A failing program to help home mortgage borrowers is the basis for the newest Obama administration program to help home mortgage borrowers.
Time will tell if it succeeds or disappoints as much as its predecessor, the Home Affordable Refinance Program, which the administration rolled out in 2009 with the expectation that up to five million borrowers would benefit. Instead it’s reached only 822,000 borrowers, less than one tenth of whom have been significantly “underwater” on their mortgages.
The new program, announced this week, revises the HARP program to potentially slash fees for borrowers who want to refinance their mortgages. The original HARP allowed only borrowers who owed up to 25 percent more than their properties were worth to participate. The new program puts no cap on how much a borrower may owe relative to the value of the property.
Home Builders, Lenders Back Program
“Making more borrowers eligible for refinancing their mortgages by enhancing the Home Affordable Refinance Program (HARP) will give a badly needed boost to consumer confidence,” said Bob Nielsen, chairman of the National Association of Home Builders, in a statement. “Enabling additional home owners to take advantage of today’s low mortgage interest rates in cases where their loans are greater than the value of their homes will give some households more money to spend on other things and enable others to at least pay their mortgages off at a faster rate.”
“The mortgage industry welcomes these changes designed to help more underwater borrowers who are current on their mortgages refinance at today’s historically low interest rates,” said David H. Stevens, president and CEO of the Mortgage Bankers Association, in a statement. “Not only will these changes allow more borrowers to qualify, but they will streamline the process and reduce the cost to borrowers and should lessen risk for Fannie Mae and Freddie Mac.”
Must Be Current
Borrowers also must be current on their mortgage and not have made a late payment in the past 12 months. And the mortgages must be owned or backed by Fannie Mae or Freddie Mac, government-sponsored entities that currently are involved in approximately 90 percent of new mortgages.
Most borrowers will not need to have their property appraised before refinancing, as long as there is an “automated valuation model” that can help Fannie and Freddie determine a current value for the home.
Certain risked-based fees charged by Fannie Mae and Freddie Mac also will be removed, cutting some costs that raise the price of refinancing.
No Fees for Shorter Loans
To avoid fees, borrowers would need to take out 20-year loans. This would result in a lower total cost and shorter time for payoff than a 30-year loan, but that compressed payoff time would come with higher monthly payments.
If a refinancing is for 30 years, fees would apply, but the monthly payment would be lower. The Obama administration estimates savings of approximately $200 a month on a typical mortgage.
“We can’t wait for an increasingly dysfunctional Congress to do its job,” Obama said during a stop in Nevada, where he announced the plan. “Where they won’t act, I will. I’ve told my administration to keep looking every single day for actions we can take without Congress.”
Anthony Randazzo, director of economic research at the Los Angeles-based Reason Foundation, said there may be other reasons for support from financial organizations.
Banks Get Buy-Back Waiver
“Currently, Fannie and Freddie are trying to force banks to buy back loans that have gone bad, claiming the mortgages were misrepresented in quality and character,” Randazzo said. “There have already been billions in buy backs, putting toxic debt back on bank balance sheets.”
Randazzo noted the plan has a waiver that would block Fannie and Freddie from forcing banks to buy back mortgages that are refinanced through the program, “reducing potentially tens of billions in liability.”
On the other hand, Randazzo noted, “Refinancing creates a new mortgage, so part of the process is paying off the old mortgage, and since that payoff is coming earlier than the full term of the mortgage, the investor is losing out on interest that would have been accruing had there been no prepayment. So there may be general opposition from the investors standing behind some of these mortgages” even with the new terms and the waiver for banks.
Merrill Matthews, resident scholar of the Institute for Policy Innovation, said he has serious doubts about this newest Obama administration attempt to boost the housing market and bailout borrowers, not the least of which is because it does not deal with major causes of the housing market collapse, including government policies that weakened loan underwriting standards.
“The Obama administration apparently still doesn’t understand—or doesn’t care—that this whole housing mess started with the Community Reinvestment Act, which set aside that old credit worthiness bugaboo and put pressure on lenders to loan money to low-income families who couldn’t afford a house,” he said.