Posted by: SWL | February 3, 2012

State of the Union Analysis, Part 1: Another Mortgage Refinance Plan

One provision from the action plan outlined in President Obama’s State of the Union speech last week was described in detail by the President on Wednesday.

This proposal would:

* allow “responsible” homeowners to refinance their private mortgage loans as Federal Housing Administration (FHA) backed loans. (Some homeowners with government loans could qualify also.)
* force mortgage lenders to reduce the principle balance on loans that are at 140% or more of the current value of the home.
* impose a fee on the nations’ largest banks to pay for the program. (*1)

Provisions for the refinancing:

* homeowner credit score of 580 or more
* home must be primary residence
* current on payments for past six months, only one delinquency allowed in past year

Even if this plan should pass Congress, it is not likely to ease the housing crisis any more than the past three mortgage adjustment programs. Neither those nor this new plan address the underlying problems.

The housing crisis had its roots in the Riegle-Neal Act of 1994 which amended the Bank Holding Company Act of 1956 to require banks to “help to meet the credit needs of the community”. Then in 1995 the Department of Housing and Urban Development (HUD) directed Fannie Mae and Freddie Mac to provide funds for subprime loans. These two government acts essentially forced banks, as part of getting approval from federal regulators, to lend to prospective homeowners who did not have sufficient income to make mortgage payments.(*2) Banks came up with creative new types of mortgages, such as interest only, and adjustable rate where payments are very low initially but adjusted upward after several years. The US economy slowed about the time many mortgage payments adjusted. People who lost their jobs could not make the high, new payments.

None of that can be blamed on President Obama. But after almost four years in the White House, Mr. Obama has responsibility for the fact that the economy has not improved more quickly. Failed bailouts, failed stimulus and earlier failed mortgage programs have eaten up federal funds, making it difficult for the government to provide truly meaningful assistance to Americans.

Nevada has led the US in foreclosures for five years in a row – 36,000 in 2011. For the many Nevadans already behind on payments and most likely to be facing foreclosure, this plan would provide absolutely no help. Americans who are facing rising prices and stagnant wages at best, unemployment at worst, are less likely to take vacations to Las Vegas, Reno or Lake Tahoe. Fewer tourists mean casinos, hotels and related businesses need to lay off employees. The unemployed struggle to pay their bills, including mortgages. Financially distressed Nevadans will only be able to make mortgage payments when the US economy improves and other Americans start visiting here again.

Aside from the fact that this new proposal does not address the underlying economic problems of the foreclosure crisis, it is not a good plan:
* It is another example of President Obama trying to have the government become more involved with business that should be handled by the private sector. About one half of all mortgages are already government backed loans.
* This would not be a good time for the FHA to take on added burden. They are already dipping into their financial reserves.
* The other government mortgage bailouts under the Obama administration have not had much impact. The Home Affordable Refinance Program was supposed to adjust payments on four to five million homes. Only one million homes have been refinanced, in part because the administration failed to recognize how far in arrears many homeowners were, making it impossible for them to qualify.
* Imposing a fee on banks would cause financial pain for everyone as banks pass that cost on to their customers in other areas. (I bought a modestly sized home and paid off the mortgage early. It is not fair to ask me to pay bank fees [or higher taxes] so others can have a lower mortgage payment. Some homeowners are truly blameless in their situation, but many purchased a larger home than they needed or were in debt from extravagant lifestyles when they lost their jobs.)
* This plan would take mortgages away from banks and turn them into government loans. That will deprive banks of the mortgage interest income. Banks would try to replace the lost revenue by imposing additional fees on their customers.
* The government should not be allowed to forcibly break mortgage contracts (forcing principle reductions on “underwater” homes). Why should the mortgage holder (likely not the original lender) have to take that kind of loss? Again, the loss will be passed on to other customers.
* If a homeowner has a credit score over 580, they obviously are able to pay their bills as well as staying current on the mortgage. Which means they really do not need assistance. One must remember that if someone is able to make mortgage payments, being “underwater” on the mortgage does not matter unless they are planning to sell the house.

This leads me to wonder if part of this plan is to punish banks or cause some of them to fail. The White House has been at war with banks and financial institutions since Mr. Obama took office. This also seems like a blatant play for middle-income votes this fall. Mitt Romney is getting criticism over a poorly worded comment about concentrating on the middle class in his campaign, but President Obama is doing the same. The poor usually could not qualify for a mortgage even under the less stringent requirements during the housing bubble and the rich do not buy homes that typically lose enough value to go “underwater”.

(*1) http://finance.yahoo.com/news/obama-detail-broader-housing-refinance-070818255.html

(*2) http://theaffordablemortgagedepression.com/2009/05/18/origins-of-the-housing-bubble-the-riegleneal-act-of-1994.aspx?results=1#SurveyResultsChart

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