The response to President Obama's recent proposal to refinance more borrowers into lower interest rate mortgages was at best underwhelming and at worst scathing. The plan would expand the government's so-far disappointing, Home Affordable Refinance Program(HARP), which helps current but underwater borrowers with Fannie Mae and Freddie Mac loans to refinance.
"Mr. President, the housing market is the foundation of the U.S. economy. It is cracked and chipping away," writes Florida real estate consultant Jack McCabe in an editorial in the Herald-Tribune.
"The walls are beginning to cave. Your answer, anecdotally, seems to be put a new roof on it."
McCabe is calling for principal write-down for troubled mortgages, not refinances for borrowers who are current on their monthly payments. The argument so far against principal write-down is that it would cost banks and investors (including Fannie Mae and Freddie Mac) too much.
Unfortunately the plan, which could allow borrowers with more than 25 percent in negative equity to refinance, is being deemed too costly as well. While the Congressional Budget Officeestimated it would cost investors in the original mortgages between $13 and $15 billion (while potentially saving 111,000 borrowers from defaulting), analysts at JP Morgan Chasesay it would cost more:
If such a policy were successful on a large scale, it would clearly devalue higher coupons, and would threaten lower coupons with incremental gross supply. A more modest HARP overhaul, while less disruptive, still forces investors to require more conservative valuations until details emerge.
All these arguments, however, may be moot, as the overseer of Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA), which would have to approve the refinance effort, is sounding wildly cautious. In a statement following the President's speech, Director Ed DeMarco states, "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 the Enterprises, we will seek to do so."
He goes on to say, however, that there are "several challenging issues to work through," and then he uses the word "uncertain" twice in characterizing any outcome.
While DeMarco doesn't detail said "frictions," they are vast and not limited to investor cost. First of all, too many borrowers probably still wouldn't qualify if they just did away with the loan to value ratio of 125 percent. Of the 838,400 HARP refinancings done so far, only 62,432 had LTVs above 105 percent, according to Jaret Seiberg at MF Global.
"We believe lenders are reluctant to HARP a loan if they fear the borrower is so underwater that they might default anyway," writes Seiberg.
Then there are issues of loan origination dates, put-backs on loans that default and borrower qualifications. Frictions. Beyond the friction, however, is the simple fact that a refinance program, while potentially an economic stimulus, is not a housing stimulus and shouldn't be characterized as such. The HARP program is and always was for current borrowers and does nothing to address the millions of non-current borrowers, bank-owned foreclosed homes and falling home prices.