Posted on 02/01/2012 10:04:20 AM PST by whitedog57
President Obama is in Fairfax Virginia today at 11am announcing his new mortgage refinancing program. The program is meant to compliment his already existing HARP 2.0 program for borrowers whose loans are not held or insured by Fannie Mae or Freddie Mac. Rather, it is meant to allow mortgage refinancing to 1 out of 3 borrowers who are not eligible for HARP 2.0 which would be an estimated 3.5 million homeowners. That is on top of the anticipated 11 million borrowers who could refinance their loans through Fannie Mae and Freddie Mac. The estimate price tag is $5-10 billion. Here is a copy of his speech: housing fact sheet 2-1 FINAL for release
The program would target FHA insured loans. The good news is that it would be relatively easing for the FHA to modify their existing platform for such an undertaking. The bad news is that the FHA is listing badly and is likely to ask for a bailout from Congress. At the end of September, the FHA insurance fund (MMI) guaranteed nearly $1.1 trillion in mortgages with just $1.2 billion as a cushion for unanticipated losses. Therefore, the Administration is proposing a bank tax to pay for the $5-10 billion price tag rather than have the FHA MMI fund eat the cost.
To qualify for the program, homeowners 1) would have to be current on their last six mortgage payments and 2) have no more than one delinquency in the previous six months. The program would be open to owner occupants and borrowers with a minimum credit score of 580. Loans that exceed FHA limits, which range from $271,050 to $729,750, depending on local home prices, are not be eligible (bear in mind that Congress kept the FHA’s conforming loan limit at $729,750 while lowering Fannie Mae and Freddie Mac’s CLL). To simplify the application process, lenders would have to confirm employment but little else. Homeowners who are deeply underwater would be eligible, but lenders would have to write down the loan balance to 140% of the value of the home.
Will It Work?
Bear in mind that this proposal is a variant of the HARP 2.0 program which is a wealth redistribution from MBS investors and taxpayers to the borrowers. So for every dollar that is allocated towards reducing interest and principal there is a dollar lost to MBS investors and taxpayers. Nothing is free.
So, will a wealth redistribution of $5-10 billion revive the housing market? It is highly doubtful. Will it lower defaults? It will not lower defaults in any meaningful way. To be sure, the borrowers that receive the lower interest rates will be happy, but they should ask their neighbors if they want to pay for it.
Wealth Redistribution By Any Other Name
It just seems to me to be wealth redistribution with minimal effects on the housing market or loan defaults. Since it is a wealth redistribution, it is like taking money from one pocket and putting it in another and thinking you are suddenly wealthier.
The bank tax will simply get passed through to consumers in the form of higher fees. Apparently, the Administration didn’t learn anything from the transfer fee fiasco of the Durbin Amendment. Like in Jurassic Park, “Markets will find a way” to pass the additional costs on to consumers. And is it “fair” to bank customers to pay higher fees so 3.5 million borrowers receive lower interest payments?
The bank tax is likely a non-starter in the House of Representatives. Is there another source of funds available? How about the unused TARP funds? But regardless of how this is funded, it makes no economic sense.
The Negative Signal of Chronic Intervention
But the big issue is the signal it sends to investors that this Administration will change the rules whenever it is in their best interest and that is not good for the market. Risk premiums will rise in the MBS space (perhaps they already did!) and this will force The Fed to intervene with MORE Agency MBS purchases to lower rates. Ah, unintended consequences!
Overall, a would rank it is a political move and bad economic policy.
Remember Chaos Theory from Jurassic Park? Here is President Obama trying to influence a T-Rex (the housing market) with a flare. It didn’t work too well other than momentary distraction of a large lizard.
Just wait until he decides the quickest way to destroy America is to declare all mortgages paid in full. Any banks, loan companies and individuals holding such will be wiped out immediately.
>> minimum credit score of 580<<
Good to know homeless bums qualify. They might as well make it 12.
Basically, it is like “vote for me and get a free turkey.”
Or maybe just the subprime loans (cars, autos, credit cards) will be paid in full.
After all, these people "deserve" it and you need to pay for it. /s
This does not require an act of Congress???
He’s the CANDY MAN, didn’t ja know??
I hope not. If he did this 3 years ago instead of the”stimulus” the major problem in our economy would be well on it’s way to being fixed. I’m paying close to eight percent. Can’t refinance because house is under water. I’ve paid every bill for the last 30 years and not asking for a reduction in principal. What are the Morgage companies paying for green backs, 1%, I think they can get by on charging me 4.5%
I agree with you.
I am a homeowner who unfortunately got convinced that a interest only loan for 5 years and then adjustable thereafter was a good thing. I make an excellent income and have never had a late payment for almost 7 years. Yet, under the stupid old rules, I would not be permitted to refinance my home without a huge amount of capital, because the value of my home went from $305,000 to $155,000.
Even having the legal experience I have as an attorney, I am having a hard time understanding why these past rules were economically sensible. Admittedly, I don’t know the ins and outs of mortgages, but this is baffling to me. To me, it appears those rules were a Congressional protection payoff for greedy and unethical banks, who as we speak, are continuing to hoard properties, prolonging our housing crisis until interest rates skyrocket.
Why did the first plan give people that are the absolute worst risks imaginable the first leg up, when they were and still are almost certain to foreclose, even with the government’s intervention? That, to me was abslutely idiotic.
This plan actually helps responsible people who can pay their mortgages, instead of allowing them to eventually be foreclosed on when double digit interest rates inevitably swallow them up.
This will be probably the one and only time you will ever hear me say this, but I think this is the best thing Obama has ever done.
He doesn’t really care whether this materializes or not as long as it plays well up to election time. Buying the non-qualifieds’ votes, ya’ know. Only thing sure to bring them off the plantation and out to the poles is a handout from Massa’ O.
It would be far cheaper and would do far more good.
Good luck!
This says that the program limits the re-fi to 140% of the value. How many homeowners are that far under water and who would want to stay in a house where they owed that much more than it was worth?
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