Researchers Recommend Accelerated Amortization Options for Underwater Homeowners
Allowing underwater homeowners to refinance their mortgages with shorter amortization periods and subsidized closing costs would benefit more than a million homeowners while also helping to stabilize the housing market and boost the broader economy—all without cost to taxpayers—according to new research and analysis by a team at Columbia Business School.
In their June 16 report "The Case for Accelerated Amortization," Alan Boyce, Glenn Hubbard, Christopher Mayer, and James Witkin analyze the costs and benefits of a proposed policy that would cover the closing costs for underwater homeowners who choose a shorter amortization period for their refinanced mortgages. A key finding is that, if implemented in conjunction with a widespread refinancing program, the proposal would save American taxpayers up to $6.7 billion through lower default rates and smaller losses on foreclosed homes for mortgages guaranteed by Fannie Mae and Freddie Mac.
For such an initiative to be successful, Fannie Mae and Freddie Mac would have to allow underwater borrowers to refinance their mortgages without constraints, as recommended previously by this research team. Currently, these entities do not permit unrestricted financing.
The full report and supporting calculations, as well as related work by this team, are available in the research section of the Paul Milstein Center for Real Estate website at Housing and the Financial Crisis. Alan Boyce is CEO of the Absalon Project; Glenn Hubbard is dean and Russell L. Carson Professor of Finance and Economics at Columbia Business School; Christopher Mayer is Paul Milstein Professor of Real Estate, Finance and Economics and visiting scholar at the Federal Reserve Bank of New York; and James Witkin is research manager at the Paul Milstein Center for Real Estate.