A homeowner fills out a form to request mortgage information at a Fannie Mae Mortgage Help Center in Culver City, Calif. Politicians and economists are debating the merits of a grand plan to offer many homeowners the opportunity to refinance.
A homeowner fills out a form to request mortgage information at a Fannie Mae Mortgage Help Center in Culver City, Calif. Politicians and economists are debating the merits of a grand plan to offer many homeowners the opportunity to refinance. Damian Dovarganes/AP
Second in a two-part series
Terry Riccio runs a pet taxi service in Boston called Fetch 4-Legged Limo. For around $50, she'll take an elderly person's dog to and from the vet.
She'll even pick up turtles and snakes.
But getting her hands around today's low interest rates is proving to be an even slipperier task.
"Even though I can pay my mortgage, the banks won't even look at me because it's a lot more strict than it was in the past," Riccio says.
Blocked From Refinancing
Just because mortgage rates are at historic lows doesn't mean homeowners can qualify to refinance. Most Americans can't because their credit scores aren't perfect, their houses have lost value or they've lost income.
As a result, tens of millions of Americans have been effectively blocked from saving hundreds of dollars a month by refinancing.
If Riccio could qualify for today's low rates, which are well below 4.5 percent, she would save $450 a month on her mortgage.
"We would avoid more foreclosures, people would be happier and I think the economy would get a lot better" if everybody could access the low rates, Riccio says.
That's basically what some economists are proposing — at least for some 30 million Americans. The premise of the idea is that because of the financial crisis, the federal government has already guaranteed 60 percent of existing home mortgages.
So, since the government is on the hook anyway, allowing all those people to refinance at today's low rates will make defaults less likely — and save homeowners money.
A 'Tax Cut' To Stimulate Economy
"You'd be giving what amounts to a tax cut for the life of the mortgage," says R. Glenn Hubbard, an economist at Columbia University who helped come up with this proposal together with his colleague Christopher Mayer.
Economists R. Glenn Hubbard and Christopher Mayer say millions of Americans are being blocked from taking advantage of today's historic low interest rates. Most people have government-backed loans, so it's in the taxpayers' interest to let homeowners refinance to get cheaper payments, avoid foreclosures and stimulate consumer spending. Here, a look at how the plan would work:
— The government would direct Fannie Mae, Freddie Mac and the Federal Housing Administration to guarantee refinanced loans for anyone who already has a government-backed loan.
— The three agencies would direct lenders to send a short application to all eligible borrowers promising to allow them to refinance with minimal paperwork.
— Lenders would receive a fixed and reduced fee for each mortgage they refinance. Savings would be negotiated on title-related costs, and those costs would then be rolled into the new loan. (The increased taxpayer exposure from the slightly larger new loan amount would be offset by a lower default rate and related savings to taxpayers.)
— Millions of homeowners, most of them middle class, would save an average of $2,000 a year and some would save much more. In total, this would represent $50 billion in annual savings for U.S. homeowners.
— Chris Arnold
Hubbard says that extra spending money would help stimulate the economy. He says it's a sizable chunk of money — as much as a few thousand dollars per year for many, many years.
In total, Hubbard says, the savings would add up to around $50 billion a year.
Hubbard is the former chief economic adviser to President George W. Bush. So, the plan is being pushed by a Republican. And some 30 Democrats in Congress have already co-sponsored a bill to make this happen.
Could this be something Republicans and Democrats actually agree on?
"I think it might," Hubbard says. He says both parties will be focused on the economy and jobs.
"The real question is whether there will be any stimulus bill at all," he says. If there is one, Hubbard says, he would expect the proposal to be part of it.
He says the plan won't cost taxpayers money — an attribute that could help win support from both parties. It would just let more people qualify for market interest rates.
Critics Of The Plan
But others aren't so sure the plan is a winner.
"I don't think this will end up working," says Anthony Sanders, a finance professor at George Mason University.
Sanders and other skeptical economists say the plan exaggerates the savings to homeowners and underestimates the costs and barriers to making this work. They say banks might throw up roadblocks. Some might even demand to be free of any legal responsibility for any loans they make — a scenario that could create problems.
Insurance companies also might not go along. And the biggest problem seems to be that this is not free money.
Sanders says he's "very scared" by the notion of giving $200 or $500 a month to millions of households because "that's not free — it comes out of somebody's pocket."
Impact On Investors
The $50 billion for homeowners will come out of investors' pockets. For example, community banks have mortgage holdings that could take a hit. Pension funds and hedge funds might also suffer. Speculators around the world have made bets that so many loans wouldn't be able to refinance into better rates.
Some investors are going to "lose out based on that refinancing," says Tom Deutsch, the executive director of the American Securitization Forum, which represents some mortgage investors.
"There is some division within the investment community about whether this would be an appropriate program and would be in their best interest," he says.
At least one big investor has a favorable outlook toward the plan.
"This seems like a no-brainer," says Scott Simon, a managing director at the investment firm PIMCO, where he oversees upwards of $200 billion worth of mortgage-backed securities.
Simon thinks the overall economic benefits would more than offset any damage to mortgage investors.
A senior Treasury Department official says the agency is "continuing to refine the administration's housing policies."
Some economists think a likely next move for the government would be to launch a scaled-down version of the plan.
Mayer and Hubbard say they hope it won't be so scaled down that it prevents many Americans from saving hundreds of dollars a month on their home loans.