Tuesday, January 10, 2012

Very Low Interest Rates and a Proposal to Encourage Refinancings

Interest rates on 15- and 30- year mortgage loans remain at historic lows, and Ezra Klein argues in this morning's Washington Post (here) that President Obama should adopt policies that would enable more homeowners to refinance.

In particular, Klein thinks the Federal Housing Finance Authority (which oversees Fannie Mae and Freddie Mac) should re-write its rules "so that anyone (!) with a loan backed by Fannie and Freddie and current on their payments for six months would be automatically approved for refinancing."

Klein says that Obama (and the FHFA) could make this change without Congressional authorization.


Klein acknowledges that there would be opposition to such a move from investors (including many pension funds) that hold the current (higher interest rate) mortgage-backed securities.

He does not address an even larger problem: declining home values.

If a mortgage is backed by a home that is worth 20% less than it was when the original loan was made, it's hard to imagine lenders agreeing that six months of on-time payments should be the sole criteria for approving a refinance. I gather that Klein's point is that the lenders won't be making the decision   Fannie and Freddie will be doing so, in their role as mortgage guarantors.

Given the supercharged political environment of an election year, it will be interesting to see whether President Obama takes steps to more proactively intervene in the housing market.