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Edited from West Chester, Pennsylvania |   About Us 

Obama Gives Refinancing a Helpful Boost

By Mark Zandi in West Chester
January 25, 2012

This commentary also appeared in the Washington Post.

President Obama spent very little time on housing-related policies in his State of the Union address Tuesday night. While disappointing, it’s not surprising, as the problems are complex, extraordinarily difficult to tackle, and very costly. In his brief remarks, he focused on the right thing: facilitating more mortgage refinancings.

The president proposed to allow “every responsible homeowner” the chance to more easily refinance, a savings of about $3,000 annually.

Helping out troubled homeowners

There is no better way to quickly buoy hard-pressed homeowners than helping them take advantage of the record-low fixed mortgage rates and significantly reduce their monthly mortgage payments.

The administration has already been working to this end. Late last year it made a number of substantial changes to the HARP program—the program to refinance underwater homeowners with mortgages insured or owned by Fannie Mae and Freddie Mac—to make it more effective. Almost 1 million distressed homeowners have taken advantage of HARP since it was unveiled in 2009. While a clear plus, this is well short of the 4 million to 5 million refinancings expected.

Among the changes to HARP are increasing the number of eligible homeowners and reducing mortgage rates to refinancing homeowners. Some 4 million Fannie and Freddie homeowners with little or no equity in their homes are good candidates for a refinancing under HARP 2.0 at current fixed mortgage rates. The new HARP is just kicking in, and it is too early to judge whether it is working, but from what I’m hearing, there are good reasons to be optimistic it will be more successful than its predecessor.

Significant macro benefits

Given the encouraging signs, it is worthwhile to encourage even more refinancing as the president has proposed. More than 30 million homeowners are current on their mortgages and could profitably refinance at current mortgage rates, which average less than 4% for a 30-year fixed-rate loan. The macroeconomic benefit could be significant. If, say, half refinance in the next six months, this would save homeowners more than $20 billion in mortgage payments this year and double that next year. Homeowners’ extra cash will quickly find its way into the economy.

It is important to note that while homeowners will have more cash to spend, investors in these mortgages will receive less interest income. This dilutes the economic benefit of facilitating more refinancing, but only modestly. The biggest mortgage investors include the Federal Reserve (through quantitative easing), Fannie and Freddie, and foreign investors. All mortgage investors are probably a bit surprised they haven’t already been refinanced out of their investments.

Improving the political odds

The president provided few details on his new refinancing plan, but he did say it would require legislation and a levy on financial institutions to pay for it. (He told Congress: “A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.”)

This could make it significantly less likely that his plan will become law. As last year’s debt-ceiling drama highlights, getting anything through Congress is a very heavy lift, particularly in a presidential election year.

As such, it might be better for the president to expand HARP 2.0 more broadly, say to all Fannie and Freddie loans. While not on the scale of what the president is proposing, an estimated 10 million homeowners would benefit. Not as big, but more doable.

It also goes without saying that the administration should continue other efforts to support the housing market, including the conversion of foreclosed property into rentals. The foreclosure crisis isn’t over, and policymakers need to remain on high alert.

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