Obama pulls trigger on January Surprise: a mass refinancing plan for U.S. mortgages

I told you so. This was the housing policy bombshell from President Barack Obama’s State of the Union address:

And while Government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief. That’s why 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. A small fee on the largest financial institutions will ensure that it won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust.

Thunderbolt. A mass mortgage refinancing plan with a new bank tax to pay for it. Obama’s description is sketchy, but here’s how ace analyst Jaret Seiberg of Guggenheim Washington Research Group sees this new plan playing out:

 The President is pushing an easy-to-execute plan to let borrowers refinance mortgages regardless of LTV. This is a much bolder initiative than expected, though we emphasize that it is a legislative proposal that cannot take effect unless Congress enacts it. Were this enacted into law, this would be a mass refinancing that we believe could help more than 10 million borrowers refinance their mortgages regardless of whether their loan is backed by the government or not. …

Hurt by a mass refinancing would be holders of MBS that is trading above par as prepayment rates would accelerate materially. … Our concern is that a mass refinancing could permanently drive housing finance costs higher. This is a real threat as investors are likely to demand a premium if government policy materially accelerates prepayment rates. … Our view is that only borrowers who have been current on their loans for at least six months – or possibly a year – will be eligible for the program. In other words, this is meant for borrowers who can afford their mortgages. It is not a mortgage modification initiative.

And CNBC describes it thusly:

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. The costs, according to administration officials, would be modest, and the President would request that a portion of his financial crisis responsibility fee offset any of those costs, so there would be no addition to the federal debt.

And here’s what I wrote in early January:

 If President Barack Obama’s legally dodgy appointment of Richard Cordray to head the consumer finance agency should stick, it may open the door to more such actions. … And why is that important? The Federal Housing Finance Agency is the regulator and conservator of Fannie Mae and Freddie Mac. And the FHFA currently has an acting director, Edward DeMarco. If Obama replaces him with a “housing advocate” via the same recess appointment process … that could lead to a mass refinancing program for agency-backed mortgages that would go well beyond the existing HARP program. That could hurt agency MBS pricing and result in higher financing costs going forward. Yet it also could be a big boost for the economy and housing going into the election. Indeed, my sources tell me the Obama administration has been eager to implement just such a plan, but needs to have its own man heading the FHFA to make it happen.

And the economic impact? Well, 10 million borrowers saving $3,000 a year equals $30 billion a year in reduced mortgage payments. But the added lift to the economy could, conservatively, be closer to $40 billion year initially. (I am using calculations based on the impact of the Hubbard-Mayer plan I described in my original post.)

But surely questions will be raised if the FHA is the vehicle. As AEI’s Ed Pinto explains, the FHA’s 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 $35–53 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 there’s the bank tax to deal with. This SOTU shocker may well be the talk of the markets today. Hopefully more details to come and soon …

8 thoughts on “Obama pulls trigger on January Surprise: a mass refinancing plan for U.S. mortgages

  1. This has already been submitted to the President and signed. It isn’t new. I heard all about it on a real estate radio show just last week. I don’t know why the President is acting as though this hasn’t as yet been done and signed by him. The whole program is supposed to start by March or April. The fee’s for taking out a new mortgage will be raised and this is how they are supposed to be going to pay for it and supposedly this (mortgage tax which is what it is), will end in 2021.

  2. Mr. Obama seems to forget that these borrowers often took significant cash out when they refinanced, often lied about their income and assets and used inflated appraisals to extract cash. There is no law or practice preventing these underwater borrowers from using the cash they took out of their home equity in 2006 and 2007 and using it to lower their LTV so that they can meet today’s requirements and refinance. But since borrowers no longer have that cash, or do not have the income or assets to qualify (remember their income and asset numbers were inflated) or have missed payments they cannot refinance.

    And now, 10 years after Barney Frank and Maxine Waters attacked the OFHEO regulator and assured us things were fine at FN/FRE “under the outsanding leadership of Franklin Raines” and 6 years after the start of the housing crisis Mr. Obama proposes a mortgage fraud enforcement unit. Really?

    The premise of the mortgage fraud enforement unit is that abusive foreclosure practices such as robo signing hurt some “responsible” homeowners. However, the banks fully understand and appreciate the bad publicity that comes with wrong headed foreclosures. The truth is that very few if any borrowers have been able to prove they should not have been foreclosed upon. And I do not believe anyone would think it fair that a borrower who has not made a mortgage payment in 3 years is entitled to keep the house mortgage free because of a clerical error.

    One striking point of the proposed settlement between state AG’s and the banks is that no one has offered an explanation as to how this proposed settlement provides justice to the homeowners who were “harmed” by the abusive foreclosure practices. Just punishing the banks and MBS investors for this mess when everyone including Congress, the GSEs, the regulators, mortgage originators, wall street securitizers and yes borrowers had a hand in it is just wrong. Rewarding other borrowers who at best were not harmed and at worst very well may have commited fraud is not justice.

    • OR they bought right before the housing crash, like we did. Even though we put 20% down, we now owe $30K more than our house is appraised. I work 2 jobs and my husband hasn’t received a raise in 5 years. At a current rate of 6%, I would love to be able to get into a lower rate. Something we haven’t been able to do unless we put another $30k down ending up with PMI. We worked so hard for 10 years to be in the right position. I would rather a bail out go to the public than another giant corp so they can turn around and give out bonuses. I am a conservative, but I would be a fool not to take advantage of this.

  3. Yes, there is a program to help underwater mortgages, but those loans must be backed by Freddie Mae or Fanny Mac. I am a responsible home buyer, have never missed a payment, put 25% down on my home and my loan is NOT Freddie Mac or Fannie Mae. I am upside down by $60,000.

    I would like to have the benefits that millions of irresponsible homewoners are receiving by being able to refinance, or even in some cases, obtaining a loan modification just because Fannie Mae and Freddie Mac back their loans. I do not need nor want a loan modification. I would just like the ability to refinance into a lower rate long term. This program that Obama is proposing really should have been introduced as part of the HOPE program years ago.

  4. So what happens if your mortgages is not owned by Freddie or Fannie as a lot of the Jumbo loans in California are not? A lot of the people who bought these overpriced homes at the peak time are way underwater!

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