U.S. Democratic Senator Barbara Boxer said she found a Republican colleague to help push a bill requiring Fannie Mae and Freddie Mac to let homeowners refinance properties worth less than their existing mortgage.
Senator Johnny Isakson, of Georgia, agreed to back the proposal that is also supported by Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., Boxer told reporters today on a conference call.
“It’s really looking at how we can help those homeowners who have been so solid in the mortgage payments every month, regardless of how the value of their housing is going down,” said Boxer, of California.
Lawmakers are seeking ways to boost an economy crimped by falling home prices as borrowers struggle to repay mortgages. Boxer’s bill aims to help homeowners with negative equity refinance at a time of historically low rates. It would also end fees Fannie Mae and Freddie Mac charge lenders for borrowers deemed to present greater risks, if the firms already guarantee the loans.
U.S. policies so far “have fallen short,” Mark Zandi, the chief economist for Moody’s Analytics and a supporter of Boxer’s bill, said on the call. “I think they have been helpful, but they clearly have not been adequate.”
Of 27.5 million mortgages owned or guaranteed by Fannie Mae and Freddie Mac, more than 8 million carry an interest rate at or above 6 percent, according to Boxer, whose proposal would only apply loans backed by the companies. The average offered on a typical new 30-year loan was 4.6 percent last week, according to data from Freddie Mac.
Lauren Culbertson, a spokeswoman for Isakson, didn’t immediately return a phone call and e-mail seeking comment on the bill.
Reluctance Over Putbacks
Lenders may remain reluctant to refinance underwater borrowers because if loans later sour, Fannie Mae and Freddie Mac may force the firms to repurchase debts with faulty documentation, said Mahesh Swaminathan, a mortgage-bond analyst in New York at Credit Suisse Group.
“The core issue is that banks are not going to refi borrowers unless they’re given indemnity against putbacks,” Swaminathan said. “Unless the proposal addresses that, it would only have a marginal impact.”
If the program were broadly used, rates on new mortgages for home buyers and refinancing may be driven up, he said. That’s because the supply of low-coupon securities would increase and mortgage-bond investors would demand greater yields to compensate for extra uncertainty about repayment patterns, he said.