Consumers could save upwards of $63 billion a year if Fannie Mae and Freddie Mac participate in a workable refinancing program for underwater borrowers, according to Moody's Investors Service.
"Clearly, not all of these savings would be realized, but even a fraction would be a big plus," Moody's said.
The rating agency's cost savings calculation is based on 18 million potential borrowers, with an average loan size of $200,000, reducing their interest rates to 4%, from 5.75%. The White House is working on such a plan but has yet to release it publicly.
Lenders that service mortgages from the government-sponsored enterprises have been using the Home Affordable Refinancing Program since early 2009 to refinance 800,000 underwater borrowers. That figure falls far short of the government's goal of 4 million to 5 million refinancings. Part of the problem is the rates charged to date.
"Fannie and Freddie are not breaking precedent in charging higher interest rates [loan level price adjustments] to borrowers with less equity and weaker credit," writes Moody's. "The two mortgage companies have always done so, because such borrowers are more prone to default. But this standard practice is weakening Harp."
Moody's believes the best way to ignite Harp would be to suspend the LLPAs.
