The push by President Barack Obama and Senate Democrats to make it easier for homeowners to refinance their mortgages is based on a simple premise: Interest rates are at historic lows. That means modifying a loan at today’s rates would put serious money in the pockets of homeowners — some $3,000 per year under Obama’s plan, he says.
Who do Americans have to thank for that? Federal Reserve Chairman Ben S. Bernanke gets the majority of the credit.
A central banker’s main tool is the ability to lift or depress short-term interest rates. Since the depths of the 2008 financial crisis, Bernanke has led the Fed into uncharted territory in an ongoing effort to spur a faster economic recovery. By the end of 2008, the Fed had pushed the rates it charges member banks for borrowing down to essentially zero and promised to keep them there until late 2014, a remarkable commitment. Recently, the Fed said it would keep rates exceptionally low until at least mid-2015.
Having exercised the traditional levers of monetary policy, Bernanke took unorthodox actions to push down long-term interest rates by buying more than $2 trillion in Treasury securities and mortgage-backed securities. Despite fierce political debate over the ongoing “quantitative easing” program, it certainly appears to have helped the housing market.
“When the Fed first announced purchases of mortgage-backed securities in late 2008, 30-year mortgage interest rates averaged a little above 6 percent; today they average about 3.5 percent,” Bernanke said in an October speech to the Economic Club of Indiana. “Lower mortgage rates are one reason for the improvement we have been seeing in the housing market, which in turn is benefiting the economy more broadly.”
Bernanke’s actions aren’t the only reason for low rates. Investors have poured money into Treasury bonds, which further pushes down interest rates. Indeed, for all the concern about the government’s fiscal trajectory, investors still see the full faith and credit of the United States as solid gold.
More than 16 million people have refinanced their mortgages since April 2009. One of those people, in fact, was the Federal Reserve chairman. In 2011, Bernanke refinanced his home, replacing a 30-year mortgage with a 5.375 percent rate for one with a 4.25 percent rate.