Mass Mortgage Refinancing Plan: Obama’s Ace In the Hole

January 5, 2012 3 Comments »
Mass Mortgage Refinancing Plan: Obama’s Ace In the Hole

We’ve heard talk of mass refinancing plans for years now, but nothing has quite delivered.

Sure, the Home Affordable Refinance Program (HARP) was recently expanded to allow just about any homeowner to refinance, regardless of negative equity issues.

But since it was announced in late October, I haven’t heard too much about it. Perhaps because it’s voluntary for mortgage lenders and still comes with cumbersome underwriting requirements?

Now there’s word of a “true mass refinance program,” one that allows pretty much anyone to refinance to today’s super low mortgage rates with few, if any restrictions.

A blog post written by James Pethokoukis that appeared on the American Enterprise Institute website yesterday is grabbing some serious headlines at the moment regarding the supposed plan.

In short, it suggests that Obama is looking to replace the current FHFA director with one of his own, which will allow the President to implement such a program. Just in time for election season too (not that I want to get political about this).

And because the FHFA oversees both Fannie Mae and Freddie Mac, anyone with a mortgage guaranteed by the pair, which is most homeowners, will be able to participate.

How the Mass Mortgage Refinancing Plan Would Work

Apparently it would be modeled after a plan originally thought up by Columbia University economists Glenn Hubbard and Christopher Mayer.

Every homeowner with a Fannie/Freddie backed mortgage would be eligible to refinance their existing first mortgage to a fixed rate of 4% or less.

The only requirement would be that the homeowner is current on their mortgage, or that they become so for a minimum of three months.

Even those with FHA loans and VA loans would be eligible, though interest rates would be higher.

No other qualification criteria would be used – no appraisal requirement, no income verification, no asset documents, LTV limits, etc.

Homeowners would get the option of refinancing into a 30-year fixed or a 15-year fixed.

But only first mortgages can be refinanced, so any second mortgages would need to be resubordinated.

Why It Works

Fannie and Freddie would get higher guarantee fees for implementing the plan, and loan servicers would receive the right to originate/service the mortgages without being responsible for “reps and warranties” violations of past servicers.

Banks and mortgage lenders would be able to refinance the mortgages quickly and cheaply thanks to the lack of underwriting requirements.

Private mortgage insurers could continue to insure the mortgages, and with lower monthly payments the mortgages would be deemed safer.

Roughly 25 million homeowners would benefit from the program in the form of lower monthly mortgage payments, with estimated annual savings of $2,800 per homeowner, or $70 billion in aggregate reduced housing costs.

These lower mortgage payments would also serve to stabilize the housing market and reduce the risk of future defaults.

It could also motivate homeowners on the brink to stay current in order to participate, unlike many loan modification programs that only serve those who fall behind on payments.

This could effectively push home prices higher, easing home equity concerns for those “on the fence” about staying or going.

Additionally, taxpayers would stand to benefit because Fannie and Freddie would reduce their losses and lower mortgage payments would mean reduced mortgage interest deductions.

The only “loser” would be mortgage bondholders, which the economists argue have already benefited tremendously from government actions taken during the mortgage crisis.

Additionally, thanks to current roadblocks, the relatively slow rate of refinancing allowed these bondholders to benefit more than they would have historically.

So there you have it. A possible mass refinance program with very few constraints. Even ineligible borrowers would “benefit” indirectly if the housing market improved as a result.

Not that I’m sold on it.  There are still a ton of question marks, namely those who can’t afford even a reduced housing payment, those already in foreclosure, the excess housing inventory, the impact of future mortgage rates, etc, etc.

Regardless, it’s clear housing policy will play a major role in the upcoming election.

(photo: KE Design)

3 Comments

  1. pm January 6, 2012 at 5:03 pm -

    how about credit? nothing was mentioned about that. how about people who filed bk? are they able to refinance as well? i’d really like to know that as a lot of people are with not so good credit and have filed bk to keep their homes? please advise?

  2. C Man January 9, 2012 at 2:05 pm -

    Er um, excuse me – if it was that simple why was it not done a long time ago? Because it is not that simple. This program would cause significant long term damage to the mortgage market. Future mortgage rates (once the program ends) for everyone will be an extra 2% or more higher than they would otherwise be. Future mortgage investors (you can call them ‘savers’, that ok you know), will demand this much extra interest coupon in order to invest in something that has such a massive risk of the ‘rules being changed half way through’ – and there is nothing the Administration or Fed or Congress could do to stop that from happening. And simple option theory will tell you this: when the prepay option is exercised by ‘borrowers’ (through the program offering a 4% mortgage) it is exactly a zero-sum – mortgage bond investors (savers, your pension funds, your life insurance, your 401k) will lose the exact same amount as the ‘borrowers’ gain: $70bn you say. Only thing is that $70bn loss to savers will hit immediately, whereas the $70bn gain to borrowers will take many years to go through in reduced monthly payments- pretty lousy economic stimulus!

  3. Daryl January 12, 2012 at 9:55 pm -

    Not everybody has a federally backed mortgage, unfortunately. I used a mortgage broker and got a Citi mortgage for my first house ever (my only house), in 2007. I had no idea there were so many benefits associated with a federally backed/guaranteed mortgage, versus the sludge my mortgage broker and Citi sold me. Should my mortgage broker have told me my loan was NOT federally backed (and therefore devoid of many benefits, like a guaranteed refi)? Is there liability for his failure to do so? What about Citi? They provided no disclosure, no warning that what I was getting was something inferior to what the rest of the market gets.

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