The New York Times
August 25, 2011
Help may finally be on the way for borrowers stuck in high-interest-rate mortgages. Shaila Dewan and Louise Story reported in The Times that the White House is considering a proposal that would ease refinancings for millions of underwater homeowners whose loans are owned or backed by Fannie Mae and Freddie Mac, the government-controlled mortgage companies.
It's a good idea, and, properly executed, the benefits would exceed any risks. The biggest question is President Obama's willingness to battle the inevitable opposition.
Fannie, Freddie and investors in the agencies' securities don't want to see their interest income fall. Republican leaders are determined to block anything that Mr. Obama proposes -- even if millions of Americans, and the overall economy, would benefit. It is not even clear if the president's entire economic team is on board; when the idea was floated last year, the administration balked.
The basic notion is to ease refinancing rules for borrowers who are current in their payments but can't qualify for new lower-rate loans because their home values have declined. The looser loan standards would not increase the risk of default. By lowering the borrowers' monthly payments, refinancing would make default less likely. It would also free up potentially tens of billions of dollars for consumer spending, helping to ensure that today's low interest rates stimulate the economy as intended. It could even help underwater borrowers restore equity in their homes if borrowers used some of their savings to pay down their loan principal.
The Federal Housing Finance Agency, which oversees Fannie and Freddie, may well object that such refinancings would cost the companies money. It is true that they would collect less interest income on refinanced loans. But some or all of the lost income would be offset by lower default rates. The public benefit from fewer defaults and foreclosures -- along with the impact of more consumer spending -- should trump any benefit derived from squeezing every last penny of interest from homeowners.
Investors in mortgage-backed securities would also collect less on refinanced loans. So be it. Those securities pay a higher rate than many other bonds precisely because of the refinancing risk. The investor losses would also be dispersed over a large, global market.
Refinancings are not a magic bullet. Homeowners facing foreclosure, often because of unemployment, need help as well in order for the housing market, and broader economy, to recover. But timely refinancings could help -- if Mr. Obama is willing to push for them.