Skip to comments.Obama’s new re-fi plan a gamechanger? (New program for borrowers who are current on their mortgages)
Posted on 01/25/2012 8:33:58 AM PST by SeekAndFind
Jim Pethokoukis thinks it might be, but I’m not so sure. As described by Barack Obama, the program is a significant expansion of a couple of programs that so far had been limited to Fannie/Freddie-backed mortgages. CNBC explains that the new initiative will now promote refinancing for mortgages no matter if backed by one of the two troubled GSEs or not, but with “precious few details” on hand, much of the program remains unclear:
After several largely ineffective programs to help troubled borrowers and after fruitless attempts at budging the hard-line conservator of Fannie Mae and Freddie Mac, President Obama is proposing a brand new refinance program for borrowers who are current on their mortgages, regardless of who owns their loan; the catch is that this one has to go through Congress.
“I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks,” the President announced in his State of the Union address.
Unlike previous efforts in the refinance space, including a recently revamped and expanded government program for borrowers who owe more on their mortgages than their homes are currently worth, this plan would not be limited to those with loans backed by Fannie Mae and Freddie Mac, according to senior administration officials. The two mortgage giants own or guarantee about half of the nation’s mortgages. It would be open to all borrowers current on their loans.
The Obama administration is offering precious few details, promising more in the coming weeks, but several sources say the plan is to ask Congress to allow the government mortgage insurer, the Federal Housing Administration (FHA), to back refinances of underwater mortgages. No estimates were given as to how many borrowers such a plan could potentially help, only that this would be a voluntary, borrower-initiated plan, and not a blanket refinance of all borrowers.
There are a lot of holes in this plan, not the least of which is why homeowners who are current on payments more than three years after the collapse need government assistance. They may be underwater on their mortgages, but if they are making their payments, then they are at no risk as long as they don’t need to sell. Their monthly payments gradually will eliminate the negative equity in their asset. Refinancing will speed that up slightly by lowering interest rates, but if these houses were bought during the bubble, the current interest rate is probably low from a historical perspective anyway. And to fix the negative equity, those homeowners would have to forego saving the $3000 a year to plow it back into the principal anyway.
Pethokoukis calls this a “housing policy bombshell,” but then summarizes AEI’s Ed Pinto to explain why it will be a dud:
But surely questions will be raised if the FHA is the vehicle. As AEIs Ed Pinto explains, the FHAs capital position using private-industry standards shows the FHA to be deeply insolvent. The FHA is estimated to have a current net worth of $17 billion and an estimated capital shortfall of $3553 billion. Private regulators would shut it down rather than continuing to allow it to grow its way out of its insolvency. Republicans will have lots of questions and may balk if this smells like a moral hazard-inducing housing bailout. (It is just this sort of thing that launched the Tea Party movement, after all.) Then theres the bank tax to deal with. This SOTU shocker may well be the talk of the markets today.
Pethokoukis also relies on estimates that indicate up to 10 million homeowners will take the opportunity to refinance through this program, and an average savings of $3000 per year would pump $30 billion more into the economy each year. However, if the problem is negative equity, then that money will go to paying down mortgage debt, not to increased consumer spending, which would render it impactless in the short or even medium term — and that’s assuming that the 10 million number is valid. We saw plenty of numbers like this in the proposals already put in place by the Obama administration to deal with housing issues, and the actual number of people who qualified for and received assistance fell far, far short of estimates. In fact, if the program operated as Pethokoukis assumes in generating spending cash for homeowners who are already under water, then it’s not that different from what helped drive the housing bubble in the first place: the use of home equity as an ATM for irrational consumer spending.
Being underwater on a mortgage is a tough economic position, but no tougher than people who invest in other assets and end up having less value than what they invested. If homeowners find themselves in this position, they can keep paying the mortgage and eventually get above water on equity while continuing to live in their homes, which isn’t ideal but certainly isn’t an emergency that warrants picking the pockets of other taxpayers. It also won’t do anything to prevent or minimize foreclosures, which is one of the actual problems in the housing market. This is nothing more than a bald attempt to buy a few votes at the expense of taxpayers and banks, and it will exacerbate the very problems it purports to address. Game-changer? More like an overtime period.
Oh, just seize the notes from those nasty banks, burn them and give everyone a free house!!! Then, since you own GM put a free car or two in every garage! Food and gas too high? Just seize the farms and refineries. That will win you the sheeple vote (take it from old Hugo, it really does sew things up for reelection).
Why have taxpayers pay for programs when the government can just take it all. Stop pussy-footing around already and get to where you want to go Mr. Dictator, er President.
He has no legal or historical authority to do any of this.
The banksters are desperate, desperate not to have to revalue their mortgage portfolios at current market prices, and will go along with anything Zero proposes to keep that from happening.
Too true. Triple check the fine print as the devil will be in the details.
Also, some numbers I read from a different site were in the 20,000 per loan by 1 million loans. Hardly a windfall. Most houses purchased in the bubble have lost 50 to 200k or more. 20,000 is chump change and does nothing to really help the homeowner.
Which is why I think this is really about tossing some turds to homeowners, calling them diamonds, while really helping out the banks with our money, who in turn kick it back to the Dims. I almost forgot, the media will hail it as the smartest best thing ever and the sheeple will buy it and re elect the won.
It is the smartest best thing ever IF you want to continue to destroy the country and get re elected for doing so.
Or, since many banks don't know if they really and truly own the note (due to the robo-signing and MBS mess) this will start the process over and the paper trail will begin anew. The banks will then know for sure they own the note.
Amen, brother, amen
I don't even have a "mortgage" anymore. I have a "home equity loan," which I pay back as if it were a "mortgage." I'm not sure what the bank's recourse is if I stop paying them back, but they do not hold a mortgage on my property.
Hey, I am not intending this as an attack on you.....you should go brush up on amortization schedules. Your interst is not a fixed dollar amount over the term of you mortgage and then “frontloaded” in your early payments. The interest portion of you pmt is a function of the size of your total principle. As you make your payments, your total principle decreases, therefore the interest for the month is a lower portion of the pmt...
I hadn’t heard that but it wouldn’t surprise me a bit if it were true.
Joe’s main point is correct, and I say this working in the financial industry.
Anyone who refinances their mortgage (including me) will now see a payment schedule reset to mortgage-first. I refinanced my loan based upon the amount of remaining principle I have to pay (it was an FHA Streamline, which did not require an appraisal).
That is why we recommend that those who pursue such a strategy, especially later in their mortgage, rededicate a portion of their cash flow savings to extra repayment, to lower the principal amount more quickly as a vehicle to early debt retirement.
rented fingers. Mortgage-first = interest-first. Argh.
well, i get this here statement from the bank, to use for tax purposes, telling me how much principal and interest I paid for the year.....and that statement, that the feds use for tax purposes, shows a smaller interest payment every year for the past 22 years... now I pay almost zero interest, yet my payment is the same...and has been for 22 years...at the beginning of my mortgage, they showed me how much interest i would pay over the life of the loan, making that amount “fixed”, and the bank got their cut first right off the top....
If I refinanced, the bank would still get it’s cut first, and my principal would remain virtually the same for years....
I do not care about amortization schedules.. If I am paying zero interest on my loan, my interest rate is zero. If the bank tells you upfront how much interest you are going to pay over the life of the loan, that amount is fixed. If the banks gets more of my payment than is applied to the principal, they are “frontloading” the loan. Simple logic applies here.
Thousands...tens of thousands. Mortgage lenders are soiling their pants, knowing that they'll eventually be taking huge losses on those mortgages. The last three years have been wasted on kicking the can down the road.
The can is changing into a nuke.
Or simply take a lower loan period.
However if you paid extra on the principle you would see the formula completely change. The interest is calculated monthly and is a multiplier of your principle. As your principle decreases, your interest is reduced. Therefore your interest portion of your pmt decreases faster.
It appears to be frontloaded, but is simply a function of simple amortization. I know because I track mine monthly to keep an eye on the mortgage company as I am aggressively paying my mortgage down! At this pace I should only have 17 more pmts!
“It is hard to imagine a more stupid or dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong”- Thomas Sowell
it still is frontloaded... however, as one poster put it, the devil is in the details... I remember having to have my contract changed, to allow for extra payments to be applied to the principal ( the bank will automatically apply any extra monies to the interest ) and to remove the early payoff penalty ( this penalty is to ensure the bank gets all of their interest )... check your papers on ANY loan for ANY thing you get from a bank or any other financial institution... the contract is written so that they get their money first... PERIOD.. do you work for a bank or financial institution.. not a put down question, but a quest for knowledge..... let me know
Nope, I do not work at a bank.
Many people do not understand amortization schedules, however they are pretty simple. Perhaps you have a very old or nonstandard loan type and it may be unique, but the standard mortgage is a simple amortization loan that calculates and applies 1/12th of the interest rate to the principle balance each month. Then the remaining portion of your payment is applied to principle.
As you pay each payment then your principle is reduced, hence your interest is less. That is why as you make payments the interest decreases as a portion of the payment. This is why my aggressive paying additional on my principle knocks multiple years off the back end. Each time I do that, it reduces the interest calculation for the next month. In turn it also effects the ratio of principle in my next month’s payment.
If you pay per you payment schedule over the loan term, you simply complete the amortization schedule per the loan agreement. In essence you are sticking with the ratio of pmt/princ each month of the agreement.
There are a number of options. That is definitely one.
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