If you weren't listening closely to President Obama's speech last night, you might have missed his new plan to help millions of homeowners.
Here it is, in its entirety: “We're going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4 percent. ... That's a step that can put more than $2,000 a year in a family's pocket, and give a lift to an economy still burdened by the drop in housing prices.”
Why so brief and vague? Perhaps because there are obstacles making it doubtful such a plan will ever get off the ground, let alone make a major impact.
To understand why, you have to look at why the administration's big refinancing plan, started two years ago, has helped only a small fraction of the homeowners it was designed to help. This is the plan Obama is proposing to fix, but it depends on getting a green light from a key regulator, which may not happen.
Launched in 2009, the Home Affordable Refinance Program (HARP) was designed to allow homeowners with little or no equity in their homes to take advantage of low interest rates, so long as their loans were backed by Fannie Mae or Freddie Mac. Normally, such homeowners wouldn't qualify for refinancing. The administration said "up to 4 to 5 million" homeowners would be able to take part.
But like the administration's other flagship housing program, its loan modification program, which promised help for 3 to 4 million homeowners, things haven't turned out that way.
As of June, just 838,000 homeowners had refinanced through the HARP program. And strikingly, only 62,000 of those were significantly "underwater" homeowners—owing 5 to 25 percent more than their homes were worth. That's just a small fraction of the roughly 5 million underwater mortgages that Fannie and Freddie own or guarantee.
Some of the reasons the old program has fallen short are complicated and unlikely to be easily fixed. Loans with mortgage insurance, for instance, are often denied because the insurer must agree to transfer the policy to the new loan. Loans with a second mortgage present their own difficulties.
But two key players—the banks and the federal regulator that oversees Fannie Mae and Freddie Mac—also have been obstacles to the program's success. Both seem likely to continue their skeptical stances, because both view helping underwater homeowners as risky.
As has been widely reported, banks have been wary of offering new mortgages to borrowers who owe more on their houses than they're worth. Although each loan is backed by Fannie or Freddie, the bank could still be on the hook if the homeowner defaults and Fannie or Freddie finds that the bank didn't properly underwrite the new loan. The bank could be forced to buy the loan back. Because underwater homeowners are seen as being at a greater risk of defaulting, banks have been wary of taking on those loans. (You might have noticed that since the housing bubble burst, banks have become much more cautious.)
Fannie and Freddie's federal regulator, the Federal Housing Finance Agency, could choose to remove that risk for banks. Doing so, however, would shift that risk from the banks to Fannie and Freddie, and FHFA hasn't been eager to do that. As a former White House aide put it to the Wall Street Journal, FHFA head Edward DeMarco's "first instinct is to say no."
FHFA is an independent federal agency, so even though taxpayers have kept Fannie and Freddie afloat, the two companies are not under the administration's direct control.
FHFA's independence has lately been a big obstacle for the White House. In December, we reported on the FHFA's opposition to cutting mortgages for underwater homeowners facing foreclosure. Reducing the principal amount would make homeowners much less likely to re-default but would lead to short-term losses for Fannie and Freddie. A public White House push on the idea has so far gotten nowhere.
FHFA has watched over Fannie and Freddie ever since the government took them over in 2008. Because of the continuing bailouts, taxpayers are $141 billion in the red. A big part of FHFA's job is to conserve the companies' assets and minimize further bailouts. That's why FHFA has been putting the brakes on White House ideas that would help homeowners but shift risk to Fannie and Freddie.
Other program fixes recommended by experts also would require FHFA approval. Currently, Fannie and Freddie charge underwater homeowners higher fees to refinance because they are seen as riskier, possibly deterring some people from pursuing it. A reduction of those fees by FHFA would mean more risk for Fannie and Freddie.
The administration is already declaring victory in its bid to convince FHFA to go along. Treasury Secretary Tim Geithner said this morning that FHFA will support reforms to the refinancing program.
But in a statement released this afternoon, FHFA chief DeMarco wasn't quite so clear. FHFA is reviewing the refinancing program, he said, and trying to identify “frictions” that have made it less successful. The phrasing is telling: “If there are frictions associated with the origination of HARP loans that can be eased while still achieving the program's intent of assisting borrowers and reducing credit risk for [Fannie and Freddie], we will seek to do so.” [Emphasis added.] DeMarco added that the “final outcome of this review remains uncertain."