Just a few more things I wanted to highlight on the Obama mass refi plan announced today. Here’s the official release, by the way, of the changes to the Home Affordable Refinance Program (HARP) included in this announcement.
• A nod to those who say, “Be reasonable, it’s better than anything the Republicans have on the foreclosure crisis!” Yes, that’s an extremely low bar, but trying to get refis done is an improvement on laissez-faire free market fundamentalism or the “liquidate houses” idea. Though it’s worth noting that there are a few Republican ideas that would go further on this front. I think that some of them, like Martin Feldstein’s plan for borrower indentured servitude, are misguided, but some do belong in the marketplace of ideas. In fact, on today’s conference call, HUD Secretary Shaun Donovan cited the sanctity of contracts in shooting down Columbia prof Chris Mayer’s idea to basically write down everyone’s mortgage rate to 4.2%.
• These aren’t going to be huge movers in the economy, as most economists recognize. FHFA estimates that 800,000-1 million borrowers could be helped by the new plan, and they’ve been off before. Assuming a $2,500 average annual benefit to the homeowner who refinances, you’re talking about $2-$3 billion in stimulus, and that’s without counting the fact that banks and investors lose this money in the exchange. Jacob Goldstein writes that lots of people have already refinanced, and as a result debt payments have already fallen pretty sharply. There’s a ways to go for underwater borrowers, but this doesn’t have an earth-shattering importance.
The Administration would probably respond that their preference is to pass the American Jobs Act, but “we can’t wait” for that, so it’s time to move to something they can initiate without Congress.
• But the relatively small size is all the more reason people should be concerned about the impact on representation and warranty claims by FHFA, which they essentially give up in this plan. Zach Carter highlights that as well:
The newly expanded program would expunge legal liabilities associated with mortgages refinanced through the program for the original lenders of the mortgages. Each time a bank sent a loan to Fannie and Freddie, it certified that the loan met Fannie and Freddie’s safe lending criteria. But many loans sent to the mortgage giants did not, in fact, meet those criteria. Currently, when borrowers default on those ineligible loans, the mortgage giants can “put back” the resulting losses onto the banks that pushed the loans.
Under the modified plan, “put back” liability at banks will be erased for any underwater mortgage that is refinanced through HARP, eliminating Fannie and Freddie’s ability to sack lenders with losses in the event that the mortgage does not pan out.
If borrowers go through HARP, but decide after several months that the modest monthly savings do not outweigh owing tens of thousands of dollars more than their home is worth, taxpayer-owned Fannie and Freddie will have to take the full loss. Even if the original loan was sent to Fannie and Freddie with false or fraudulent guarantees from the bank — promises that may directly be tied to the borrower’s current financial problems — banks will be immune from liability. Fannie and Freddie plan to charge banks “a modest fee” to extinguish this liability, but the administration has yet to determine what that fee will be.
You can bet that fee will be much smaller than the result of the current lawsuits FHFA is pursuing against 17 banks. There’s obviously a trade-off here, of stimulus (not necessarily keeping people in homes, as this does nothing for negative equity, and payment reductions have been found to not be entirely successful for foreclosure mitigation) for the waiving of this put-back risk. But as stated above, the stimulus isn’t all that big.
• There are also a number of limitations on the program, as Nick Timiaros describes. One, if you have already used HARP for a lower interest rate, you cannot use it again. Two, the fees that often prevent people from refinancing are lowered, but not eliminated, if the borrower needs another 30-year loan. If they refinance into a shorter, 15-year term, those fees will be waived.
• Finally, we should be very afraid of the same people who bungled the response to the foreclosure crisis at every step handling this new program. Zach Goldfarb’s deep dive into why housing policy failed in the Obama Administration is a good place to start on these issues. They didn’t use the money appropriated to HAMP, disagreed philosophically with steps to benefit borrowers, and were far more concerned about moral hazard for someone cheated on a predatory loan than moral hazard for, say, the banks. Digby has more on this.
Even now, you have Larry Summers saying that credit standards for housing are now too high, and presumably should be lowered to allow more borrowers into the market. Summers also stressed the need to eliminate the put-back risk. This is the key sentence and shows the key concern of those dealing with current housing policy, and it ain’t homeowners:
Fifth, there were clearly substantial abuses by financial institutions and most everyone in the mortgage industry during the bubble. Just compensation to the victims is a legitimate objective. But allowing negotiation over past actions to be the dominant thrust of policy creates overhangs of uncertainty that impose huge costs on the financial system and inhibit lending. A rapid resolution of disputes is equally in the interests of bank shareholders and the housing market. The FHFA should be striving to rapidly conclude this period of uncertainty.
Look forward, not backward, then, the rule of law be damned. Fortunately there are some justice Democrats making it difficult for this whitewash to take place.
I’ll have some more later on about what a fair and equitable anti-foreclosure plan could look like.