Fannie and Freddie Regulator Mulls Cheaper Mortgages
Fannie Mae and Freddie Mac are exploring ways to help homeowners refinance into cheaper mortgages, said the companies’ regulator, who stopped short of a promise to deliver on a proposal from President Barack Obama.
Edward DeMarco, acting director of the Federal Housing Finance Agency, said he is working with the administration to reduce “frictions” in a two-year-old program for borrowers who owe more than their homes are worth. DeMarco, charged with restoring government-controlled Fannie Mae and Freddie Mac to financial health, said the FHFA must determine whether the program can be expanded without more losses for the firms.
“The final outcome of this review remains uncertain but FHFA believes this undertaking is worthwhile and consistent with our conservator responsibilities,” DeMarco said in a statement yesterday.
DeMarco’s comments came the day after Obama said he wanted to give more homeowners a way to take advantage of record-low interest rates to stoke the listless housing market and boost consumer spending.
“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,” Obama said in his speech to announce a $447 billion jobs package.
The plan would could 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.
FHFA officials met yesterday with mortgage industry executives to discuss possible changes to the Home Affordable Refinance Program, or HARP, according to two people with knowledge of the private meeting who spoke on condition of anonymity.
Some staff members of Fannie Mae and Freddie Mac have expressed concerns about easing rules to make refinancing more accessible because a wave of repayments of the old, high- interest loans would reduce the value of the securities into which they are bundled. Investors would be forced to reinvest the cash that gets returned into lower-yielding securities, according to a person briefed on the discussions within the mortgage firms.
That would harm the big institutional investors who own most of the securities and make up the most important customers of Fannie Mae and Freddie Mac, the person said. A few senior officials overseeing the agencies are resisting this pressure and have encouraged staff members to work on viable plans out of a desire to aid the overall economy, bring relief to homeowners and reduce defaults, according to the person, who spoke anonymously because the discussions are private.
HARP, announced in March 2009, allows Fannie Mae and Freddie Mac to guarantee mortgages worth up to 125 percent of a home’s value. The program is meant to help those so-called underwater borrowers take advantage of record-low interest rates to reduce their monthly payments and prevent foreclosure.
Obama administration officials originally predicted that the program, which has been extended twice and is now set to expire in June 2012, would help as many as five million underwater homeowners. As of June, fewer than 840,000 borrowers had permanently refinanced under HARP. Banks have avoided participating because such loans are more likely to default.
“You’ve got a whole bunch of borrowers who have good credit, they’ve been paying their mortgages, but because they don’t have equity in their homes they can’t get refinancing,” said James Parrott, a senior adviser to Obama’s National Security Council. “They’re stuck at 6 percent in a 4 percent market.”
Options for changing HARP might include giving banks more protection against defaults, for example by charging higher premiums for their guarantees. The program also could raise the maximum loan-to-value ratio from 125 percent to expand the pool of eligible borrowers.
Obama is under pressure from lawmakers, housing advocates and some economists to do something about record foreclosures and home prices, which have fallen by about a third from their peak in July 2006.
Three years into the crisis, the administration has limited options thanks in part to the independent FHFA, which oversees the two mortgage companies. Fannie Mae and Freddie Mac continue to report losses even after drawing more than $170 billion in taxpayer aid since September 2008.
Economists disagree about the stimulative effect of a large-scale mortgage refinancing. A Congressional Budget Office working paper found that lowering interest rates on nearly 3 million mortgages would lead to fewer defaults and save Fannie Mae, Freddie Mac and the Federal Housing Administration almost $4 billion. That savings would come at the expense of bondholders including the Treasury and Federal Reserve, giving taxpayers a net loss of $600 million, the CBO report found.
“Because the estimated gains and losses are small relative to the size of the housing market, the mortgage market, and the overall economy, the effects on those markets and the economy would be small as well,” the report concluded.
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