As soon as today, the White House will announce that millions more underwater homeowners can take advantage of a refinancing program if their loan is owned or guaranteed by Fannie Mae or Freddie Mac. This is a plan that had been expected for a couple months when the President announced it as part of his American Jobs Act speech, but this is the first time we get the details. Basically, they’ve opened up the Home Affordable Refinancing Program to everyone who’s current on their loan, regardless of how far underwater they are.
The overhaul will, among other things, let borrowers refinance regardless of how far their homes have fallen in value, eliminating previous limits. That could open up refinancing to legions of borrowers in Nevada, Arizona, Florida, California and elsewhere who are paying high interest rates and are deeply “underwater,” owing more than their houses are worth. President Barack Obama is expected to tout the program in Las Vegas on Monday.
The plan will streamline the refinance process by eliminating appraisals and extensive underwriting requirements for most borrowers, as long as homeowners are current on their mortgage payments, according to administration officials and an official at the Federal Housing Finance Agency. Fannie and Freddie have also agreed to waive some fees that made refinancing less attractive for some.
The revamp is aimed at homeowners like Christine and Hector Penunuri of Gilbert, Ariz., who have never missed a mortgage payment and who both have jobs and good credit. Yet their application to refinance their five-bedroom home, which has fallen in value, was denied earlier this year because their tax returns showed a $1,000 loss in start-up costs from Mr. Penunuri’s business, which isn’t even his day job.
It’s “absurd,” says their mortgage broker, Steve Walsh of Scottsdale, because the loan is already guaranteed by government-backed mortgage company Freddie Mac.
I don’t know that there are that many people like the Penunuris, but this does significantly expand eligibility for the program.
People should watch what they say when they call this a housing program, however. Payment reductions on the interest rate have proven unsuccessful in keeping that many people in their home. This is a stimulus program, because it saves borrowers a certain amount a month to refi, money that can be used in the economy.
It also removes a kind of subsidy from the banks. In a normal circumstance without a housing bubble, many more borrowers who are now underwater would have taken advantage of lower mortgage rates and refinanced. That they haven’t done so protects the banks and allows them to make more money on performing loans. So a stimulus program paid entirely by the banks (as well as investors in mortgage-backed securities)? What’s not to like? And it has the potential to be significant, because Fannie and Freddie own around half of all mortgages.
Of course, there should be skepticism about any housing program managed by this Administration. HARP in its initial form well undershot its target of 4 million refis, just as HAMP was a miserable failure. The estimates for this program are more in line with reality, with FHFA saying that between 800,000-1 million borrowers would be able to get a refi now. But this Administration has had no success with housing, as this long Zach Goldfarb article details. And some of that is by design – in the name of protecting bank profits or making sure the “right” people got help (Tim Geithner has a lot more concern about moral hazard for homeowners than he does for banks), the plans to mitigate the foreclosure crisis have either shrunk into nothing or been weaponized by banks into something harmful to borrowers.
This is a different time, however, as we’re nearing election season. And there’s more of an acknowledgement that debt overhang is a primary cause of the economic torpor in the country. In addition to announcing this refi scheme for underwater borrowers with Fannie and Freddie-backed loans, there’s also a planned announcement on student loans, another source of heavy debt. That initiative is coming Wednesday, though there are no details.
All of this is separate from the state AG settlement with the banks over foreclosure fraud, though the same mechanism, refinancing for underwater borrowers, is used in that proposed settlement as a carrot for AGs in underwater states like California’s Kamala Harris. This is absurd, because a state like California, where Countrywide was a major lender, has almost no bank-owned loans, and only bank-owned loans would be eligible under the settlement offer. This is spin to try and get Harris back on the settlement, and not even particularly good spin.
A real plan for housing would begin and end with principal reductions. But as a stimulus measure that puts the cost on those who can afford it, this is fine.