We got a big hint of this new proposal from Barack Obama in last week’s State of the Union message, and now Obama has rolled out his proposal to accelerate mortgage refinancing to bolster the housing market. However, it has at least one poison pill that will make it nearly impossible to get Congress to budge, and its reach is significantly limited. Here is Obama, speaking earlier today, of his attempt to help “responsible homeowners” and not the people who walked away from their obligations:
CNBC reports that FHA will indeed be the vehicle for this new program, and that might tip over an already extended agency:
Critics will also argue that the FHA, which now has an inordinately, historically large share of the mortgage market, is in no position to take on any more risk. The FHA could be considered “underwater” itself, guaranteeing about $1 trilling in mortgages but sitting on just a $1.2 billion dollar cushion to cover losses.
To that end, officials say they could create a separate fund for these loans, not the regular mutual mortgage insurance fund (MMI). This would be a special risk fund, designed to handle high losses.
Basically, it sounds like an extension of the bailout, only now for people who bought high and had to watch as values dropped. The reach of the program would not keep people at risk from losing their homes, but simply allow people to lower their interest rates on the existing principle in most cases, which means it doesn’t make them any less underwater, either. In fact, it might make matters worse:
To be eligible, borrowers would have to be current on their mortgages, not having missed a payment in at least six months. They need a credit score (FICO) above 580, must be employed, and must have a conforming loan (between $271,050 and $729,750 depending on their location). No appraisal would be necessary, according to officials.
Estimates are that the plan could help 3.5 million borrowers in addition to the 11 million expected to qualify for the existing refinance program for those with Fannie Mae and Freddie Mac loans (HARP). The one sticking point could be the mortgage insurance premiums charged by the FHA. If rolled into the loan, they would put a borrower further underwater.
“To use taxpayer dollars to bail out the few who are current and don’t need payment assistance but are underwater is ludicrous and worsens their equity position,” says JT Smith of Aristar Funding.
Note that I said most cases. When the principal is more than 140% of current home value, the program would force lenders to write down the principal to 140% … which still leaves homeowners underwater and reduce assets for lenders, making it more difficult for them to lend money. The administration will argue that this helps the lenders by getting rid of “risky” loans. They’re only “risky” if the homeowners can’t make the payments, though, and even if that were true, lenders could simply choose to do this on their own. Not only that, but because FHA — an outright government agency — would take on the loan instead of Fannie/Freddie or a completely private lender, taxpayers would also on the hook for that same “risky” loan for which taxpayers had no prior risk at all.
Jim Pethokoukis argued last week that this is Obama’s attempt to buy some middle-class support. Republicans may stop it for its new fees on lenders, which will supposedly fund the costs, but certainly not the risks involved in this shell game, but that would also be useful for Obama in vote mining among underwater middle-class homeowners — in fact, it might be more useful than passage. (Republicans could pass it with a provision approving the Keystone XL pipeline and dare Obama to veto it, too.) Its passage will only extend the problem for most of these homeowners, transfer risk from private lenders to taxpayers in many cases, and do nothing to create conditions in which demand rises for housing that would solve the valuation issue.