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It looks like the Obama Administration is about to endorse some version of the Hubbard-Mayer plan of letting everyone (or at least everyone with an agency mortgage) refinance at today's low rates, regardless of whether they are delinquent or underwater. (Gotta love how the administration picks up a 3-year old Republican plan with obvious deficiencies and acts like it's fresh meat.) I fail to see how such a plan will accomplish much.
The ability to refinance depends heavily on whether a homeowner is current and has equity. Consider, then, the impact on the 4 categories of homeowners under this rubric:
(1) Borrowers who are current and have equity. Refinancing is always possibly for anyone who is current and has sufficient equity in their home. That's a lot of existing borrowers for whom a new refi program does nothing.
(2) Borrowers who are current but lack equity. There is also a large pool of borrowers who are current, but have insufficient equity or negative equity for a refinancing. A new refi program probably doesn't do much for them either. It doesn't take very much equity to do a FHA refinancing, but putting that aside, the Home Affordable Refinancing Program (HARP) allows for negative equity refinancings. There haven't been a lot of them, however, and I think that bodes poorly for any new program. The closing costs for refinancings can be a major obstacle for households without a lot of extra cash sitting around and with uncertainty as to whether they'll stay in an underwater house long enough for the lower rates to make the refinancing worthwhile.
(3) Borrowers who are delinquent, but have equity. These borrowers can already get out of the house via a sale. In any case, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent. Lower monthly mortgage payments aren't going to do a thing to change their delinquency or the pending foreclosure.
(4) Borrowers who are delinquent and lack equity. As with delinquent borrowers who have equity, most of these borrowers are seriously delinquent, not just 1 or 2 months delinquent. Lower monthly mortgage payments aren't going to do a thing to change their delinquency or the pending foreclosure.
So in the end, it's really not clear who this would help. It ignores that there's already been lots of refinancing at low rates since 2008--it's not clear how much more refinancing some new initiative will possibly produce, much less how many foreclosures it will prevent. The refi idea seems to do nothing on either negative equity or unemployment. Any program that fails to address those just isn't serious. I get that the administration has a MacGyver problem given that it can't move anything in Congress, but that necessitates much more creativity, financially and legally, not rewarming old ideas. My prediction: this ends up accomplishing about as much as FHAShortRefi or Hope4Homeowners.
We need a TARP for Main Street. This isn't it.
Would not homeowners in categories (3) and (4) be helped since their loans would be no longer delinquent? Wouldn't pending foreclosures be cancelled if a loan is refinanced?
There needs to be some type of streamline refinancing made available for underwater but current (and well employed borrowers). HARP was close but there were too many overlays from lenders and some dumbass rules from Fannie/Freddie. There are a ton of people who would like to refinance and teh only reason they can't is due to the appraised values. They are in no danger of losing their homes, good credit, well employed, etc. However, they can't write a check for $50k or whatever it may be to keep the loan to value at a level that makes sense for refinacning.
The problem is by the time the banks/fannie/freddie get through overlaying with price hits and adjustments, the actual benefits of refinancing to lower rates are gone. Prime example is FHA. FHA used to have a great streamline program - no appraisal, no income. Just drop the rate and you are done. Problem now is that you can be at 6% and want to drop to 4% but it doesn't make any sense to because FHA jacked up the MI premium on new loans. So now you are saving money on teh interest rate but pissing it away with higher MI premiums. No point in refinancing....
Refinancing delinquent borrowers is insane. If someone is delinquent on a mortgage, saving $200 bucks a month or whatever it amounts to is not going to stop an eventual foreclosure. People are delinquent because they have no income... this is why modifications typically fail.
One idea they should also consider is instead of a mortgage interest deduction, why don't we do a dollar for dollar tax break for PRINCIPAL reduction?
Give people a tax break for paying down their mortgages instead of a tax break for having a bigger mortgage. This would encourage everyone to deleverage. This helps out borrowers and banks by reducing their loan portfolios.
If I knew I was going to have significant tax break for paying off my mortgage, I would do whatever is necessary to start paying it off. Instead of 401k deduction, I move that money to additional principal.
Just a thought....
With the Fed. Funds rate at around .25% why are we paying more than 1%-2% interest on a mortgage. The money is ours, not the banks.
Alan Solot--I think there's an open question as to how past delinquency would be treated with a refi. It probably would just get amortized over the life of the new loan. If so, that would clean up the past delinquency and the payments would be lower, but unless the delinquency was caused by a passing problem--temporary unemployment, now fixed--it won't do much good. It just kicks the can down the road 3 months.
Also, will they refi unemployed homeowners?
Isn't it a little glib to say that borrowers who are delinquent but have equity can solve their problems by selling? With the glut of homes on the market in so many cities, paper equity is hard to convert into cash quickly -- especially when the homeowner trying to sell at retail is competing with the bank owned properties and short sales.
There's another subcategory to think about, which is borrowers who are current and have some equity, but don't have the stellar FICO required to get a refi approved these days. Will this program make low rate refinancing available to any and all regardless of credit score, just by asking for it? If so, the applications will come in like a deluge of biblical proportions.
Yes. It is a little glib. You'd have to have real equity, not say 5%, and be willing to sell low to move the house quickly.
It's kind of silly for the GSEs not to refi an existing GSE loan because of a low credit score--they've got the risk already, so why not reduce it with a more affordable loan? It will mean giving up an above-market asset, but that's mitigated by the lower default risk.
Adam, you touched on it.
I have a loan from a big bank. As far as I can tell it was not securitized.
I probably can't qualify to refinance right now, not enough income, but I have made all the payments and I have hundreds of thousands in equity.
One thing they want to refinance is a credit report, the other thing is an appraisal. I asked "why?" You're already loaning me money, if my credit was a problem I would still owe you. Again, if the house won't appraise, what does that matter now? You already loaned on it. If it did happen to be underwater, you can't get away now by getting an appraisal, you are already on the hook.
What I'd rather get is a loan mod, just to lower my rates and payments, but no, can't get that for some reason.
Adam--category 2 seems gigantic, and those homeowners haven't received very much help, particularly given the higher demands on mortgage insurance, etc. Here's what I would like to see:
For borrowers who are:
a) underwater in their mortgage b) have owned their house for at least five years (before the crash) c) current on their payments
they should be allowed to do a no-fee refinance, and without a second appraisal. The government could pay for the fees via a forgivable loan (say, $1,000 for every year of ownership), creating an incentive for people to keep their homes.
I suspect there are a lot of people who would rush to refinance if they knew they could do it without paying fees, and without having to go through a new appraisal. This would provide stimulus to the economy and, unlike other housing proposals, reward responsible, but unlucky, homeowners.
Here's a thought:
@whitehouse Make the banks reset ALL mortgages to FMV and let them use the NOLs to offset profits for 3-5 years. Housing crisis solved!
Refinancing is the opposite of deleveraging. There is nothing new here. Banks persist in the delusion that home price appreciation will turn the straw on their balance sheets back into gold. The current Administration's mortgage crisis policy is fundamentally the same as its predecessor's. http://pubcit.typepad.com/clpblog/2008/06/tokyo-drift.html.
what they need to do is get all those second mortgages that are portfolio loans off the banks books - they need a program to roll those seconds and agency firsts into one govt. loan at lower rates. this would help with the banks solvency issues and would give the bondholders a higher balance/higher coupon sustainable bond they want. in exchange the homeowners would have smaller monthly payment. i bet they could write down those 2nds 30 percent and still have this make some sense.
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