Mortgage Savings: Leaders Seek Refinancing Options

Sep 14, 2011
Originally published on September 15, 2011 5:08 am

In his jobs speech last week, President Obama also took time to say he wants to help more Americans save money on their mortgages.

"To help responsible homeowners, we're going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent," he said to applause from lawmakers on both sides of the aisle.

Millions of American homeowners don't qualify for those low rates. If they did, they'd be saving hundreds of dollars a month on their home loans, which might give them more money to spend elsewhere and help boost the economy.

"I know you guys must be for this because that's a step that can put more than $2,000 a year in a family's pocket and give a lift to an economy still burdened by the drop in housing prices," Obama said.

At a Senate hearing Wednesday, lawmakers from both parties spoke out in favor of the idea.

Democrat Barbara Boxer has introduced legislation with the same aim: allowing millions more Americans to refinance. Homeowners would be able to refinance even if they owe more than their homes are worth. They could also do so regardless of their credit scores.

Boxer said people with high interest rates who never missed a mortgage payment as the value of their homes went "down and down and down" should have a chance to refinance at current levels.

Proponents say there's a way to do that without more government spending.

The crux of idea is this: Millions of people are stuck at 6, 7 or 8 percent interest rates, and their loans are already guaranteed by mortgage giants Fannie Mae and Freddie Mac.

It would actually be in Fannie and Freddie's best interest to let those people refinance into lower interest rate loans, since that would make the loans more affordable for people and make defaults and foreclosures less likely. That would save Fannie and Freddie money since they need to pay investors to cover losses on loans that they guarantee.

So, if Fannie and Freddie simply extended their existing guarantees for these people, to cover new refinanced loans at the current low interest rates, the private sector would make those loans. And proponents say that shouldn't cost taxpayers anything.

"I think there are ways to do things here that don't cost taxpayers money — at all, any money," Moody's economist Mark Zandi testified at the hearing. "I think this is one of those things."

In fact, since the federal government is propping up Fannie and Freddie, letting so many people refinance could save the government money.

A Congressional Budget Office analysis found Fannie and Freddie would actually make money, Boxer said, "about $100 million, because it would stop many people from defaulting. Right away."

Basically, fewer foreclosures could mean less taxpayer bailout money for Fannie and Freddie.

Republican Sen. Johnny Isakson of Georgia, a co-sponsor of the bill, said allowing people to qualify for today's low-interest-rate loans would mean fewer people deciding to walk away from their houses.

"It does make it less likely that people will use strategic foreclosure as a mechanism to deal with their financial situation, and it should help to stabilize home prices in the long run and the short run," Isakson said. "I think it's something Fannie and Freddie ought to do. If they'll do it tomorrow we're ready for them to do it."

Fannie and Freddie don't need an act of Congress to do this, and the Obama administration is pursuing the idea without any new legislation. It would do so by expanding a current federal refinancing program called the Home Affordable Refinance Program, or HARP.

Some economists at the hearing had reservations, however.

"The question I have in my mind: A mortgage is one person's liability, it's somebody else's asset," Mark Calabria with the conservative-leaning Cato Institute said.

In other words, the homeowner would be saving money with a lower interest rate, but an investor in mortgage bonds somewhere was making money off that higher interest rate, so those bondholders would lose money.

"So you're increasing somebody's wealth by decreasing their monthly payment; your decreasing somebody else's wealth by reducing their bond payment," Calabria says. "It's not clear to me as an economist that the effect will be any less than zero."

But other analysts say the move would take billions of dollars from investors around the world and put that money in the pockets of middle-class Americans, who would go out and spend it. They say that would be stimulative.

"This plan would function like a long-term, middle-class tax cut without impacting the budget deficit," said Columbia Business School economist Chris Mayer, who has been proposing the idea for some time.

Some critics say the move still wouldn't be fair to those bond investors. It's also still unclear how many people the plan would reach. Everything depends on how it's implemented, Mayer said; you might reach fewer than 1 million people or you might reach 20 million, depending on the details.

Copyright 2018 NPR. To see more, visit http://www.npr.org/.

DAVID GREENE, host: It's MORNING EDITION from NPR News. Good morning. I'm David Greene.

STEVE INSKEEP, host: And I'm Steve Inskeep.

The economic plan that President Obama proposed last week included an idea for American homeowners. Interest rates are so low that millions of Americans could save money by refinancing their home loans, but they can't get new loans for many reasons. For example, that their homes are no longer worth enough to serve as collateral.

Treasury Secretary Tim Geithner said on this program last week that the government can help and need not even wait for an act of Congress. But the idea is generating enough interest that Congress is getting involved all the same. NPR's Chris Arnold reports.

CHRIS ARNOLD: In his recent speech about creating jobs, President Obama also took time to say that he wants to help more Americans save money on their mortgages.

PRESIDENT BARACK OBAMA: To help responsible homeowners, we're going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near four percent. That's a step...

(SOUNDBITE OF APPLAUSE)

ARNOLD: That drew loud applause that included at least some Republican lawmakers.

OBAMA: I know you guys must be for this, because that's a step that can put more than $2,000 a year in a family's pocket and give a lift to an economy still burdened by the drop in housing prices.

ARNOLD: At a Senate hearing yesterday, lawmakers from both parties spoke out in favor of the idea. Democrat Barbara Boxer has introduced legislation with the same aim - to allow millions more Americans to refinance. That's even if, with the drop in home prices, they're underwater; that means they owe more than their home is worth.

SENATOR BARBARA BOXER: If you have paid your mortgage all along through all these difficult times, and it is at a high interest rate, but you never missed a payment as the value of your home went down and down and down, you should have a chance if you want to refinance at the current levels.

ARNOLD: And proponents say there is actually a way to do that without more government spending. Economist Mark Zandi with Moody's testified at the hearing.

MARK ZANDI: I think there are ways to do things here that don't cost taxpayers money at all, any money. And I think this is one of those things.

ARNOLD: The crux of idea is this. These people who are stuck at six or seven or eight percent interest rates, for most of them their loans are guaranteed by the mortgage firms Fannie Mae and Freddie Mac. So if Fannie and Freddie agreed to guarantee new loans for those people at today's lower interest rates, then the private sector would make those loans. And Barbara Boxer says that wouldn't cost Fannie and Freddie or taxpayers anything.

BOXER: Fannie and Freddie actually make money on this - as we looked at the CBO analysis, about $100 million - because it would stop many people from defaulting right away.

ARNOLD: The CBO - that's the Congressional Budget Office. And the idea is that fewer foreclosures could mean less taxpayer bailout money for Fannie and Freddie.

ARNOLD: Republican Senator Johnny Isakson of Georgia is a co-sponsor of the bill. He also thinks it would result in fewer people deciding to walk away from their houses.

SENATOR JOHNNY ISAKSON: And it should help to stabilize home values in the long run. And I think it's something Fannie and Freddie ought to do by - I'm not interested in pride of authorship - if they'll do it tomorrow by policy, we're ready for them to do it.

ARNOLD: Isakson is saying that Fannie and Freddie don't need an act of Congress to do this. And the Obama administration is pursuing the idea without any new legislation, by expanding a current federal refinancing program. But some economists at the hearing had reservations. Mark Calabria is with the conservative-leaning Cato Institute.

MARK CALABRIA: The question that I have in my mind, a mortgage is one person's liability. It's another persona's asset.

ARNOLD: In other words, the homeowner would be saving money with a lower interest rate. But an investor in mortgage bonds somewhere was making money off that higher interest rate. So such bond-holders would lose money, or at least they wouldn't make as much money.

CALABRIA: So you're increasing somebody else's wealth by reducing their monthly payment. You're decreasing somebody else's wealth by reducing their bond payment. It's not clear to me as an economist that the effect on consumption is going to any different than zero.

ARNOLD: And some critics say the move just wouldn't be fair to those investors. Also, it's still unclear how many people the plan would ultimately reach. Even proponents say everything depends on how it's implemented. Some say you might reach fewer than a million. Or they say you might reach 10 or even 20 million, depending on the details.

Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.