Mortgage borrowers who have experienced employment disruptions as a result of the COVID-19 pandemic are unable to refinance their loans to take advantage of historically low market rates. In this article, we analyze the effects of a streamlined refinance ("refi") program for government-insured loans that would allow borrowers to refinance without needing to document employment or income. In addition, we consider a cash-out component that would allow borrowers to extract some of the substantial amount of housing equity that many have accumulated in recent years.
- Many borrowers could significantly lower their rates through a streamlined refinance program. The current market rate for a 30-year fixed-rate loan is 115 basis points (bps) lower than the rate that the average Fannie Mae and Freddie Mac borrower pays and 91 bps lower than the rate paid by the average Ginnie Mae borrower.
- Most borrowers have accumulated substantial amounts of equity in their homes. The median Fannie/Freddie borrower has a mark-to-market loan-to-value (LTV) of 50 percent, while the median Ginnie borrower has a LTV of 65 percent.
- A streamlined refi program that held mortgage balances constant would lower monthly payments for the average Fannie/Freddie (Ginnie) borrower by approximately $280 ($200) while decreasing default risk by 44 percent (38 percent).
- A streamlined cash-out program that held payments constant and allowed loan balances to increase would generate an average of $54,000 ($35,000) for Fannie/Freddie (Ginnie) borrowers while increasing default risk by 31 percent (26 percent).
- A hybrid program that holds default risk constant would reduce average payments for Fannie/Freddie (Ginnie) borrowers by $96 ($93) and generate approximately $38,000 ($23,000) in cash-out.
Center Affiliation: Center for Housing and Policy
JEL Classification: G28, G51, R38
Key words: mortgage, refinance, cash-out, COVID-19
The Federal Reserve Bank of Atlanta's Policy Hub leverages the expertise of Atlanta Fed economists and researchers to address issues of broad policy interest. Our research centers coordinate this work and seek to influence policy discussions. Areas of interest include: forecasting, fiscal policy, and macroeconomics (Center for Quantitative Economic Research); financial stability, innovation, and regulation (Center for Financial Innovation and Stability); human capital, labor markets, health, and education (Center for Human Capital Studies); and government-sponsored entity reform, mortgage markets, and affordable housing (Center for Housing and Policy). Sign up for email updates. Under "Publications" select "Policy Hub."