Let’s Use Fannie And Freddie To Bail Ourselves Out By Refinancing Everyone’s Mortgage — Says Glenn Hubbard, by Daniel Gross, Yahoo!

Glenn Hubbard, Harvard-trained economist, former Bush administration official, dean of the Columbia Business School, is a mild-mannered, buttoned-down guy. But his proposal to bolster the housing market and provide some stimulus to America’s long-suffering homeowners is a bit radical.

In a recent New York Times op-ed article, Hubbard and Columbia Business senior vice dean Chris Mayer urged a simple solution: Fannie Mae and Freddie Mac, the government-controlled housing giants, should just refinance homowners at today’s low interest rates.

Hubbard joined Aaron and me to discuss this proposal, as well as other prescriptions he lays out for reforming America’s housing finance

system in his new book, Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity, co-authored with Peter Navarro.

Hubbard noted that the government and the Federal Reserve have already made significant efforts to shore up housing. “The Fed’s purchase of mortgage-backed securities really helped the housing market a lot,” by helping to narrow the spread between Treasuries and mortgages, Hubbard said. But falling house prices have made it difficult for people with under water mortgages to take advantage of lower rates. “Even with low interest rates, it’s hard to see a lot of refinancings because loan to value ratios are high,” he says.

A Sensible, Low-Cost Solution

His suggestion is that Fannie and Freddie could simply refinance existing mortgages at lower rates, at no additional cost to taxpayers. With Fannie Mae and Freddie Mac under U.S. conservatorship, the taxpayers already guarantee most mortgages through them. Hubbard believes this refi boom would ultimately save taxpayers money, since borrowers would be more likely to stay current on new mortgages with lower interest rates.

“More to the point for stimulus, this would be the equivalent of a $50 billion to $60 billion per year long-term tax cut for middle-income families, with no cost to the Treasury,” he says. “It seems pretty sensible.”

A bonus: this plan wouldn’t require passing legislation through a gridlocked Congress.

Of course, there are obstacles. Even at today’s much lower volumes, the home-lending system is having difficulty processing mortgage documents efficiently. Many critics are calling for Fannie and Freddie to reduce their scope of activities, not to increase them. And then there’s the question of moral hazard: Wouldn’t this just be another example of taxpayers bailing out borrowers who made what turned out to be poor decisions?

Not so much, says Hubbard. Many of the borrowers who now have loan-to-value (LTV) ratios that preclude them from refinancing are in the situation not because they borrowed so much to buy a home, but because the property supporting the mortgage has declined in value by 30 percent. “The whole thrust is to keep people in their homes and provide a tax cut that they would have gotten if their LTVs weren’t so high,” said Hubbard.

More Housing Solutions

In Seeds of Destruction, Hubbard and co-author Peter Navarro offer some other provocative thoughts on how to reform housing finance and avoid another debacle. Among the suggestions:

  • Both homeowners and lenders should be required to have some “skin in the game” on mortgages.
  • Prohibitions or restrictions on funky lending practices such as interest-only and adjustable-rate products, especially if they’re going to be securitized.
  • Greater disclosure on the information that goes into creating credit ratings for mortgage-backed products.

Perhaps most controversially, Hubbard calls for a rethinking of the home mortgage deduction, which allows homeowners to deduct interest on loans up to $1 million from their taxable income. The home mortgage deduction is an inefficient and expensive means of subsidizing housing and benefits higher-income Americans disproportionately.

“I’m not saying repeal it this afternoon, but we should take a hard look at our subsidies for housing and ask if they really make sense,” he tells Aaron and me in the accompanying clip.

If there’s a need to subsidize homeownership for lower and middle-income Americans, policy should focus subsdies on those sectors, Hubbard says. “But the very expensive subsidy system we have now really helped get us in trouble.”

Mortgage Refinance: Proposed Home Refinance Bill Could Allow Almost Everyone to Refinance, by Rosemary Rugnetta, Freerateupdate.com

(FreeRateUpdate.com) – Although the current low mortgage interest rates have helped numerous homeowners torefinance into better terms, many have not be able to take advantage of these deals. Tighter lending guidelines have left many homeowners with no where to turn for help. In an effort to help save homeownership for many Americans, Representative Dennis Cardoza of California has proposed a home refinance bill that could allow almost everyone to refinance.

H.R. 6218 is called The Housing Opportunity and Mortgage Equity Act of 2010 (HOME). It is designed to offer refinances directly to homeowners who need help. As other foreclosure prevention programs have failed to prevent further defaults, this bill can possibly reduce foreclosures drastically and reward those who have continued to make their monthly mortgage payments even through economic struggles. With reduced mortgage payments, consumers will have more available cash to spend each month thus stimulating a dragging economy. In addition, this type of refinance can help eliminate strategic defaults and loan modifications.

Following are some of the details of the bill:

-A qualified mortgage is one that is current or in default as long as it is the borrower’s primary residence and is owned or guaranteed by Fannie Mae or Freddie Mac, This residence can be a single family dwelling, one to four family dwelling, condominium or a share in a cooperative ownership housing association.

-Any penalties for prepayment or refinancing and penalties due to default or delinquency would be waived or forgiven.

-The term of the new refinance could be no longer than 40 years.

-The servicer cannot charge the borrower any fees for refinancing.

-Fees for title insurance coverage will be reasonable in comparison with fees for the same coverage available. Any fees associated with the refinance would be rolled into the mortgage.

-The enterprise (Fannie Mae and Freddie Mac) will pay the servicer a fee not to exceed $1,000 for each qualified mortgage that is refinanced.

-There will be no appraisal required.

-In order to pay for this, the old mortgages will be paid off when refinanced. The new refinances will be funded by selling new mortgage securities.

Although lenders believe that they will lose too much money if this bill is adopted, it can probably be the best solution given to date to halt the endless foreclosure issue. It will be interesting to see how this bill develops, what will be added and what will be taken away or even if it will pass. According to Congressman Cardoza’s website, there are about 30 million mortgages guaranteed by Fannie Mae and Freddie Mac. The savings from this program could be tremendous and have been estimated by Morgan Stanley and JP Morgan Chase to be an annual reduction of approximately $50 billion in mortgage payments. While the success of the available current programs is still questionable, this proposed bill which allows almost everyone to refinance could be the answer to accelerating the economy.

Housing Finance Needs U.S. Backstop, Executives Tell Lawmakers, by Lorraine Woellert, Bloomberg.com

Congress must preserve some form of U.S. guarantee on mortgages to attract private capital to the housing-finance system and stabilize a market recovering from the credit crisis, industry executives told lawmakers.

Private capital must play a bigger role in housing finance as policy makers replace the current system, which is dependent on guarantees from government-backed Fannie Mae andFreddie Mac, the executives said today in testimony prepared for a House Financial Services Committee hearing. U.S. support will still be needed to keep loans flowing to borrowers and preserve products such as 30-year, fixed-rate mortgages, they said.

Without a government backstop, there wouldn’t be enough private capital to support the $8 trillion in home loans that are funded by investors, said Michael Farrell, chief executive officer ofAnnaly Capital Management Inc., a New York real estate investment trust that owns or manages $90 billion of mortgage-backed securities.

The House panel called Farrell and other housing-industry executives to testify as they seek ways to overhaul a finance system that collapsed in 2008 amid losses on securities linked to subprime mortgages. Some economists and lawmakers have urged that any new system rely solely on private capital and be priced to reflect the risks.

“Recommendations to completely privatize miss the necessity of a government backstop to ensure consistent functioning of mortgage-backed securities markets under all economic conditions,” said Michael Heid, co-president of home mortgages for Wells Fargo & Co.

Fannie, Freddie

Fannie Mae and Freddie Mac, which own or guarantee more than half of the $11 trillion U.S. mortgage market, relied on an implied government guarantee to pool and sell mortgage-backed securities, which generated cash that could be channeled back into additional loans. The federal government seized the two companies amid soaring losses in September 2008 and promised to stand by the debt.

Since then, Washington-based Fannie Mae and Freddie Mac, based in McLean, Virginia, have survived on a promise of unlimited aid from the U.S. Treasury Department. The companies lost $166 billion on their guarantees of single-family mortgages from the end of 2007 and the second quarter of this year and have drawn almost $150 billion so far. Treasury Secretary Timothy F. Geithner has promised to deliver a plan for overhauling the housing-finance system in January.

One challenge for policy makers is how to keep money flowing into the system without the kind of open-ended commitment that left taxpayers responsible for catastrophic losses at the government-sponsored enterprises.

“The GSEs clearly did not operate with enough capital to buffer the risks they assumed,” Christopher Papagianis, managing director of non-profit research group Economics21, told lawmakers. “Policy makers should recognize that bailouts in the housing sector are inevitable if the key institutions in the space do not hold sufficient capital,” said Papagianis, an adviser to former President George W. Bush.

To contact the reporter on this story: Lorraine Woellert in Washington atlwoellert@bloomberg.net;

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.