The bill, co-sponsored in the Senate by Barbara Boxer (D-Calif.) and Johnny Isakson (R-Ga.), deals with two problems in the current housing market: First, it directs Fannie Mae and Freddie Mac to offer refinancing opportunities to anyone who is current on his or her mortgage, no matter how underwater the mortgage is. That’s the “responsible” part of the bill’s title: If you’re 50 percent underwater and you’re still making payments, you are beyond responsible. You are making a decision to pay more than your home is worth when you could simply walk away.
Second, it waives some of the costs that homeowners often have to pay when refinancing mortgages, including pre-penalty fees, loan level price adjustments and post-settlement delivery fees. That matters, as homeowners who are barely able to pay their bills often aren’t can’t cough up $5,000 or $10,000 to refinance, even if refinancing will save them money in the long run.
What them measure doesn’t do is deal with the “reps and warrants” problem I laid out in this post. In short, it doesn’t protect the banks who are refinancing the mortgages from the mistakes that might have been made by the banks that offered the original mortgages. As that is arguably the biggest practical problem with persuading banks to refinance troubled mortgages, some experts I spoke to were skeptical that this bill would work.
But it’s worth a try. It’s been endorsed chief economist Mark Zandi of Moody’s Analytics, the National Consumer Law Center, the National Association of Mortgage Brokers, the California Association of Realtors, the California Association of Mortgage Professionals, and William Gross, managing director and co-chief investment officer of fund manager Pimco. And if it doesn’t work, it’s pretty much a no-harm, no-foul sort of deal, as it’s not going to cost the government money if banks don’t refinance mortgages.
In fact, the law isn’t likely to cost the government much money even if it works great. And it might even save the government some money, as refinancing troubled mortgages makes homeowners less likely to default, and it is default that costs money for Fannie Mae and Freddie Mac.