President Obama today announced a new proposal to alleviate the pressure on homeowners who are under water, as he traveled to Nevada, the ground zero of the housing bust.
From the front porch of a Las Vegas home — which has one the highest foreclosure rates in the country — the president promoted a plan to allow struggling homeowners who are backed by federal mortgages refinance without getting a new appraisal or a full credit check. The program also eliminates some risk-based fees for borrowers.
The changes are being spearheaded by the Federal Housing Finance Agency, which oversees government-sponsored Fannie Mae and Freddie Mac. The plan falls under the Home Affordable Refinance Program, which, the agency estimates, has helped already 894,000 families.
While administration officials say it will help thousands of homeowners, the program has its caveats. Only those homeowners whose mortgages are backed by Fannie Mae and Freddie Mac will be eligible for refinancing. Borrowers must have good credit and must have kept up with their mortgage payments, with no late payment in the past six months and no more than one late payment in the past 12 months. Additionally, the mortgage must have been sold to the agencies before May 31, 2009, and not been refinanced previously under the Home Affordable Refinance Program. The loan-to-value ratio has to be greater than 80 percent.
Proponents of the program say it would help boost the economy by relieving financial stress on homeowners and reducing their mortgage so that they would have more expendable money.
But economists disagree on the number of people who would actually benefit. Some say it wouldn’t affect more than a 1 million households, a relatively small number given that more than 6 million homeowners are facing foreclosure or have delinquent payments. Others say the restrictions are too stringent and automatically cut out those under-water homeowners who have bad credit.
“It’s certainly going to be a constructive step in terms of supporting the economy,” said Karen Dynan, vice president of the economic studies program at the Brookings Institution. But “the other important point is that it’s not a free lunch. Homeowners are going to save on their mortgage payments but there’s another side of that transaction. Investors and lenders, people who fund the mortgages, are going to suffer” by getting a lower return.
The changes come as the housing market, which is central to economic recovery, continues to struggle despite record-low interest rates and government programs to help homeowners.
Even though there is an oversupply of houses and interest rates are low, demand is low, given the high unemployment and general skittishness about the direction of the economy. Even those with buying power are facing a hard time obtaining loans because banks have tightened their restrictions after the mortgage meltdown.
In its Economic and Housing Forecasts for October 2011 report, Fannie Mae forecasted that home sales will remain “sluggish” and house sales will bounce near the bottom at least for another year. The large inventory of distressed homes continues to put downward pressure on prices, according to the report.
The Obama administration’s efforts to boost the market have been met with mixed results.
The program to give first-time homebuyers a credit met with enough success that it was renewed and even extended to existing homebuyers, under certain conditions. But critics of the plan say it artificially inflated the housing market and pulled those buyers into the market who would have brought in later months or years.
The biggest criticism has been leveled at the $75 billion Home Affordable Mortgage Insurance Program, launched in March 2009, which didn’t attract as many distressed homebuyers as the administration had hoped. In fact, many homeowners who took advantage of the program ended up defaulting again on their mortgage.
Some experts say the HAMP program was not aggressive enough in tackling the issue. Others say the administration, instead of cracking down on banks, did the opposite by paying them to change mortgages of struggling homeowners.
“The problems that need to be fixed have changed over time and the policy hasn’t kept pace with what the problems are,” Dynan said. “The other problem is that things turned out to be more complicated than people anticipated.”
Some housing experts say the administration’s programs need to level the playing field.
“It’s hard to know what would have happened had they not been there,” said Preeti Vissa, community reinvestment director at the Greenlining Institute, a public policy research and advocacy group. But the impact has “been almost negligible, particularly in hardest hit states or communities of color. Much more needs to be done.”
Although few 2012 candidates have discussed the issue, the housing market will play a significant role in the upcoming elections. If it continues to weaken, it will weigh on the economy and, in turn, consumer confidence.
Even the president admitted recently that too little has been done to tackle the issue and that his administration has provided too little support to distressed homeowners.
“The continuing decline in the housing market is something that hasn’t bottomed out as quickly as we expected,” Obama said at a Twitter town hall event in July. The administration’s programs are “not enough. And so we’re going back to the drawing board.”
Unfortunately there is no silver bullet, there is no simple fundamental restructuring that will wipe away the damage done by the bursting of the housing bubble. But there are measures that we can take that can help homeowners
He also said that no federal program could solve the housing crisis and that “some folks just bought more home than they could afford and probably they’re going to be better off renting.”
White House Press Secretary Jay Carney echoed a similar sentiment today.
“Unfortunately there is no silver bullet, there is no simple fundamental restructuring that will wipe away the damage done by the bursting of the housing bubble,” Carney told reporters. “But there are measures that we can take that can help homeowners.”