Underwater borrowers whose loans are not guaranteed by GSEs are essentially unable to refinance at all. Policy changes directed at this last, larger group of homeowners would have to be carefully designed so as not to transfer credit risk from private investors to the government, and could well require legislation.
13  Of course, the income gained by consumers is lost to the holders of the mortgages that are prepaid as homeowners refinance. But there are two reasons to believe that aggregate demand would increase. First, the marginal propensity to consume of the average homeowner is almost surely higher than that of the average holder of a mortgage-backed security.