Thanks to low interest rates, home owners are refinancing their home mortgages in sizable numbers, and that’s great for them and for the economy, because it helps free up money that can be put to other uses. A Bloomberg report earlier this week put the refi volume at a projected $932 billion for this year, up from $858 billion in 2011.
It’s a good guess the federal government is taking a strong interest in these numbers. Among all the efforts that the government has undertaken to help resolve the housing crisis and spur economic growth, none has been more central than its efforts to spur refinancing among struggling home owners. The government’s HARP program (Home Affordable Refinance Program) is all about providing incentives to borrowers to refinance their mortgage into something they can more easily handle. Incentives are provided to lenders and investors, too, to let borrowers do that.
To date, the government’s refi efforts have produced modest results, with roughly a million refis over the last few years, far fewer than the 3-4 million that was intended.
Without a doubt, the government should continue to look for ways to work with borrowers, lenders, and investors to spur refinancing. But what the Bloomberg report makes clear is that refis shouldn’t be the government’s only focus for improving the housing picture, especially if one of the government’s goals is to inject money into the economy through these refinancings. That’s because these refinancings, while they can be expected to free up some $2,900 a year for each home owner on average (assuming a typical $200,000 mortgage), exactly how much of that money will make its way into the economy as new spending is unclear. Economists interviewed for the report differ, but several say much of this money will go to shoring up home owners’ savings or paying down other debt, so only over time will the money make it into the economy as new spending.
In other words, even though the refis are important and ultimately beneficial, don’t expect them to jolt the economy with new spending.
The modest immediate benefit of refis shows just how important it is for the government to take a balanced approach to addressing the housing challenges today, and that means thinking long and hard about what we need to spur new purchases of homes. Clearly, rule one should be to do no harm, a refrain that NAR and others have been making for several years now. Doing no harm means taking a reasoned approach to banking regulators’ proposed qualified mortgage (QM) and qualified residential mortgage (QRM) rules. The QM rules will require lenders to make loans only to borrowers who can demonstrate the ability to repay, and the QRM rules will require lenders to hold 5 percent on their books for home loans they securitize and sell to investors, unless the loans meet certain “safe” underwriting standards. Loans that meet the “safe” standard don’t come with the hold-back requirement, making them more affordable to borrowers.
With these rules, the devil is in the details, and NAR has called for QM to give lenders sufficient flexibility so that a wide range of qualified, responsible borrowers can get affordable loans, not just borrowers with gold-plated credit profiles, and has also called for the QRM rules not to include a minimum down payment requirement, among other things, that would make it hard for many households to get a loan.
NAR is also looking closely at proposed bank capital standards in Basel III, the international banking protocol, that could force lenders to hold so much capital for home loans that, again, only borrowers with the best credit risk will be able to get affordable financing.
Other rules and laws that generate concern are being explored, but the point is clear: Although the government is right to look for ways to help troubled borrowers refinance into something more sustainable, the government at the same time must take reasonable steps on the new-purchase side of the equation. Not only is shaping these proposed rules in a reasonable way the right thing to do from a policy standpoint, but we can expect good rule-making to have a boosting effect on the economy as well, because new home purchases are the time-tested way for injecting money into the economy as new owners spend on upgrades, furnishings, and all the other things that make housing such an integral part of the economy. Encouraging refis is only half the equation.
FHA is lowering its mortgage insurance premiums to help borrowers refinance into lower interest rates, President Barack Obama announced yesterday in a national press conference at the White House. The initiative also includes help to members of the military who’ve been wrongly foreclosed on or denied a chance to refinance.
Under the FHA initiative, the agency is reducing its up-front premium to .01 percent, from 1 percent, for streamlined refinancings of loans originated prior to June 1, 2009, and cutting the annual fee for these refinancings in half, to .55 percent, from 1.15 percent.
The Administration says the two fee reductions together should save the typical FHA borrower about a thousand dollars a year, which is “on top of the savings that they’d also receive from refinancing,” President Obama said at the press conference. “That would make refinancing even more attractive to more families. It’s like another tax cut that will put more money in people’s pockets. We’re going to do this on our own. We don’t need congressional authorization to do it.”
In a scenario of how this would work provided by the White House, a typical FHA borrower with $175,000 outstanding on a mortgage would be able to reduce the monthly payments to $915 a month, assuming a new mortgage at 4 percent. Without the fee reduction, the monthly payment after a refi would be $1,010 a month.
The fee cuts begin June 11. (Details from HUD.)
President Obama used the press conference to urge Congress to pass elements of a broader housing assistance proposal he outlined in his State of the Union speech in January and which was subsequently fleshed out a few weeks later in another address. That proposal would apply the administration’s existing HARP program (Home Affordable Refinance Proposal) to all loans, not just those backed by Fannie Mae and Freddie Mac. To pay for that expansion of the program, a fee would be charged to the country’s largest banks, which received public help after the mortgage crisis hit a few years ago.
Under HARP, lenders agree to modify mortgages, even if the borrower is underwater, as long as certain requirements are met.
Under the assistance to home owners in the military, the administration says it will take the following five steps:
1. Conduct a review of every servicemember foreclosed upon since 2006 and provide any who were wrongly foreclosed upon with compensation equal to a minimum of lost equity, plus interest and $116,785;
2. Refund to servicemembers money lost because they were wrongfully denied the opportunity to reduce their mortgage payments through lower interest rates;
3. Provide relief for servicemembers who are forced to sell their homes for less than the amount they owe on their mortgage due to a permanent change in station;
4. Pay $10 million dollars into the Veterans Affairs fund that guarantees loans on favorable terms for veterans; and
5. Extend certain foreclosure protections afforded under the Servicemember Civil Relief Act to servicemembers serving in harm’s way.
Read a transcript of the President press conference yesterday.
President Barack Obama today fleshed out a proposal he announced in his State of the Union speech last week to help boost the housing market by helping more underwater home owners than are being served now by lenders.
In the details he released today, the President said he wants to make the federal government’s existing mortgage refinance program, called HARP (Home Affordable Refinance Program) available to more home owners. It’s currently available to struggling borrowers with loans backed by Fannie Mae and Freddie Mac. For these borrowers, incentives are provided under certain conditions to make refinancing more attractive.
Under the new proposal, this HARP program would be expanded to include borrowers with loans that aren’t backed by Fannie and Freddie. These are the borrowers whose loans were securitized in private-label securities without any federal backing, and they would be allowed to refinance into FHA-backed loans, the same as the Fannie and Freddie borrowers. The administration has estimated that borrowers would save $3,000 a year in mortgage costs.
Key points: 1) More underwater home owners would be able to tap federal refinance assistance than can do so today, 2) mortgage servicers would be restricted in their ability to foreclose until after they’ve exhausted efforts for borrowers who’ve make a good-faith effort to modify their mortgage, and 3) efforts to reduce the inventory of foreclosed homes through bulk sales to investors for use as rental housing would be tried in a pilot program.
To be eligible, borrowers would have to have made their mortgage payments over the last six months with only one delinquency, and their loan amount couldn’t exceed the FHA loan limit for their area. If borrowers owe more than 140 percent of the value of their home, the lender has to agree to reduce the loan balance. Also, borrowers wouldn’t have to submit a full file of paperwork for the refinancing as long as they can verify their employment. The proposal also would enable borrowers who still have equity in their home—up to 20 percent—to participate.
The changes will require legislation, so Congress will have to agree to them for the expanded program to take effect.
In his State of the Union speech last week, Obama said he would pay for the expanded program using a fee charged to the country’s largest banks so the initiative wouldn’t add to the deficit. But some members of Congress have said they oppose charging banks a fee to cover the cost.
The Obama plan would also introduce a Bill of Rights for home owners, part of which is intended to smooth the mortgage modification and foreclosure processes, which today can be contentious and difficult for borrowers to understand. A key part of this is an effort to curb banks’ practice of undertaking a mortgage modification while at the same time proceeding with a foreclosure—a process called dual tracking. Before they can start foreclosure, banks will have to show they took all reasonable steps to modify a borrower’s mortgage.
To help ease inventories of foreclosed homes, the plan would give a green light to Fannie Mae to implement a pilot program to make foreclosures available to investors in bulk purchases for conversion to rental housing. Under the pilot, Fannie would package for sale foreclosed homes in a limited number of markets and require them to be used as rental properties for a period of time.
NAR has concerns with this proposal and has been talking with federal regulators to ensure that the program is carefully tailored to the communities who can truly benefit from it, that small- and medium-sized investors be able to participate, and that real estate professionals continue to play a role in the disposition of the homes.
In a statement released after the President outlined the details of his proposal, NAR said it’s urging the regulator of Fannie and Freddie, the Federal Housing Finance Agency, “to proceed cautiously with the REO-to-rental program since housing markets are complex and varied.
“NAR believes an overly aggressive REO-to-rental program that is not privately administered by local entities and does not involve substantial participation of local market experts, especially licensed real estate professionals, could be disruptive and counterproductive to communities already suffering from high foreclosure inventories and lower housing values.”