During last night’s State of the Union address, President Obama acknowledged continued concern for the housing market by proposing a mortgage refinance plan that would save homeowners $3,000 a year on their mortgage.
The President said that there would be, "No more red tape. No more runaround from the banks." Adding that, "Responsible homeowners shouldn't have to sit and wait for the housing market to hit bottom to get some relief."
According to the Associated Press, the proposal is a new arm to the recently renovated Home Affordable Refinance Program (HARP 2.0). Instead of only allowing borrowers with government-backed mortgages to refinance, those who financed through private lenders would also qualify.
Approximately one million have refinanced through HARP, however 11 million underwater homeowners (owing more than what their home is worth) are in desperate need of refinance.
Credit Suisse Group AG research reports that of the 11 million underwater borrowers, approximately 8.5 million have managed to make their mortgage payments on time. Plus, roughly half of all mortgages in the U.S. are owned by private lenders, which is why so many have been left out in the cold.
Although unemployment is at its lowest level since February 2009 and housing sales have increased, homeowners have had trouble refinancing due to falling prices, which are now 32% below top dollar days in 2006 along with tightened lending criteria.
Columbia Business School professor Christopher Mayer said this proposal plays an important part to going forward. “It’s going to help homeowners who are struggling and it’s likely to be a first step to really opening up the market to more normal credit standards,” he said.
In his speech President Obama assured viewers that this program would not be funded on the backs of the consumer, but instead through a small fee on banks that have more than $50 billion in assets.
The program is estimated to help two to three million underwater homeowners who have loans that are backed by private lenders with the program expenses not exceeding $10 billion.
The proposal falls in line with Fed Chairman Ben Bernanke's request for government officials to offer more housing market assistance as rates continue to slide. A 30-year mortgage loan now stands at 3.88% for homeowners who qualify.
Although no specifics have been revealed, possible refinance options include loans backed by the Federal Housing Administration (FHA), Freddie Mac and Fannie Mae.
“We've all paid the price for lenders who sold mortgages to people who couldn't afford them, and buyers who knew they couldn't afford them," Obama said. "It's time to apply the same rules from top to bottom: No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody."
Critics Weigh In During an Election Year
Bryan Whalen, co-head of mortgage bonds at Los Angeles-based TCW Group Inc. said that the plan “Sounds close to impossible to get passed.”
Analyst Joshua Rosner voiced skepticism as well. “The President clearly understands the chances of passage this year are close to zero because there’s no appetite to increase the credit risk at the government.” He adds, "Welcome to the election cycle."
As the President delivered his speech, Republican Presidential candidates were campaigning in Florida, which has the seventh highest rate of foreclosure filings per household last year, RealtyTrac Inc. reported.
According to Huffington Post blogger and strategic analyst Mark Steitz, Florida would benefit greatly from the plan. He writes, “In Florida alone a broad refi plan would allow two million households in Florida to lower their annual costs by an average of more than $2,500 this year, strengthening the economy, reducing foreclosures, and building confidence.”
Steitz urges Republican candidates to support the plan for the good of the country, however the proposal will have hurdles. Jeb Mason, a policy adviser in the Treasury Department during the George W. Bush administration said, "The administration is somewhat liberated from the details or the consequences of what it proposes, knowing that a Republican House can be relied upon to kill a bad or overly complex idea."
Some economists voiced concerns about whether Congress could make a decision on the package. Barclays Capital analyst Ajay Rajadhyaksha said in a report, “Given the inability of Congress to agree on most big issues in the past couple of years, we believe the decision to refer a bill to Congress greatly reduces the chance of a mass refinancing program happening.”
Jaret Seiberg, analyst at Guggenheim Securities LLC gives the plan a one and three chance of being approved and adds that it would “almost impossible to enact the bank tax into law” especially if the Republicans are not on board.
Regardless of which side of the aisle political candidates sit, economists and government officials agree that something must be done. Kathleen Day from the Center for Responsible Lending said, “Economists on all sides of the political aisle seem to agree that we really have to do some principal write-downs. We need to modify people’s loans.”
Politics aside, real people are hurting. Tampa Bay, Florida retirees are a good example of who reforms can help most. Chris and Mary Lou Ferguson lost $200,000 when they sold their home and then Mary Lou also lost her job. “That’s our nest egg, gone,” Mary Lou said.
Her husband Chris added, “The banks have to work with people who are underwater. Change the rules. Reasonable controls are good. That’s why things went bad because there were no controls.”