Refinancing Out of Reach for Many Americans

Interest rates are at historic lows, but many homeowners won’t benefit.

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In his Thursday evening address to Congress, President Obama is expected to unveil an estimated $300 billion stimulus program designed to revive the ailing economy, which many experts expect will include a provision for some type of mortgage refinancing initiative.

Despite the favorable conditions for refinancing—U.S. mortgage rates are near their lowest levels in more than 50 years—many homeowners haven't been able to benefit from the downward march in mortgage rates because they either don't have enough equity in their homes or don't qualify under today's stringent lending rules.

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"The big obstacle for people now is lack of equity," says Greg McBride, senior financial analyst at Bankrate.com. Several government programs, such as the Home Affordable Refinance Program (HARP), already exist to help homeowners refinance with little or no equity he says, but only up to 125 percent of the home's value. "125 percent is far too low to help homeowners in the hardest hit markets like Florida, Nevada, and Arizona," McBride says. Although Fannie and Freddie back millions of underwater loans, fewer than 63,000 of those borrowers have been able to take advantage of the program, primarily due to reluctance from banks to refinance riskier borrowers.

Obama's refinancing initiative could involve broadening the HARP program, making it easier for the millions of Americans with government-backed loans to refinance at lower rates. The idea is that lower monthly payments should help struggling homeowners keep up with their mortgage payments, easing foreclosure activity and providing a little extra padding to Americans' wallets. More disposable income could mean a boost for the economy, experts say, especially if Americans start spending again on things like computers, cars, and other goods and services.

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"The benefit of refinancing is that it reduces monthly payments and creates a little bit of breathing room in household budgets," McBride says. "That means more money that can be pumped back into the economy."

In past recoveries, refinancing activity has triggered consumption as homeowners cashed out equity in their homes to buy other goods and services. But even if more consumers were able to refinance mortgages and draw on equity, some experts fear the effect would be muted because more Americans are saving and paying down debt instead of spending. While that's not necessarily bad for the long-term economic health of the economy, in the short term, the lack of consumer spending remains a major headwind for the recovery and could even push the nation into another recession.

While supporters of the plan have billed the initiative as a no-cost way to boost the economy and help the hobbled housing market, detractors point a host of negative ripple effects that refinancing millions of mortgages could have. Ed Glaeser, an economics professor at Harvard University and author of Triumph of the City, wrote in a recent Bloomberg column that "universal refinancing is far from free, and is poorly designed to stimulate either the economy or the housing market."

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On top of huge losses for Freddie and Fannie, taxpayers and investors could take a hit as well. In particular, mortgage-backed security investors and banks who own loans at the higher rates would lose out.

Moreover, essentially we are all mortgage-backed security holders now because our government owns enormous amounts of agency-insured debt. The Federal Reserve System owns nearly $900 billion in securities backed by the two mortgage giants, while the Treasury had about $80 billion worth of those securities on their books as of July. "When we're talking about reducing payments to Freddie and Fannie mortgage holders, we're really talking about reducing payments to ourselves," he wrote. "Our government owns a massive amount of agency-insured debt and would take a significant part of the hit if debtors reduced their payments."


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