Why would any bank refinance a mortgage on an underwater home? It makes no sense. But Senator Barbara Boxer has found a Republican to cosponsor legislation to do just that.
Economist Mark Zandi supports the proposal.
Banks are going to want guarantees before they extend such refinancing.
Bloomberg reports: Of 27.5 million mortgages owned or guaranteed by Fannie Mae and Freddie Mac, more than 8 million carry an interest rate at or above 6 percent, according to Boxer, whose proposal would only apply loans backed by the companies. The average offered on a typical new 30-year loan was 4.6 percent last week, according to data from Freddie Mac.
This program is likely to raise mortgage interest rates for new mortgages.
If the program were broadly used, rates on new mortgages for home buyers and refinancing may be driven up, he said. That’s because the supply of low-coupon securities would increase and mortgage-bond investors would demand greater yields to compensate for extra uncertainty about repayment patterns, he said.