Effort to refinance underwater GSE mortgages gains steam

A bill from Sen. Barbara Boxer (D-Calif.), which would allow borrowers who are current but underwater on their Fannie Mae or Freddie Mac mortgage to refinance into a lower-rate loan, gained more industry support but also stirred more concern from investors.

Currently, more than 8 million Fannie or Freddie loans carry an interest rate of more than 6%. Boxer introduced the Helping Responsible Homeowners Act of 2011, S. 170, earlier this year. It would eliminate the negative equity restrictions and the upfront fees Fannie and Freddie charge when evaluating current homeowners. The bill would target roughly 2 million borrowers for a refinance into today's lower interest rate loan.

"They have been so solid in their mortgage payments every month even though the value of their home is going down," Boxer said in a conference call Tuesday. "This bill would remove the barriers that kept them trapped."
But under current tax law, a loan with a loan-to-value ratio over 125% would not be allowed to be packaged into a mortgage-backed security.
An aide for Boxer said there are vehicles that could be created and that it was also possible for Fannie and Freddie to move these loans into their portfolio – portfolios that under current conservatorship agreements should be on the decline.

The bill carries the support of Sen. Johnny Isakson (R-Ga.) and several industry trade groups including the National Association of Realtors, Mark Zandi, chief economist for Moody's Analytics and Bill Gross, the founder of investment firm PIMCO.
"The policy efforts implemented throughout the financial crisis have fallen short," Zandi said. "There have been many efforts and they've been helpful and they've clearly not been adequate.

The cost from this bill should be very small. I think this is a very efficient and effective way to help address one of the biggest roadblocks to a recovery and do it very quickly when the economy needs it."

One of the biggest hindrances to one of those initiatives that have under whelmed so far, the Federal Housing Administration Short Refinance program, is that Fannie and Freddie do not participate under guidance from their regulator the Federal Housing Finance Agency.

Wall Street investors expressed nervousness on Tuesday about the proposal, claiming such a move could shake-up an already fragile MBS market. But Boxer claims the cost to Fannie and Freddie to refinance these loans would be offset by the millions of underwater borrowers who could walk away otherwise.
"We don't think this is going to disrupt anything. In fact, we think this will stabilize the markets," Boxer said. "What would roil the market is if these millions of borrowers walk away from their loan."