Most investor losses incurred by home loan refinancings would not impact U.S. economy

January 12, 2012 10:45AM

In its research paper on the housing market, the Federal Reserve Bank of New York urged Congress to allow American homeowners an easier path to refinancing despite potential losses to investors because the benefits to homeowners outweigh losses to investors, according to the Wall Street Journal.

“Refinancing is not a zero-sum game and can benefit the entire economy,” said Joseph Tracy, an executive vice president at the Fed, and Joshua Wright, a trader with the bank. “The greater the scale and scope of the refinancing program, the larger these benefits are likely to be.”

While there’s little argument that refinancing would help unburden distressed homeowners and, potentially, unleash their newfound spending power on the economy, rather than on interest payments for debts, critics have bemoaned the losses to investors who own the mortgages. Any gains to homeowners, they say, would be offset by the losses dealt to investors.

But Fed research demonstrated that government or foreign investors own about 47 percent of mortgage-backed securities, and insurance and pension funds hold another 8.3 percent. The money they spend on U.S. goods and services is unrelated to the income from their bonds, the Fed paper said. [WSJ]