Many homeowners are taking advantage of low interest rates to refinance their mortgage.  One group is conspicuously absent: low income homeowners with a history of shaky credit.  Refinancing would help them and the economy at large but the costs of refinancing plus the reluctance of lenders to lend has compromised the availability of credit to this group.  What is the solution?  There are three proposals that are in the public domain.

1. Inflation: This has been proposed by Ken Rogoff.  He would use inflation to reduce the value of debt and get borrowing moving again.  The difficulty is that the FED has carefully nurtured a reputation as an inflation fighter for the last couple of decades.  Once it loses that reputation can it recover in time for an inflationary period?  This issue makes he Rogoff solution unpopular with many central bankers.

2. Loan Modification: Posner and Zingales propose a loan modification program.  The details are complex but require some Congressional input to change bankruptcy law or pass new legislation.  This is politically impossible in the current political climate so whatever the merits of the plan, it does not seem feasible.

3. Refinance:    Boyce, Hubbard and Mayer propose to ease lending rules and offer loans at 4% to eligible homeowners whose loans are guaranteed by Fannie and Freddie.   How much if this plan is implementable by the President without Congressional approval?  That is the question.  On first blush, this plan seems the most politically feasible to me.

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