Oct 29th 2011
SOMETIMES the best stimulus is not the biggest, but the one that’s possible. While Barack Obama has been haranguing Congress, without success, to pass his $447 billion stimulus plan, a more modest effort paid off on October 24th when the Federal Housing Finance Agency (FHFA), the regulator of Fannie Mae and Freddie Mac, the two big mortgage-finance companies, made it easier for borrowers to lower the rates they pay on their mortgages.
Mortgage rates are the lowest in a generation, triggering a rush by homeowners to retire higher-rate loans and take out new ones (see chart). But roughly a quarter of homeowners cannot refinance because their mortgages exceed the value of their homes. In early 2009 the administration introduced its Home Affordable Refinance Programme (HARP), allowing refinancing for “underwater borrowers” with no history of delinquency. Although Fannie and Freddie were taken over by the federal government in 2008, HARP would not expose the taxpayer to any more loss, since refinancing did not make the loan riskier.
The programme has been a disappointment. Up to the end of August only 894,000 borrowers had refinanced mortgages through HARP, a far cry from the 4m-5m the administration had hoped for. The reasons are complex, but boil down to Fannie and Freddie trying to protect their profits by imposing onerous fees and conditions. That might seem perplexing, since the Treasury is covering their losses, but the FHFA had stood by its legal obligation to minimise losses to taxpayers.
It has now relented. The previous maximum loan-to-value ratio of 125% has been eliminated. Fees imposed on high-risk borrowers of up to 2% of the mortgage amount have been reduced or eliminated, and applicants in many cases no longer need a new property appraisal.
A big impediment to refinancing had been the banks who originate the mortgages and then sell them to Fannie and Freddie for inclusion in mortgage-backed securities. If a bank refinanced a loan that soon became delinquent, Fannie and Freddie would look for evidence that the bank had violated the representations and warranties it had made about the borrower and the property, and force it to buy the defective loan back. Now Fannie and Freddie will no longer generally require originators to make such representations and warranties.
Critics question the programme’s potential to stimulate the economy, when the increased cashflow of borrowers will come at the expense of the investors who own the mortgages. But the owners are unlikely to reduce their spending by as much as the borrowers increase theirs, especially since Fannie, Freddie and the Federal Reserve are among the largest owners. Even so, the benefits will be modest. The FHFA reckons the number of beneficiaries could rise by about 1m. Assuming savings of $2,500 each, that makes just $2.5 billion in additional cash, barely noticeable in a $15 trillion economy. Nor will it do anything to stimulate house-buying.
Other steps will be necessary to rejuvenate housing. Federal Reserve officials have hinted in recent days that they may resume large-scale purchases of mortgage-backed securities, paid for with newly printed money. That would push mortgage rates down further. Meanwhile, states are trying to negotiate a settlement with banks over flawed mortgage servicing and foreclosure practices. A deal would compel banks to help underwater homeowners avoid foreclosure. Until then, every little bit helps.http://media.economist.com/sites/default/files/imagecache/290-width/images/print-edition/20111029_USC856.gif