The Obama administration’s new plan to help owners of “underwater” homes refinance their mortgages at lower interest rates – announced today -- is unlikely to raise up the depressed housing market but could deliver a dose of stimulus to the economy.
Celia Chen, an economist with Moody’s Analytics, says the changes could open up the program to 1.6 million borrowers through 2013 assuming that interest rates hover near 4.25 percent next year and 4.75 percent in 2013. Still, even if the program allows 1.6 million more homeowners to refinance, it will still be less effective than originally hoped, she says. (The Federal Housing Finance Agency, the regulator of mortgage giants Fannie Mae and Freddie Mac, pegs the number of borrowers who could benefit from the expanded program for homeowners who owe more than their properties are worth at up to 1 million out of an estimated 4 million “underwater.”) While any support is positive, the new plan “won’t help the housing market greatly to get out of its doldrums,” Chen says.
Chen says the one of the biggest factors dragging down the housing market is weak demand because of high unemployment and anemic consumer confidence. Second, there are approximately 3.8 million distressed homes -- a massive glut of inventory that is holding down homes prices, which have plunged nearly 30 percent since their peak in 2006. The new program won’t address either of those two largest problems in the housing market, she says.
However, Janaki Rao, a mortgage strategist at Morgan Stanley, says the Obama plan has the potential to “unlock substantial economic stimulus through housing by unleashing a refinance wave.” She estimates that loan modifications could bring in an annual cash flow savings of approximately $7 billion, assuming that borrowers refinance into a 4 percent mortgage. Administration officials estimate that refinancings could mean an average annual savings of $2,500– or the equivalent of a substantial tax cut.
The new initiative, which involves removing barriers to homeowners qualifying for the Home Affordable Refinance Program (HARP), is the latest in a series of steps by the president to defend his lackluster mortgage relief efforts and promote his jobs and economic policies. Until now, HARP has helped fewer than 1 million borrowers refinance their homes. There are $550 billion in mortgages that could benefit from removal of current refinancing restrictions, Rao says.
At its core, the latest initiative would allow homeowners to refinance regardless of how far their home has fallen in value. It scraps the current ceiling of 125 percent of a loan’s current value. The FHFA also is extending the expiration date for HARP by 18 months, to Dec. 31, 2013 for loans originally sold to Fannie Mae and Freddie Mac.
The plan would also eliminate certain risk-based fees for borrowers who refinance into shorter-term mortgages and would lower fees for other borrowers, which have been a significant deterrent for many homeowners.
Tacitly acknowledging the politics of the housing crisis, President Obama announced the initiative, which can be implemented without legislative action, in Nevada, the foreclosure capital of the country. Some 60 percent of all homeowners there hold mortgages that total far more than the value of the underlying property. The median value of homes in Nevada plummeted by 46.4 percent between 2007 and 2010, from $286,391 to $153,364, and the state continues to lead the nation in foreclosures, with one in every 118 households receiving a foreclosure-related notice last month, according to RealtyTrac Inc. Across the country, approximately 10.9 million, or 22.5 percent, of all residential properties with a mortgage are underwater, according to CoreLogic, a California-based data aggregator.
Rep. Dennis Cardoza, D-Calif., an outspoken critic of the Administration’s housing policies, said the new plan is likely to underperform like previous proposals. “I have no confidence in their ability to get this right if they are going to act the same way they have to date,” Cardoza told The Fiscal Times. “To go to Las Vegas to raise hopes of those borrowers there that something significant is going to happen unless you have a robust proposal is really unfair in my mind. You’ve got to excise the cancer that caused problem before the patient can recover.” Cardoza has called for the resignation of Shaun Donovan, Secretary of the Department of Housing and Urban Development (HUD), in part because he says the HARP program is too complex. The housing crisis has crushed California’s Central Valley region, which Cardoza represents.
When he first took office, Obama pledged to boost the nation’s depressed housing market and assist as many as 9 million homeowners avoid losing their homes to foreclosures. Nearly three years later, the administration has fallen far short of that mark, and Obama has spent just $2.4 billion of the $50 billion he promised. Previous efforts have helped just 1.7 million people.
The Administration has been criticized for not acting sooner to modify the program as the housing market struggles to stabilize. But some housing experts say it wasn’t always obvious what steps to take. “A lot of these housing initiatives take us into more uncharted territory,” says Jared Bernstein, former chief economist and policy adviser to Vice President Joe Biden. “Self correcting as you go makes sense. I think it’s the right medicine for one of the aspects of the disease ailing the housing market.”
The Mortgage Bankers Association welcomed the Administration’s changes to HARP but warned homeowners that the changes won’t be implemented overnight. It could take several weeks for lenders to receive specific guidance and operational details to put the changes into practice.