Federal Reserve Chairman Ben S. Bernanke and his policymakers last week announced Operation Twist, the rearranging of the Fed’s vast resources from short-term debt to long-term debt.
Without going into too much detail, the announcement surely was a double-edged sword. The day after the announcement, the Dow Jones industrial average dropped 391 points, more than 3 percent. The yield on the 10-year Treasury bond, however, collapsed to a near-all-time low of 1.73 percent. Mortgage rates continue to plummet.
Mr. Bernanke is accomplishing his objective — to reduce interest rates. But will it help the economy?
I always have thought that if the millions of American homeowners could refinance to lower mortgage rates and save a couple hundred dollars a month it would, indeed, have a significant positive impact on the economy.
Think about it. An extra $200 each month in millions of homeowners’ pockets must go somewhere. Some of it would be saved, but much of it would be spent in grocery stores, restaurants, department stores and so forth.
I was invited to be interviewed on a radio talk show in Charleston, S.C., last week to discuss Operation Twist and the effect it might have on the economy. Listeners could call in with questions or comments, and to my delight, a very nice fellow named Jim heard me and called. He happened to be a fellow who had refinanced his home with me and actually had closed the loan papers the day before.
At the time of his call, I was describing the incredibly low interest-rate environment and the refinance opportunities for eligible homeowners. I also was warning that any would-be refinancer should expect to bring in a ton of paperwork.
That’s when Jim called. On the air, he identified himself as a recent refinancer and confirmed the paperwork that was necessary to get the loan closed. If I recall correctly, he said something like this:
“They make you jump through a million hoops. I had to provide paperwork about my pension and disability income that I never dreamed I’d need to dig up. But it was totally worth it. My rate dropped by 1.25 percent, I switched my loan from a 30- to a 15-year fixed rate, and my payment didn’t budge, and I shaved 12 years off my loan term.”
Then he gave a shout-out to my assistant, Erin Taylor, by saying on the air: “Erin — she really runs the show over there.”
I obviously was delighted that a happy customer plugged the benefits of refinancing on the radio waves, despite the paperwork required, but the point is this: Until we can jump-start the housing market, homeowners should, indeed, turn themselves into circus bears temporarily and jump through the hoops required to refinance to a lower rate.
If Mr. Bernanke really wants to accomplish his objective, he should direct the powers-that-be to engage in common-sense underwriting and lend money to folks who obviously can repay the loan. There are too many qualified homeowners out there who don’t fit the mold and thus cannot take advantage of today’s remarkably low rates.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.
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