Last Tuesday, a bipartisan group of sixteen Senators wrote a letter to federal regulators endorsing a broad refinance program in order to help the housing market. The letter was addressed to the Department of Housing and Urban Development, The U.S. Treasury, The National Economic Council, and the Federal Housing Finance Agency.
The Senators endorsed a plan that would allow homeowners with higher interest loans to refinance at today’s lower rates. This would be achieved by:
- Doing away with loan-to-value ratios
- Eliminating loan level pricing adjustments (which are up-front, risk-based fees which increase rates for those with higher LTVs and lower credit scores)
- “Ensuring that second lien holders do not stand in the way of a refinance”. It is unclear how this would be accomplished.
Back in August, the Obama Administration endorsed some sort of vague refinancing plan, which contained pretty much no specifics. The nebulous plan may allow some unspecified number of people who have a mortgage that may or may not be owned or backed by Fannie Mae or Freddie Mac to possibly refinance. Again, there are no specifics whatsoever, so it is unclear if the new program would allow those who are delinquent or underwater to refinance their mortgages (approximately 20-25% of homeowners with mortgages owe more on their mortgage than their home is worth). Those who have no home equity typically cannot refinance. Many who purchased homes at the peak of the market (2006-7) are underwater, and are stuck paying rates 2-3 points higher than current rates.
While the plan endorsed by the Senators has a little more in the way of details than the Obama plan, I fear that it fails to address larger issues that are hurting the housing market right now (an overhang of supply caused by continued foreclosures, and a lack of demand owing to low consumer confidence and unemployment).
After Obama floated his “plan”, Georgetown School of Law Prof. Adam Levitin wrote about the potential benefits (or lack thereof) of a mass refi program. The professor contends that the plan would have a minimal impact because it ultimately has a limited benefit for those who are very far underwater, and those who are having trouble making home payments due to loss of income/unemployment.
I am inclined to agree with the Professor. I believe that any sort of proposal to help the housing market that doesn’t include some level of principal reduction will be of very limited impact. My view is reinforced by witnessing the failures of HARP, FHA Short Refi, HAMP, etc. This program would be of marginal benefit to the housing market, although it would help the mortgage industry for a period of time. I maintain my view that the best way to help the housing market would be to focus on job creation. If people start working again, the rest will take care of itself in time.
The Senators “urge a speedy and comprehensive conclusion to this process”. In senate-speak, “speedy and comprehensive” probably means that some action will be taken sometime between now and the end of this decade.
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