The latest attempt by the White House to help struggling homeowners concerns a plan to enable borrowers to refinance their mortgages and take advantage of low interest rates. The plan applies only to government-backed mortgages. It constitutes one of multiple plans the White House has on the table, which includes the possibility of renting out foreclosed homes. With 2012 elections looming, the administration needs some sort of feather in its cap to show it can lead the country out of the housing quagmire and weak economy.
Refinancing to lower interest rate mortgages help homeowners save money. The administration believes homeowners, with additional discretionary income in their pockets, help stimulate a stagnant economy. People with extra money tend to buy clothing, furniture, appliances, automobiles, and other goods. Columbia University real estate finance and economics professor Christopher Mayer states, refinancing could save borrowers $75 billion annually.
Mayer says this could represent “some of the first good news we have seen in housing in years.” Besides stimulating the economy, Mayer states lower mortgage payments reduce the rate of foreclosures because homeowners with “lower payments are much less likely to default on their mortgages."
A “Tax” Break for the Middle Class
Mayer equate the proposal as the same as a tax cut for middle class homeowners .According to his estimation, homeowners with mortgages under $200,000 should receive about 54 percent of the benefits. The word on the street -- the Fannie Mae and Freddie Mac regulator and mortgage bond investors do not support a plan for mass refinancing of mortgages.
For government-backed mortgage bonds investors, it's understandable. Mayer believes investors will end up footing most of the cost of the proposed mortgage refinance program. However, he suggests Fannie and Freddie benefit because of fewer defaults over the long run.
This proposal to help homeowners refinance to low interest rate mortgages follow in the footsteps of a long line of federal programs designed to help homeowners. The problem remains, not one program have had the sort of impact the Obama administration hoped would stabilize the housing market and turn it around. Nonetheless, this sort of plan has surfaced before, but with the current level of mortgage interest rates, homeowners will save much more money.
The administration still has to work out the details of the plan. This includes whether mortgage lenders will administer the program and if homeowners behind on their mortgages qualify to refinance to a low interest rate mortgage. The administration is desperate to do something about the housing slump, which continues to worsen.
A recent report revealed the values of homes with mortgages guaranteed by Uncle Sam dropped 5.9 percent in the second quarter, compared to a year ago. This represents the largest decrease in value since 2009. In addition, 20 percent of homeowners owe more than their homes are worth.
The plan does not require congressional approval, which makes it very appealing. In addition, it does not tap into $45.6 billion appropriations for the Troubled Asset Relief Funds intended to assist financially struggling homeowners. So far, only about 50 percent of the funds, or $22.9 billion, have actually gone to modify the mortgages of fewer than 1.7 million borrowers.
Criticism of the Plan
One major criticism of the plan, the consistency the federal government has in missing its targets in estimating the number of homeowners who would benefit from the program. Some housing analysts worry that a large volume of refinancing will make borrowing funds more expensive in the end for the federal government and for homeowners because investors would demand higher interest rates to protect themselves in the future.
Concerns have also been expressed that mortgage refinancing does not address two important issues currently plaguing the housing market -- underwater mortgages and unemployment.