Is another refinance plan on its way?by Tim Manni
If you were among the many watching the president’s State of the Union address last evening, chances are you didn’t even realize President Obama hinted at a new refinance plan. In fact, the word “refinance” didn’t even appear in the president’s speech. The term “refinancing” was only mentioned once.
“And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates,” said the president. “No more red tape. No more runaround from the banks. A small fee on the largest financial institutions will ensure that it won’t add to the deficit and will give those banks that were rescued by taxpayers a chance to repay a deficit of trust.”
What about HARP 2.0?
You might be saying to yourself, “I thought we already had a federal refinance plan in place?”
You’re correct; HARP 2.0—and expansion of the original HARP program–was announced back in November and we’re still waiting for those updates to take effect (we anticipate lenders will have their software updated and ready to roll by March).
That said, you have wonder, with no details or written plan in place, how serious is the president about yet another refinance plan? Will this proposed refinance effort replace HARP by being an all-encompassing program, or is it merely a political move in an election year?
What sets this new program apart?
Nick Timiraos of the Wall Street Journal explained that the refinance plan hinted at during last evening’s address could be designed to include all borrowers, not simply those with loans guaranteed by Fannie Mae and Freddie Mac.
“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,” wrote Timiraos. “Already, the three entities are responsible for backing nearly nine in 10 new loans.”
Same problem, different day
If you’re experiencing déjà vu, you’re not alone.
From the start, the issues have been the same: Current borrowers who have experienced reduced incomes and a loss of equity, let alone negative equity, can’t qualify for a refinance due to strict lending standards.
This problem becomes increasingly exasperated when mortgage rates continue to trend down toward record lows. According to the latest figures from HSH.com, the average rate for conforming 30-year fixed-rate mortgages was 4.08 percent, while conforming 5/1 hybrid ARM rates closed our Wednesday-to-Tuesday wraparound weekly survey at an average of 3.00 percent.
But the idea behind the president’s latest refinance plan hinges once again on the (flawed) idea that private lenders will want to voluntarily refinance these loans. They’ve proven in past programs that that simply isn’t true.
“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,” wrote Timiraos.
He continues, “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.”
Does this plan stand a chance?
Here’s one last thing to chew on: If this new refinance effort is to include the FHA, how responsive will Republican lawmakers be to the plan—even in an election year—given how critical they have been of the FHA reserves?
We’ll see if this plan goes anywhere or if it was simply political posturing at the start of an election year. We’ll keep you posted.