Moody's: Refinancing Is Key to Housing Market Recovery

If all of Fannie Mae’s and Freddie Mac’s borrowers paying interest rates that are higher than the median rate were to refinance at 4 percent, the savings would total $63 billion, according to Moody’s. While such an option would not bring the total $63 billion in savings to fruition, Moody’s chief economist, Mark Zandi, says “even a fraction would be a big plus.” In a recent release, Zandi states, “Policymakers should consider taking additional steps to support the housing and mortgage markets.” He adds, “The most efficacious policy step that could make a meaningful difference quickly is to facilitate more mortgage refinancing.” The Obama administration enacted the Home Affordable Refinancing Program (HARP) in 2009 to facilitate refinancing for Fannie Mae and Freddie Mac borrowers paying above-market interest rates. However, after its original forecast of helping 4 million to 5 million homeowners, the program has facilitated 800,000 refinances. HARP’s major obstacle, according to Zandi, is the loan level price adjustments Fannie and Freddie impose with the refinance option. While loan level price adjustments are typical components of a refinance, “this standard practice is weakening HARP,” Zandi says. Also, because Fannie and Freddie bear the risk for these loans, a loan level price adjustment may not be necessary. Refinancing more loans through HARP would mean less interest income for Fannie and Freddie as well as investors. However, the GSEs and the taxpayers “would be made substantially whole” because increased refinances would translate to decreased defaults, according to Zandi.