In a best case scenario, consumers might save upwards of $63 billion a year if Fannie Mae and Freddie Mac participated in a workable refinancing program for underwater borrowers, according to a new report from Moody's Investors Service.
However, Moody's cautions that “Clearly, not all of these savings would be realized, but even a fraction would be a big plus.”
The rating agency's cost savings calculation is based on 18 million potential GSE borrowers – with an average loan size of $200,000 -- reducing their note rate to 4% from 5.75%.
The Obama White House is working on such a plan, but has yet to release it publicly.
Lenders that service GSE mortgages have been using the 'Home Affordable Refinancing Program' since early 2009 to refinance underwater mortgagors with poor results: 800,000 refis to date compared to a government stated goal of 4 to 5 million. (HARP allows for refis with LTVs of up to 125%.)
Moody's and other mortgage market participants say a major stumbling block to refinancing troubled borrowers is the loan level price adjustments (LLPAs) the GSEs slap on such loans.
“Fannie and Freddie are not breaking precedent in charging higher interest rates [LLPAs] to borrowers with less equity and weaker credit,” writes Moody's analyst Celia Chen and her team.
“The two mortgage companies have always done so, because such borrowers are more prone to default. But this standard practice is weakening HARP.”
Chen believes that the best way to jumpstart HARP would be to suspend the LLPAs.