Economist David Grossman cautions that a proposed federal mortgage refinancing initiative could destabilize financial markets, citing potential inflationary pressures and unintended consequences for Treasury yields. The plan, intended to ease household debt burdens, may instead amplify systemic risks.
- Proposed mortgage refinancing program could cost $90 billion over five years
- Project assumes 2.5 percentage point reduction in average mortgage rates
- 10-year Treasury yields could exceed 5.2% under the plan
- Historical refinancing programs led to 1.8% spike in yields within six months
- Mortgage-backed securities holders may face over $12 billion in revaluation losses
- Market now prices in 40% chance of Fed rate hike in Q2 2026
A proposed national mortgage refinancing program has drawn sharp criticism from economist David Grossman, who warns it could backfire by triggering a surge in long-term interest rates. The plan, which would allow millions of homeowners to refinance at below-market rates, is projected to cost $90 billion over five years. Grossman argues that such large-scale fiscal intervention would likely increase Treasury bond issuance to fund the program, crowding out private investment and pushing 10-year yields above 5.2%—a level not seen since 2023. The initiative, designed to reduce monthly payments for 22 million households, assumes a 2.5 percentage point reduction in average mortgage rates. However, Grossman notes that market expectations of sustained fiscal expansion could erode confidence in U.S. debt sustainability. Historical data from past refinancing efforts in 2009 and 2021 show that similar programs led to a 1.8% spike in 10-year yields within six months, signaling increased risk premiums. Financial institutions with significant exposure to mortgage-backed securities, including JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), could face revaluation losses exceeding $12 billion if rates rise sharply. Insurers and pension funds, which hold vast portfolios of long-duration bonds, may also see asset values decline, particularly those with duration above 12 years. Market participants are now reassessing the timing of Federal Reserve rate cuts, with futures pricing in a 40% chance of a hike in Q2 2026—up from 25% in December. The policy's potential to disrupt the bond market underscores the delicate balance between supporting household finances and maintaining macroeconomic stability.