Mass Refi Plan Would Hit Pensions While Easing Mortgage Payments
Like many homeowners, Vicky Kovari and her husband want to refinance their mortgage. A lower interest rate would save them hundreds of dollars a month -- and it would cost them, too.
That’s because like many Americans, Kovari also owns mortgage bonds through her retirement savings, which could lose value if the U.S government succeeds in getting millions of homeowners to switch out of high-interest loans.
Kovari, 57, and her husband William O’Brien, 64, say they’re willing to take that trade.
“Retirement is scary and it’s pretty much around the corner for us. But I’m really desperate to get my house refinanced,” Kovari said. “That right now is a lot more important to me.”
A drumbeat of support for a large-scale federal refinancing program has grown louder in recent months, with labor unions, homeowners, civil justice groups and some economists touting the idea as a way to roust housing from its doldrums.
Few proponents have addressed the flip side of the issue, that rewriting the rules of the $6.6 trillion mortgage bond market for the benefit of some U.S. homeowners could leave millions of Americans among the losers.
“Bond markets are people, too,” said Jason Gold, a senior fellow at the Progressive Policy Institute, a left-leaning Washington think tank. “We’d all take a hit.”
Mutual funds, pensions, insurers and real estate investment trusts are the biggest holders of government-backed mortgage bonds, known as agency bonds. Together they hold nearly $1.5 trillion, or more than 27 percent, of the $5.4 trillion total, according to Inside Mortgage Finance, a trade publication based in Bethesda, Maryland.
The Federal Reserve energized the mass-refi cause on Jan. 4 when Chairman Ben S. Bernanke noted that millions of borrowers have failed to take advantage of record-low interest rates. In a research paper, his staff said that policy “experiments” including principal forgiveness or a government-triggered mass refinancing “might be socially beneficial,” even if they come at a cost to taxpayers and bondholders.
President Barack Obama has taken small steps in that direction, most recently with a plan to help “responsible” borrowers secure low-interest loans insured by the Federal Housing Administration even if they owe more than their house is worth.
“If you’re ineligible for refinancing just because you’re underwater on your mortgage, through no fault of your own, this plan changes that. You’ll be able to refinance at a lower rate,” Obama said in a Feb. 1 speech.
That plan, like others before it, won’t be a “game- changer,” said Mahesh Swaminathan, a Credit Suisse analyst who described it as “chipping away at the margins.”
A big fix continues to elude Washington policy makers in part because of the cost. Any large-scale plan would require the cooperation of Fannie Mae (FNMA), Freddie Mac or the Federal Housing administration, government-supported programs that stand behind 82 percent of all mortgage bonds.
In theory, the government could force all three to forgive mortgage debt and shoulder the cost of the refinancings. If that happens, taxpayers and many of the nearly 70 percent of U.S. households with retirement savings or pensions would be paying a large portion of the price.
At Fannie Mae and Freddie Mac alone, 14 million loans still have interest rates of 5 percent or higher, even though the current cost of a 30-year, fixed-rate mortgage is less than 4 percent, according to the Federal Housing Finance Agency, which oversees the companies.
Refinancing those borrowers in bulk would benefit a portion of homeowners at the expense of taxpayers, who already have spent more than $153 billion on the companies, said Edward J. DeMarco, acting director of the FHFA.
“The notion that Fannie Mae or Freddie Mac or FHFA could wave a wand and reset the interest rates on mortgages should be understood in its simplest terms as transferring wealth from one group of people to another,” DeMarco said in an interview.
Moreover, any benefit could be short-lived, because a government intervention is likely to spook investors, make mortgages even harder to come by and drive up the cost of future borrowing, DeMarco said.
For the homeowner getting a break on his payments, it’s a blind bargain, said David H. Stevens, chief executive officer of the Mortgage Bankers Association in Washington.
“Joe Homeowner will wake up the next morning and not realize he lost value in his retirement funds and that he’s impacted the housing market of the United States for years to come,” Stevens said. “It’s addressing short-term self-interest against the ability of the U.S. to have a functioning mortgage finance system.”
The losers also would include banks and savings institutions, which hold more than $1.4 trillion in mortgage bonds, about 27 percent of the total. Foreigners, led by China’s central bank, which has helped finance the U.S. housing market for at least a decade, hold $615 billion, or 11 percent. Fannie Mae and Freddie Mac own $568 billion of their own mortgage bonds, also about 11 percent.
Kovari is a policy director for the Michigan Organizing Collaborative, a group which promotes urban and economic development. Her husband works at a social services agency. They bought their Detroit home 12 years ago for $190,000, have made their payments regularly and didn’t tap into the equity even when property values were booming.
The couple still owe $110,000 in principal, yet thanks to falling home prices, the house is now worth just $100,000. So far, they haven’t been able to refinance out of their 6.5 percent loan.
Some of their retirement savings are invested in Fannie Mae and Freddie Mac bonds through OppenheimerFunds Inc., in New York. A company prospectus warns that when interest rates fall, mortgages are more likely to be paid earlier than expected and “that money may have to be reinvested in other investments having a lower yield.”
Mark Zandi, chief economist of Moody’s Analytics and an advocate of a far-reaching refinancing program, argues that the pain to bondholders is offset by gains to borrowers and the broader economy. Bond investors also have profited from government intervention since the 2008 subprime collapse, he said in an interview, including the bailout of Fannie Mae and Freddie Mac and the Fed’s purchase of $1.3 trillion of mortgage bonds.
“Investors have been tremendous beneficiaries,” Zandi said. “They’re going to lose on this particular policy response.”
Zandi and others calculate that the economic stimulus of a large-scale refinancing effort would outweigh costs.
One idea, which would target Fannie Mae and Freddie Mac borrowers with 30-year loans, could inject at least $36 billion a year into the economy, said Alan Boyce, who with Columbia University Business School Dean R. Glenn Hubbard and Professor Christopher J. Mayer co-authored a widely circulated proposal.
Bondholders would pay the bulk of the costs, Boyce said, while the plan could actually yield a profit of as much as $16 billion for Fannie Mae and Freddie Mac through fees and lower defaults. All sides would benefit from an improved economy.
“This whole idea that it’s a zero-sum game is incorrect. There’s a net positive,” said Boyce, chief executive officer of Absalon Project, a George Soros venture to develop a new housing finance system.
“I’d say that Wall Street has been favored enough over the past year and a half,” Gross said. “Let’s give Main Street a chance.”
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