Reno Foreclosure Blog

By CNBC’s Diana Olick

Friction in Obama's refi proposal
 
"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 US
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% in negative equity to refinance, is being deemed too
costly as well. While the Congressional Budget Office estimated
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 Chase say 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%. Of the 838,400 HARP refinancings
done so far, only 62,432 had LTVs above 105%, 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."