On Thursday, Bank of America (BAC) stock rose 8.6 percent. Market insiders attributed part of the stock’s rally to the unfounded rumor that the Obama administration was working on a scheme to fund a huge mortgage refinancing initiative beyond HARP 2.0. costing as much as a $1 trillion dollars according to some estimates.
Citibank, JP Morgan and other bank stocks came in line with the broader industry index, which rose 2.2 percent. BAC’s market advance may point more to the effect investors believe a massive mortgage refinance program would have on the bank’s significant exposure to bad mortgages.
However, Sterne Agee Group Inc., analyst Todd Hagerman said even if with a huge mortgage-refinancing plan, “you’re not going to see any impact whatsoever on the banks.” According to an opinion shared by many market analysts, Bank of America’s real problem concerns liability from representations, and warranties because of foreclosure improprieties. Legal rulings against BAC could have severe financial repercussions.
Housing industry analysts also questioned the effectiveness of any mortgage refinance program when the key challenge homeowners and potential buyers face have to do with income and jobs.
Source of the Rumor
One reason the rumor took off has to do with a concept put forth by Jaret Seiberg, a policy analyst for the Washington Research Group, of the possibility of President Obama assigning housing advocate at the Federal Housing Finance Agency (FHFA). The FHFA operates as the conservator for Freddie Mac and Fannie Mae.
According to Seiberg, such a move would lead to a “mass refinance program for agency-backed mortgages.” This would have a negative effect on mortgage bonds, as investors would lose interest in bonds. In addition, Seiberg expects mortgage-financing costs to escalate.
How Does Underwater Mortgages Affect Borrowers?
When home prices fall below the market value, it limits homeowners’ financial flexibility during challenging times. Generally, in an environment of appreciating home prices, homeowners refinance their mortgages and withdraw equity to remedy financial situations.
However, in an environment of underwater mortgages, many borrowers could neither finance nor sell their homes.
Non-prime mortgage holders tend to bear the most from the decline in home values, especially where those who purchased their homes with little or no down payment. Ultimately, the decline in home values started to affect prime homeowners who put down large down payments. Many responsible homeowners lost well-paying jobs or had their incomes significantly reduced, which diminished their capacity to meet their obligations.
HARP 2.0 lifted the 80 percent loan-to-value ratio requirement, which prevented homeowners with underwater mortgages from refinancing to low interest rate mortgages. It is too early to tell, since its official launched in mid-November, it has not created much of a buzz. The banks are still working out the details of processing mortgage-refinancing applications under the revised program.
Fed’s White Paper Addresses Key Issues
On January 4, 2012, the Federal Reserve Board recently released a white paper titled, “The U.S. Housing Market: Current Conditions and Policy Considerations,” which takes a comprehensive look at the challenges we face in the housing market and economy. Rather than taking a piecemeal approach with another mortgage refinance scheme, it emphasizes the obvious—designing solutions that address the factors holding back the housing market and economy recovery. These solutions include:
Foreclosure Inventory: Stabilize homeowners to keep more from falling into foreclosure. The strategy must also formulate a plan to deal with the current inventory foreclosed properties, which continue to weigh down on home prices. One idea for solving the excess inventory of homes involves converting foreclosed properties into rental units.
Credit: Another problem concerns the difficulty “creditworthy” borrowers have experienced obtaining credit, which limits home sales and access to refinancing. This inability to obtain credit comes in many forms, such as higher financing costs, tighter appraisal requirements, more income documentation, fewer mortgage options and higher down payment requirements.
Analysts and the Feds agree on the need to eliminate excessive credit barriers restrictive than before sub-prime lending became widespread, to provide support to the housing market and helps grow the economy.
Job Creation: The main problem is the lack of prolific job creation the economy needs to put Americans back to work. According to the Feds, “high unemployment and weak income growth have made it difficult for many households to purchase homes despite the large decline in housing prices and mortgage rates.”
Jobs could immediately strengthen the finances of many homeowners in tenuous financial circumstances and keep them from falling into foreclosure. Even if borrowers refinance into low interest rate mortgages or purchase a home, they require solid employment and stable income to make their monthly mortgage payments.
This rumor surfaces on top of the revised HARP, which helps borrowers who property values have dropped under below the amount of their outstanding mortgages— or “underwater mortgages,” refinance their mortgages. Rumor or not, it is time for a national strategy to solve the persistent issues in the housing market, as identified in the Federal Reserve Board’s report. Any plan implemented by the White House going forward will receive fair criticism, as a ploy designed to generate positive economic news, in an election year.