NEW YORK — The economic benefit of home-loan refinancing to consumers far exceeds the effect of lost returns to investors who provide the residential financing, according to a Federal Reserve Bank of New York research paper, in the bank's latest salvo in support of a more active U.S. housing policy.
To restore consumer spending, some economists have recommended that the government should help more homeowners to refinance their mortgages, especially if they owe more on the loans than their property is worth. Critics have said such moves wouldn't work because losses to investors who own the mortgages would offset any gain to homeowners.
The New York Fed paper challenges critics' views, saying that government or foreign investors own about 47% of securities backed by residential mortgages, and the money they spend on U.S. goods and services doesn't depend "to any significant degree" on the income from their bonds. Another 8.3% of MBS are held by insurance and pension funds whose spending effects would probably be spread out over a long period of time, it said.
"Refinancing is not a zero-sum game and can benefit the entire economy," said New York Fed Executive Vice President Joseph Tracy and Joshua Wright, a trader in the central bank's markets group. "The greater the scale and scope of the refinancing program, the larger these benefits are likely to be."
"Benefits are likely to be larger still if a broad-based refinancing effort is accompanied by other measures to help stabilize house prices," they added.
The paper, posted to the New York Fed website on Wednesday, comes as Federal Reserve Chairman Ben Bernanke is urging the Obama administration and Congress to step up efforts to underpin the housing market that has remained a dark corner of the U.S. economy. A trio of Fed officials, including New York Fed President William Dudley, last week underscored Bernanke's view in calling for more housing policy interventions.
The Fed's views come even after the main U.S. housing regulator late last year expanded the government's Home Affordable Refinance Program that had disappointed in its goal of refinancing borrowers with underwater loans.
Failures of government policy to stop the deterioration in housing are sure to be a key issue in this year's U.S. presidential election, analysts said.
Investors' returns on the $5 trillion in bonds issued by Fannie Mae, Freddie Mac and the Government National Mortgage Association, or Ginnie Mae, are typically cut as refinancing triggers an early repayment of principal at face value. Investors are left to reinvest at lower rates, and sustain a mark-down on their holdings of MBS that are trading at near record premiums.
Some mortgage-bond investors and analysts counter that a more aggressive refinancing program would represent a wealth transfer from savers to spenders, and wouldn't address the overhang of housing supply that some contend is the market's biggest albatross.
"If refinancings were so great, why did the most spectacular housing boom and bust cycle immediately follow the biggest refinance wave in history in 2003 and 2004," said Walter Schmidt, head of mortgage strategy at FTN Financial. Faster refinancings may also mean higher mortgage rates if banks, which hold $1.2 trillion in MBS, see margins drop and hold off on future purchases, he said.
Schmidt also noted that pension funds are already having a hard time meeting yield targets to cover liabilities.
But the Fed said investors have been compensated for the risk that the security is called after a refinancing. Mortgage bonds have returned more than many models predicted over the past two years because of greater-than-expected impediments to refinancing, Tracy and Wright said.
And for consumers, every dollar reduction in a homeowner's mortgage payment from a refinancing is likely to generate close to 50 cents of additional spending, they said.
