Safe as Houses: Obama extends mortgage help to more underwater mortgages

Posted Tuesday, October 25, 2011 in Investigation

Safe as Houses: Obama extends mortgage help to more underwater mortgages

by Gina Hamilton

WASHINGTON D.C. -- HUD Secretary Shaun Donovan and Director of the National Economic Council Gene B. Sperling held a telephone press conference with regional reporters on Monday morning to explain President Barack Obama’s announcement Monday that the Federal Housing Finance Agency (FHFA) would be making changes to help more homeowners refinance if they are underwater.

As property values fall, many homeowners are left with mortgages far higher than the value of their homes.  With high unemployment, and underemployment, this leads too often to default or foreclosure.

Previous attempts to shore up the mortgage industry by giving banks incentives to renegotiate mortgage contracts has done little to aid the ailing market.

Part of the reason is that although a bank may service a particular loan, few banks hold the note on the loan themselves.  The mortgage market has been securitized, and one note may have many different part-owners.

About 800,000 homeowners had refinanced under the HARP program, but Donovan said that it did not go far enough.  Donovan said that he was directed to help remove barriers.

Under the previous plan:

  1.  Any homeowner who was more than 25 percent underwater, was not eligible.  This plan removes the 125 percent barrier and opens it up to any mortgage holder, regardless of home value.
  2. Many homeowners could not refinance because of cost of refinancing, including risk-based fees, in some cases multiple appraisals, and other key elements of closing costs. This plan reduces the number of people who need appraisals, and helps with title insurance costs.
  3. Reps and warrants on existing loans.  The original lender who made the loan has some responsibilities to Fannie and Freddie for underwriting, and based on bad underwriting practices, many of the loans were questionable.  Because of the uncertainty, other lenders were unwilling to come in and refinance.  By eliminating reps and warranties on old loans and streamlining reps and warranties on new loans, the loan process should be more competitive. 
  4. Mortgage insurers who hold risks on these loans have similar problems with reps and warranties.  They have agreed to transfer coverage from the old loan to new loan automatically.
  5. The team worked with major lenders who have agreed to resubordinate any second loan or lien, which had been a major sticking point in refinancing up to this point.

With these changes, Donovan says that all lenders and other private sector partners are fully committed to doing the work necessary, and they have agreed to extend the term of the program until June of 2013.

Donovan estimated that an average savings of $2,500 per family could be attainable by taking advantage of record low interest rates.  He said that up to two million borrowers could be affected.

However, most analysts see this program as too little, too late.  MF Global Finance said that fewer would actually be assisted.  "Between 600,000 to 1 million more refinancings of underwater borrowers. … For those who get HARP refinancings, this offers economic help. But we don’t see how this turbo charges the economy.”

Others say that what is really needed is a mass conversion - of all or nearly all current mortgages in the country - to 4.2 percent or less.  "That would affect 25 million homeowners," MF Global said, "and bring $70 billion back into the economy."

blog comments powered by Disqus