order to help pay for this plan, Obama proposes to levy a fee on banks. The thought behind this legislation is that it would help spur the economy, but my numbers do not add up to any substantial benefit.
What then is Obama's purpose for this plan?
The official thinking on this plan from the president is that by allowing more people to refinance to a lower interest rate on their loans, they will be paying less per month. This monthly savings would then be assumed to go toward purchases in the economy. The exact amount of this revenue increase is very much in dispute.
NPR estimates the number of those to benefit at a mere 2 million homeowners. Other estimates from supporters go as high as 20 million homeowners. The Obama plan estimates $2,500 savings per homeowner who goes through the program.
If we accept that number, the amount of money put back into people's pockets would range from $5 billion to $50 billion. Now if we assume that half that savings is actually spent back into the economy rather than paying off bills or going into savings, means we will have $2.5 billion to $25 billion injected into the economy.
The plan then calls for a yet to be named fee levied against the banks to help pay for these refinances. This fee would be then passed down to the consumer so that takes money back out of the economy. That needs to be deducted from the economic benefits. The United States' annual retail sales GDP runs near $5 trillion, so that means the economic injection from Obama's plan would be only a small drop in the bucket for the economy. Ultimately, this plan will add too little to the economy to be a reasonable fix for the current recession.
So once again, the question that begs to be asked is: What is Obama's purpose for this plan?
The answer is simple: The states hardest hit by overvalued mortgages, according to CNNMoney: Florida, California, Nevada, Michigan, and Arizona. These are also the states that Obama needs to win in his re-election bid this fall. This is simply nothing more than an election-year grab for votes.
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