The seemingly never-ending debate on housing policy continued on Wednesday in Washington, as economists and policy analysts from a myriad of organizations testified before a Senate subcommittee on what to do about housing, particularly the 11 million borrowers who are underwater on their mortgage.
One idea that dominated discussion came from Senators Barbara Boxer of California and Johnny Isakson of Georgia, who suggested eliminating LTV restrictions and fees when refinancing loans by Fannie Mae and Freddie Mac.
“Our bill is based on a very simple premise: if you have paid your mortgage through this difficult time and it has a high interest rate, but you’ve never missed a payment and you’re underwater, you should be rewarded with a program like this,” Boxer said. “You should have a chance to refinance at the current levels.”
And the plan has support from the Congressional Budget Office, which predicted the plan could save Fannie and Freddie roughly $3.9 billion. However, the Federal Reserve would lose money in the deal, as the mortgage-backed securities the Fed owns – the value of which are determined by the underwater mortgages – would lose money with the lower refinancing rates. How much money? About $4.5 billion. So with the $3.9 billion in savings and $4.5 billion in losses, the Boxer/Isakson plan could cost taxpayers $600 million.
Another detail of the plan that was debated was rep and warranty risk. According to David Stevens, the CEO of the Mortgage Bankers Association, if Fannie and Freddie are unwilling to waive their strict lending rules, which require lenders to buy back refinanced mortgages that slip into default, very few lenders will go along with the proposal.
“All lenders are necessarily cautious with respect to protecting their capital base given the widespread uncertainties in this environment,” Stevens said. “MBA believes policy makers should consider setting a clear limit on the duration of an originator’s repurchase obligation following the origination date.”
Beyond savings to the taxpayer, the effectiveness of the plan on consume demand was also debated. Christopher Mayer, a professor of finance and real estate at the Columbia Business School, was highly supportive of the measure, comparing it to a permanent tax cut that would give roughly 25 million borrowers an average of $2,800 in savings, or, income they could spend on goods and services.
“This plan would function like a long-lasting tax cut for these 25 or 30 million American families,” Mayer said. “Empirical evidence suggests that consumers spend a larger portion of permanent increases in income than temporary increases.”
On the other side of the debate was Mark Calabria of the Cato Institute, who wondered if lower interest rates would make investors lost money, hence canceling out any savings for homeowners.
“But a mortgage is one person’s liability and another person’s asset. So it’s not clear to me as an economist if the effect on consumption will be zero,” Calabria said, who also added that under the plan, there is no LTV restrictions, so borrowers with 300 percent LTV could ostensibly refinance their loans.
Ultimately, debate led to one pressing question: rather than convince lawmakers to support another housing measure, should the government simply revamp the Home Affordable Refinance Program? The program, an underperforming housing plan started by the Obama White House in 2009, does not require any congressional support for changes or alterations to its policies.
Moody’s Analytics Chief Economist Mark Zandi, for instance, said that if the average Fannie and Freddie security was refinanced to 4.25 percent (from the average rate of 4.5 percent), then borrowers would save up to $10 billion in interest payments.
At the end of the day, the only thing desired was action, something Boxer spoke to.
“Let’s get in front of this crisis for once,” she said.