Politicians and housing industry experts batted around a plan to further refine government refinancing programs Wednesday, weighing the impact of helping more struggling borrowers against the financial interest of American taxpayers who continue to prop up government mortgage giants Fannie Mae and Freddie Mac.
The draft bill discussed at the "Helping Responsible Homeowners Save Money Through Refinancing" hearing at Wednesday's meeting of the Senate Subcommittee on Housing, Transportation, and Community Development, would allow borrowers with loans backed by Fannie Mae and Freddie Mac to refinance their mortgages more easily to take advantage of rock-bottom interest rates. Allowing them to refinance would reduce struggling borrowers' monthly payments, help keep them in their homes, and put more money in their pockets, experts say, easing financial stress. By some estimates, homeowners with a $150,000 loan could save $1,600 a year.
More than 17.5 million borrowers with loans backed by Fannie Mae and Freddie Mac currently pay more than 5 percent interest, said New Jersey Sen. Robert Menendez, chairman of the subcommittee and a co-sponsor of the bill. As it stands, many of those struggling borrowers still can't take advantage of the government initiatives such as the Home Affordable Refinance Program, or HARP, even with the more lax guidelines introduced last December.
Despite the benefits many experts say come with expanded access to refinancing, the government has been slow to move on opening up programs like HARP to more borrowers with government-backed loans.
The rub is the impact on taxpayers, who essentially own the risk on the loans, a portfolio of assets that the Federal Housing Finance Agency has a duty to "preserve" and "conserve."
"It can be argued that Fannie Mae and Freddie Mac are resisting loan modification to protect their retained portfolios," said Anthony Sanders, professor of finance at the George Mason University School of Management. "Hence, fewer borrowers are able to refinance their mortgages."
But the FHFA's argument that allowing more refinancing could increase the risk and loss to taxpayers doesn't really hold water, said Christopher Mayer, professor of real estate, finance, and economics at Columbia Business School. New refinancing would actually lead to fewer defaults, he argued, citing a Congressional Budget Office study that found that for every 1,000 refinancings there are 38 fewer defaults. Under the draft bill, Mayer estimated as many as 11.6 million refinancings would take place, earning the GSEs an additional $24 billion.
"According to the CBO Working Paper, a widespread refinancing program would result in higher profits for the GSEs, even taking into account portfolio losses, because more refinancings lead to fewer defaults and lower insurance costs," he added.
Fellow witness Laurie Goodman, senior managing director at Amherst Securities, agreed, saying that refinancing some of the GSE's riskiest borrowers—those with loan-to-value ratios between 80 and 125 percent—"would benefit the affected individuals and taxpayers alike."
But due to the reticence of government housing institutions to institute streamlined refinance efforts, more than 300,000 unnecessary defaults have occurred, costing American taxpayers and the GSEs upwards of $10 billion in insurance costs from excess foreclosures, Mayer said. That not only compromises the assets the Federal Housing Finance Agency is charged to protect on behalf of taxpayers, but it undermines the stability of the housing market.
And while strides have been made to clear the bottleneck hindering more refinancing, efforts thus far have been "inadequate," Mayer said. More can be done to help borrowers refinance, all without contradicting the mandates of the Federal Housing Finance Agency.
Still, Sanders warned legislators to do their due diligence before launching any broad-based policies concerning the housing market.
"We are in unchartered waters for housing finance and Federal Reserve policies and further changes should be enacted with extreme caution," he said.