Friday, August 20, 2010

Bill Gross' big idea

At Tuesday's conference on the Future of Housing Finance, Bill Gross suggested that anyone who was current on a Fannie/Freddie loan should automatically be refinanced to the current mortgage interest rate of about 4.5 percent. This should happen instantaneously, without underwriting.

I am trying to see the downside of this. It reduces the probability of default, because it reduces the present value of the loan balance and payments. It only rewards those who pay their mortgages on time. And as Bill Gross pointed out, it would amount to an enormous stimulus (what he didn't point out is that the stimulus would be at least partly funded by foreign holders of MBS).