By Jon Prior
January 25, 2012
Even if the promising mortgage refinancing plan President Obama announced Tuesday night passes Congress, critics say it will fall short of solving the deepest housing problems.
The White House did not release great amounts of detail, but the plan would help homeowners current on their mortgage to refinance down to a lower rate and save an average $3,000 a year on payments. The plan widens the Home Affordable Refinance Program to include mortgages not guaranteed by Fannie Mae and Freddie Mac and would tax banks to raise funding.
Analysts said Wednesday morning the program could cost as much as $10 billion and could reach between 2 million to 3 million borrowers.
But it should only boost GDP by 0.1%, according to Paul Dales, senior U.S. economist at Capital Economics. If the new refi program falls short of similar initiatives such as the Home Affordable Modification Program, which is destined to reach less than one-third of homeowners originally thought, the economic impact could be less.
The program would also do nothing for the 4.1 million borrowers at least 30 days past due on their mortgage, according to Lender Processing Services (LPS: 16.20 -2.17%). And the 11 million borrowers who owe more on their loan than the property is worth, according to CoreLogic (CLGX: 14.715 +0.51%), would see little relief if only the interest rate is cut.
"It does not provide sufficient relief to those homeowners who are facing foreclosure because of unemployment, unsustainable loans, or negative equity — a well-documented driver of foreclosure," said Tom Feltner, vice president at the Woodstock Institute.
More robust principal reduction programs remain elusive and costly. FHFA Acting Director Edward DeMarco said last week the only way for a principal reduction program to happen is through legislation.
"President Obama's latest proposal to help more households refinance to a lower mortgage rate is another policy that tinkers at the margins rather than striking at the heart of the problems that are holding back housing and the wider economy," Dales said. "Moreover, as the retuning of the existing HARP scheme will need congressional approval, it might never see the light of day."
Analysts at Barclays Capital said the program would face many challenges on the secondary market as well. If borrowers are given a 3.5% mortgage rate, the loans will end up getting sold into 3% coupon securities.
"Private investors will probably balk at buying these loans," BarCap said, adding that banks would have problems managing the risk on buying long-term securities at that interest rate.
So, they concluded, the buyer would be the Federal Reserve. Given Chairman Ben Bernanke's recent white paper, which actually called for a more robust refinancing plan, the central bank would most likely be the secondary investor on Obama's refi boost.
"If, and this is a very big if, the bill actually goes through Congress, the Fed would presumably be buying very long duration," BarCap said. "We think the central bank would then exchange this for the higher-coupon MBS it currently owns."
Despite the challenges such a program faces, it would give responsible homeowners, who've been funding everything from big-bank bailouts to faulty modifications for their neighbors, some relief.
Such an idea is more concrete than anything coming from the Republicans now on the campaign trail in Florida. The front-runners have only issued vague notions of speeding up a foreclosure process with no details on how to deal with backlogs, lawsuits and documentation mix-ups as they release tax returns and past contracts with Freddie Mac.
"The president rightly called for immediate actions to deal with the housing crisis in his State of the Union speech, including a new proposal for mortgage relief," said former Department of Housing and Urban Development Secretary Henry Cisneros in a statement to HousingWire. "Now the president and Congress must work together to address these key issues. The nation's full economic recovery will not be realized until we take measures to improve the health of the housing sector."
Jaret Seiberg, senior policy analyst at Guggenheim Partners, said banks might actually be on board if they are cleared from representation and warranty claims on the loan they refinance. These buybacks are costly. At the end of 2011, Bank of America (BAC: 7.265 -0.34%) set aside $15 billion in repurchase reserves.
"One should not dismiss this idea outright," Seiberg said. "We believe it may be far less expensive for the government than the market may believe. That could make it difficult for Republicans from states still suffering from housing woes to object."
Tim Rood, partner and managing director of the financial advisory firm The Collingwood Group and former Fannie Mae executive, said the biggest help the Obama administration can provide is the bulk REO deals to come from the government-sponsored enterprises.
A shadow inventory of 6 million distressed and foreclosed homes hangs over the market, and when the foreclosure process does eventually speed back up — as it's already doing — the sales cycle could balloon from roughly eight months now to close to 20, he said. The FHFA said the first bulk deals could come early in 2012, but Rood said the market needs them now.
"We have a shadow inventory that is imminent, and if the servicer settlement with the attorneys general occurs, the foreclosure process will move into the light of day," Rood said. "What's the plan to deal with all of the inventory that will certainly be staring us in the face sooner rather than later?"
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