PBO’s Remarks on the Housing Plan: May be Boon for Would-be Refinancers

by Alex Stenback on February 18, 2009

Update: Here’s a Q&A that answers some of the questions we posed below.  Of note:

[Refinance] Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.

Back of the Napkin here: With values in the Twin Cities (and elsewhere) down 25% from peak since 2006, if you put 20% down 2 or 3 years ago, it is a coin flip whether you have the value to refinance under this program. After 2006, you might be eligible if you put 10% or more down. Maybe.  0-5% down purchasers, unless very recent, probably won’t be captured by this initiative at all. 

This will help some, but not a huge amount of homeowners refinance.

President Barack Obama’s prepared remarks for today’s 11.15a (CST) speech in Phoenix are posted at the WSJ.  Here’s the part that grabbed my attention:

“Right now, Fannie Mae and Freddie Mac – the institutions that guarantee home loans for millions of middle class families – are generally not permitted to guarantee refinancing for mortgages valued at more than 80 percent of the home’s worth. So families who are underwater – or close to being underwater – cannot turn to these lending institutions for help.

My plan changes that by removing this restriction on Fannie and Freddie so that they can refinance mortgages they already own or guarantee. This will allow millions of families stuck with loans at a higher rate to refinance. And the estimated cost to taxpayers would be roughly zero; while Fannie and Freddie would receive less money in payments, this would be balanced out by a reduction in defaults and foreclosures.”

Initial Thoughts:

• This part of the plan, IF it can be crafted in such a way to capture enough homeowners, makes too much sense not to happen.  If it is a window dressing program that will apply to only a very narrow slice of the homeowning population, why bother?

• A similar program has existed with FHA mortgages for years under streamline refinance rules, which require neither appraisal or income verification so long as a homeowner is current on their loan and the payment goes down, so there is something like a precedent here.

• It might be a tremendous stimulus in it’s own right, with the potential to put a few hundred dollars per month in the hands of homeowners.

• Also note that by reducing the interest people are paying, the aggregate mortgage interest deductions taken by homeowners will go down, which also offsets the potential cost of this program to taxpayers.

A key question not addressed: What will be done with the mortgage insurers or second mortgage holders?  Will they be forced to insure these refinances? Will Fannie/Freddie carry these loans without mortgage insurance, cutting mortgage insurers out of the deal entirely?  What of the second mortgage lenders?  Forced subordinations?

Obama’s Prepared Remarks on the Mortgage Crisis [WSJ]

{ 1 comment… read it below or add one }

Alec February 22, 2009 at 11:43 pm

Alex:

Once again you hit the primary issue on the head when you ask the question about how MI and second mortgages will be handled. There are many people who would greatly benefit from a Conventional streamline refinance program–but most will be shut out of this option unless your question is addressed. Mortgage Insurance companies are in no position to take on more risk as they are all hemorraging cash as it is because of the foreclosures and short sales. Maybe the government will come up with a brillant plan like launching it’s own mortgage insurance (a la FHA) to work around the problem.

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