White House Refinancing Plan: Working Against History

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NEW YORK (MainStreet) – It appears that failure is not a deterrent for current federal government policy, which is trying a new tactic to keep Americans in their homes and in better financial situations after a few failed attempts to do so in the past two years.

The New York Times reported on Wednesday that the White House was considering a plan for troubled homeowners to refinance their mortgages at lower interest rates.

The idea would be for American homeowners who have lost excessive value in their homes – housing industry professionals call them “underwater homeowners” – to benefit from rock-bottom mortgage interest rates.

The plan would impact only mortgage loans backed by the U.S. government, and would extend the offer to homeowners who don’t have two critical characteristics that most refinancing candidates should have: good credit and decent equity in their homes. If enacted, the plan would save U.S. homeowners $85 billion per year, the Times reports.

The White House is playing coy, but the Times anticipates some kind of announcement before the end of the year.

“As one would expect, we continue to look for ways to ease the burden on struggling homeowners and to help stabilize the market, whether that's through assessing new proposals or older ones worth re-considering as market conditions change," White House official said in a statement. "That said, we have no plans to announce any major new initiatives at this time."

OK, if and when the refinancing plan is rolled out, what are the chances it will be any more successful than the administration’s lackluster Home Affordable Mortgage Program (HAMP)?

That initiative didn’t stand up to the “mission accomplished” standard.

A recent study from the California Reinvestment Coalition that studied the impact of HAMP by race and ethnicity shows that, across the board, HAMP has been underwhelming at best, and a certified disaster at worst. Here are some conclusions from the CRC study:

  • Stuck in trial modifications. More than three quarters, or 78% of housing counselors, reported that borrowers were stuck in trial modifications “always” or “almost always.”
  • Borrowers are denied permanent modifications. Along the same lines, 72% of housing counselors reported that borrowers are denied permanent HAMP loan modifications “always” or “almost always.”
  • “Dual track” problems are endemic. An astonishing 94% of housing counselors reported working with clients who have lost their homes while they were working with their loan servicer on a loan modification.
  • Principal reduction is needed, but very rare. Fewer than 5% of borrowers in the Fresno and Los Angeles Metropolitan Statistical Areas (MSA) received loan modifications that included a reduction in principal, according to HAMP data.
  • HAMP excludes many. Almost half – 46% – of borrowers who requested loan modifications in California never even made it to the initial trial modification stage, presumably because they didn’t meet eligibility criteria, according to HAMP data.

Christopher Mayer, a finance professor at Columbia University and a big proponent of the Obama administration’s plans, told Fox News Radio on Wednesday that 54% of the new White House refinancings would go to homeowners with mortgages at $200,000 and below. He also said that consumers could save $75 billion annually on lower interest rates alone. "If you think of it from a policy perspective, it's the equivalent of a middle-class tax cut," Mayer said.

But left unsaid, so far at least, is how homeowners with good credit and paid-up mortgages would view another government giveaway. Probably as another fly in the ointment. And mortgage bond investors would likely balk at the idea, especially if mass refinancings make it more expensive for all homeowners to refinance (a rush to refinancing could push mortgage rates up).

Consequently, the White House will have to sharpen its pitch to sell this plan on Wall Street – and on Main Street. But for homeowners who need a break, the plan could be just the safety valve they’re looking for.

In other words, everything HAMP wasn’t – they hope.

Are you in the market for a new home loan? Make sure you check out MainStreet's look at all the basics you need to know in Achieving the Dream: Getting a Mortgage!

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