Legislation to stabilize the foreclosure crisis through the federal government’s conservatorship of Fannie Mae and Freddie Mac was introduced in the U.S. House of Representatives Tuesday by Congressman Dennis Cardoza (D-California).
The Housing Opportunity and Mortgage Equity (HOME) Act would require Fannie and Freddie to allow borrowers to refinance their mortgages by locking in today’s record-low interest rates for longer fixed-term loans. The legislation would affect up to 30 million mortgages held or backed by the two GSEs.
To fund the program, Fannie and Freddie would issue new mortgage-backed securities (MBS) to fund the refinanced mortgages and use the proceeds to pay off the existing mortgages.
Fannie and Freddie would receive the same cash flow to cover default risk that they do now, passing along the reductions in financing costs to borrowers. Borrowers that qualify for the program would be able to refinance without facing penalty fees.
According to Rep. Cardoza, the measure would help stabilize the housing market by decreasing the inventory of foreclosed homes and reducing declines in property values from issues surrounding blight and abandonment.
At the same time, he argues that those with mortgages backed by Fannie and Freddie would have additional disposable income, providing a direct economic stimulus.
“No solution to date has addressed both foreclosure prevention and the decline of home equity, Cardoza said in a statement. “The reality is the housing crisis has spread far beyond the subprime market, hindering our economic recovery.”
Cardoza criticized the administration’s current housing programs for not being strong enough to make a dent in the worst foreclosure crisis in U.S. history.
“Until we see a program that cuts to the heart of the recession, we will continue to see little growth in our economy, families losing their homes, and lifetime investments with lost equity,” Cardoza said.
The legislation was initially introduced in January 2009. It has been modified based on new input Cardoza received from the House Financial Services Committee and several well-reputed economists, including Christopher Mayer, senior vice dean of Columbia Business School, and Mark Zandi, chief economist for Moody’s Analytics.
Cardoza says the proposal has gained increased interest as more economists realize that measures aimed at addressing the foreclosure meltdown have not been sufficient.
“If we allow housing to go into a free fall, everyone loses: taxpayers will have more bailouts, homeowners will watch their homes continue to decline in value, local communities will struggle to fund their schools. Everyone loses,” Mayer said. “Housing is an important part of what is holding back the economy. The government has a chance to help housing without harming the deficit. We should take it.”
Zandi added, “With mortgage rates near record lows, the quickest and most effective way policymakers can help the economy is to facilitate more mortgage refinancing. The HOME Act does this at little or no cost to taxpayers.”