With the nation in a prolonged economic slump, President Obama has put forth yet another economic stimulus package to try to pull the country out of the malaise. One aspect of the American Jobs Act proposes a mortgage refinancing scheme to help homeowners take advantage of ultra-low mortgage interest rates. This plan will not require taxpayers' support. However, Obama will have to persuade the administrator,the Federal Housing Finance Agency (FHFA) of the two Goverment-sponsored enterprises (GSE) -- Fannie Mae and Freddie Mac, to participate in the program.
The proposed plan -- dubbed “HARP 2.0” -- constitutes a refurbished version of the “Home Affordable Refinance Program” (HARP). Initially introduced in March 2009, HARP enables homeowners with Fannie Mae loans refinance their mortgages. Originally intended to help up to 4 million homeowners, only 838,000 borrowers have benefited from the HARP program.
HARP 2 refinances borrowers out of mortgages at 6% or higher, into low interest rate mortgages about 4%. Typically, homeowners spend the money saved on consumer goods. On the surface, it is hard to argue with this plan because does not require any legislative action on the part of Congress. In addition, it does not require any funding, which would add to the country's deficit woes.
Whom Will It Help?
Conventional thinking says that most borrowers who can refinance to low interest rate mortgages would have already completed such a transaction. This leaves “risky borrowers,” who may have mitigating circumstances, such as low credit scores, underwater mortgages or employment issues. Some critics state that refinancing troubled borrowers has the following effect on U.S. taxpayers: lower interest payments from loans purchased by the GSAs and foreclosures.
Undoubtedly, some homeowners will benefit from lower mortgage payments. According to the president, refinancing "can put more than $2,000 a year in a family's pocket and give a lift to an economy still burdened by the drop in housing prices."
This savings may provide the edge some homeowners need to avoid foreclosure. However, a low interest rate mortgage will not save a person who loses a job, suffers underemployed or incurs a debilitating medical illness or disease.
The wildcard in past refinancing proposals has been getting the support of the Federal Housing Finance Agency (FHFA) created as a requirement of the Housing and Economic Recovery Act of 2008. The FHFA administrators have steadfast refused to allow mortgage principal reductions despite repeated requests by the Treasury Department.
Currently, the HAMP requires borrowers to have a loan-to-value ratio between 80 to 125 percent and up-to-date mortgage payments. The economic climate in the last few years has resulted in a decline of home prices and loss of employment has created financial hardships that make it difficult for homeowners to qualify under the guidelines.
Early rumors persist that the FHFA will not approve of the plan unless borrowers go through a standard qualification process. This means struggling homeowners with damage credit or underwater mortgages will not received the lifeline. On Friday, FHFA acting director Edward Demarco stated the agency would conduct a review of it current polices regarding the refinancing program and how to make the program available to more homeowners.
What the Experts Say
Some analysts fear that ultimately, the real estate market will comprise homeowners who are underwater in their mortgages and those who have ultra-low interest rate mortgages. These homeowners will need a good reason or substantial incentive to move into the future. Rather than move into higher interest rate mortgages. This phenomenon will lead to a less mobile work force.
Taxpayers also earn less interest on loans held by Fannie and Freddie when homeowners prepay high interest rate mortgages. The transactions do not show on the ledger as a direct cost of the program, the bottom line -- taxpayer will not realized the interest. Higher interest payments going into the coffers of GSEs counteract potential losses for loans guaranteed by the government.
Paul Krugman, a New York Times columnist and Princeton University professor hoped for a much large stimulus package. According to Krugman, "The plan would be a lot better than nothing, and some of its measures, which are specifically aimed at providing incentives for hiring, might produce relatively a large employment bang for the buck."