The Wall Street Journal
By: Nick Timiraos
January 24, 2012
Obama to propose mortgage-refinance plan
President Barack Obama called on Congress during Tuesday's State of the Union address to approve new legislation that would give all homeowners who are current on their mortgages the opportunity to refinance at record low mortgage rates, officials said Tuesday.
Administration officials declined on Tuesday to outline the mechanics or costs of the program, and they said those details would be spelled out in the legislation in the coming days. "Responsible homeowners shouldn't have to sit and wait for the housing market to hit bottom to get some relief," Mr. Obama said. " No more red tape. No more runaround from the banks."
It's unclear whether such a measure would win bipartisan support, but the bill could prove a shrewd bet during an election year to put pressure on Republicans who remain wary of further government intervention in housing markets.
"The administration is somewhat liberated from the details or the consequences of what it proposes, knowing that a Republican House can be relied upon to kill a bad or overly complex idea," said Jeb Mason, a policy adviser in the Treasury Department during the George W. Bush administration.
Still, the measure could allow Mr. Obama to deflect criticism from the left that he has been "flatfooted on housing," said Mr. Mason, who now works for financial-services consultancy Cypress Group, while arguing to the broader electorate that "the Republicans are the party standing between you and a lower rate on your mortgage."
Three months ago, Mr. Obama traveled to Las Vegas to trumpet a revamped initiative to refinance government-guaranteed mortgages, using the slogan "We Can't Wait" for Congress to act.
Unlike the existing program, which was unveiled in 2009, the latest proposal wouldn't limit such opportunities to borrowers whose loans are already backed by mortgage giants Fannie Mae and Freddie Mac, which guarantee about half of all outstanding loans.
Mortgage rates have fallen to their lowest recorded levels. Last week, the 30-year fixed-rate mortgage stood at an average 3.88% rate, according to Freddie Mac. But many borrowers haven't been able to qualify because they owe more than their homes are worth or they have lost income, making it difficult to qualify under today's tighter lending standards. Others simply have concluded that refinancing isn't worth the upfront costs.
CoreLogic, a company that tracks 85% of all mortgages, estimates that 28 million homeowners could cut the interest rates on their loans by more than one percentage point if they could refinance.
Senior administration officials wouldn't elaborate on the coming legislation, but one vehicle for such refinancing would be the Federal Housing Administration, a government agency that doesn't make loans but instead insures lenders on losses for loans that meet certain standards.
Using either the FHA or Fannie and Freddie to refinance risky loans that they don't already guarantee would represent a dramatic expansion of the government into the mortgage market. Already, the three entities are responsible for backing nearly nine in 10 new loans.
Obama administration officials said any losses on refinanced loans would be funded by a fee on financial firms with more than $50 billion in assets that the administration initially proposed two years ago. At the time, officials said the tax would raise $117 billion, but it never moved through a Democratic-controlled Congress.
Refinancing has been particularly limited in five states that have seen the biggest home-price declines: Arizona, California, Florida, Michigan and Nevada. In those states, some 6.4% of borrowers with credit scores between 680 and 719 refinanced in 2010, compared with 9.7% of borrowers in the remaining 45 states, according to Federal Reserve data.
Both the Obama and Bush administrations have struggled with various initiatives designed to help at-risk borrowers to refinance without putting new costs on taxpayers. Around 960,000 borrowers have refinanced through the program for Fannie and Freddie loans, including at least 80,000 that owe more than their homes are worth.
Some economists and officials have said that recently announced changes to the program, while helpful, don't go far enough. "More could and should be done," said William Dudley, president of the Federal Reserve Bank of New York, in a speech earlier this month.
The refinance program is the latest in a series of housing measures that the White House has under consideration, including some pilot programs that would sell some foreclosed properties held by federal entities to investors that would convert them into rentals.
After rolling out a series of ambitious loan-modification programs in 2009 that fell short of their goals, the White House largely shied away from more housing policies over the past two years. But last summer, Mr. Obama said his economic team was "going back to the drawing board" on housing amid a listless recovery.
Housing figures to become a major political issue this year because the road to the White House passes through some of the nation's hardest-hit housing markets. Prized electoral battlegrounds such as Florida, Nevada, Arizona, Michigan, and Ohio have been among the most devastated by the housing bust.
It is an open question how aggressively banks would respond to the program, in part because the costs of collecting monthly payments on riskier loans has soared as banks find themselves overwhelmed by the volume of troubled loans.
In 2010, the White House rolled out a program that would refinance borrowers into FHA-backed loans if lenders and investors were willing to forgive principal. The voluntary program hasn't been widely used. The Bush administration and Congress in 2008 passed a separate bill to allow more homeowners to refinance into FHA-backed loans, but only a few hundred borrowers took advantage of the program.
Any new role for the FHA would be likely to face skepticism from congressional Republicans because the agency faces mounting losses and has thin capital reserves. At the end of September, independent auditors estimated that the agency had just $2.6 billion in reserve to cover unanticipated losses on $1.1 trillion in loan guarantees.