How Mortgage Refinancing Could Help Spur Economy

Christopher Mayer, an economist at Columbia University, talks to Steve Inskeep about his top fix for the economy. Mayer thinks homeowners with mortgages through Fannie Mae or Freddie Mac should be able to refinance their homes at lower interest rates, regardless of their credit score.

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STEVE INSKEEP, host:

Okay. More travel may be one way to give the economy a kick, whether it's with shoes on or shoes off. And we've been asking people for other suggestions to help the economy. Not necessarily one big solution to everything, just an idea that might help some way, help something. And this morning we'll take a look at the fix offered by Christopher Mayer, an economist at Columbia University. He's been involved in a plan that is starting to get attention from the Obama administration. It would allow homeowners with mortgages, through Fannie Mae or Freddie Mac, to refinance their homes at lower interest rates regardless of their credit score.

Mr. CHRISTOPHER MAYER (Columbia Business School Professor): I think Fannie Mae and Freddie Mac should send a letter to all borrowers who are current on their mortgage and have been so, not the people who have had problems, and give them a one-page piece of paper: Would you like to refinance your mortgage?

INSKEEP: So I'm a homeowner. I've been paying my mortgage and I get this letter. It says: You can now refinance at a lower rate, without jumping through a lot of the normal hoops in order to do that. What do I do? I just take that letter into the bank and say, okay, swap out my mortgage.

Mr. MAYER: Yeah. So you take that letter. You send it to the servicer who is servicing your mortgage on behalf of Fannie Mae and Freddie Mac. My guess is there'll be some costs on the order of 500, at most $1,000 to kind of redo the mortgage. They would not go through any of the normal underwriting, which would be requiring a new credit score, you know, getting an appraisal, verifying income. They don't have to do that because they're already underwriting and guaranteeing your mortgage so there's no need to re-underwrite a new mortgage.

INSKEEP: Oh, so it is basically swapping out the mortgage for the one for which they already qualified, and on which they are currently making payments. You're excluding people who can't make the payments. This is people who are paying right now.

Mr. MAYER: I think we should start the program with people who are paying. Let's reward the people who have been really good credits throughout the crisis and who have struggled to make it, because there are tens and millions of households like that.

One of the other things I should point out is that if you look at this crisis, the households who have been refinancing are - tend to be higher income households who are more financially sophisticated. And the decision to refinance a mortgage, how to think about that, is a decision that more sophisticated homeowners can think about more easily. This is really focusing on people who may not be as sophisticated but if we were to implement such a program would be getting lots of help and they're not sort of being approached by, you know, originators who are going to rip them off with higher rates. You know, at this point everybody is going to get the same opportunity at the same rates.

INSKEEP: So Fannie Mae or Freddie Mac make it possibly without a lot of the paperwork, without a lot of the qualifications that it might be hard for people to make at this present time, to refinance at a lower rate. Somebody who might have an eight percent mortgage or a seven percent mortgage right now might get a four and a half percent mortgage under this plan. And so what does that mean for the economy broadly?

Mr. MAYER: I think we need to give people confidence that we're going to stem the flow of new foreclosures. And so I think this plan allows us to help stabilize the housing market, provide some confidence. And this also puts tens of billions of dollars a year into consumers' pockets, which can be used to lower debt, which can be used to sort of - to buy things which will help spur the economy.

This is a permanent payment reduction. Your mortgage rate is going to go down every year. And so those savings would go back into the economy and they would be going and benefiting middle income, predominately working households.

INSKEEP: Christopher Mayer is the Paul Milstein Professor of Real Estate at the Columbia Business School. Thanks very much.

Mr. MAYER: Great talking to you, Steve.

INSKEEP: And tomorrow, CEO Tim Brown says the United States should try to improve the economy by reviving apprenticeships.

Mr. TIM BROWN (CEO, IDEO): Skilled people like to pass on their training and their skills to others. And I think there's a tremendous opportunity to do more of that.

INSKEEP: And you'll have an opportunity to hear his economic idea tomorrow.

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