Can housing refis rescue the economy?
The Obama administration considers using rock-bottom mortgage rates to help homeowners reduce monthly payments. Too bad it's unlikely to succeed.
This post comes from Marilyn Lewis at MSN Money.
Can the government refinance us out of the housing disaster?
That's the plan being considered, according to The New York Times. In an article today, the Times says administration officials are tossing around the idea of a "blanket refinance" homeowner rescue plan. It would capitalize on current hyper-low interest rates to help struggling homeowners get payments they can afford.
Any new plan "must help a broad swath of homeowners, stimulate the economy and cost next to nothing," the Times adds.
"A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers' mortgage bills right away and allow them to spend elsewhere."
The effect: "up to $85 billion in stimulus a year," writes Ezra Klein of The Washington Post.
Searching for ideas
At the same time -- and separately -- the administration is asking for proposals on how to dispose of foreclosures (.pdf file) owned by Fannie Mae, Freddie Mac and the Federal Housing Administration. The administration likes the idea of partnering with private investors on "bulk sales" of many homes that would be rehabbed and rented on the private market, says National Mortgage News.
Fannie, Freddie and the FHA own some 248,000 homes. Disposing of them is a complicated issue. Radar Logic, an analytics firm, says bulk sales could drive down home prices.
Leveraging low mortgage rates would be one tool that could meet all those requirements mentioned by the Times. Mortgage rates broke record lows last week. The average was 4.15% for a 30-year fixed loan. It was, USA Today reported, the lowest since 1971:
The last time long-term rates were lower was in the 1950s, when 30-year loans weren't widely available. Most long-term home loans then lasted 20 or 25 years.
This week, rates popped back up but only a little. A 30-year fixed-rate mortgage is at 4.22% on average and 15-year fixed mortgages are at 3.44%.
The details of the refi plan aren't nailed down. Its large-scale effectiveness would depend on the rules. For example, could delinquent homeowners take part? So far, rules for federal rescue programs have been so narrow that few homeowners have been eligible and the programs have not made a large impact.
"A mass refinancing plan would spread the benefits of the Federal Reserve's most important economic policy response, low interest rates, to more people," says the Times.
But refinancing would not touch one of the biggest problems of the housing crisis: Americans owe about $700 billion more on their mortgages than the homes are worth.
Only a principal "forgiveness" program would change that, by reducing amounts owed.
"If banks wrote down all underwater mortgages to market value and reﬁnanced the homeowners into 30-year, ﬁxed-rate loans at current market interest rates, that would pump $71 billion into the national economy," says a report by ThinkProgress.org, a progressive organization.
Government and banks have been unwilling to consider debt forgiveness, although Bank of America has begun reducing principal on some seriously underwater loans.
What refinancing could do, though, would be to get homeowners lower payments through lower interest rates. Also, they would get the choice of new, longer repayment periods that could lower payments still further.
Currently, few homeowners have been able to jump on the rock-bottom rates because the government agencies -- Fannie Mae, Freddie Mac and FHA -- require a borrower to have a minimum amount of equity in the home. (Your equity -- or your ownership share in the home -- is the difference between what the home is worth and what you owe. About 27% of all U.S. homes are in "negative equity" territory, according to this CNBC-Zillow report.)
Falling home values mean homeowners have less equity. Requirements vary by lender and program but, "as a rule, homeowners need an 80% loan-to-value ratio, or LTV ratio, to qualify for a refinance," says Bankrate.com, which tells here how to calculate your LTV and apply for a refi. Use MSN Money's refinance calculator to see your payments at today's rates. Post continues after video.
The heat's on
The pressure is on to do something. Not only is the 2012 election drawing nearer, but housing data are growing worse by the day:
- Prices of homes with government-backed mortgages fell 5.9% in the second quarter from the year before -- the worst drop since 2009.
- Even super-low interest rates haven't helped much. The National Association of Realtors blames low appraisals and homeowner stock market losses for an unusually large number of home purchases begun but then canceled.
- After decreasing, mortgage delinquencies are rising again.
- Home prices are likely to fall another 5% this winter.
Will this refi rescue plan gain traction? Writes the Times:
The proponents say the plan carries little risk because the mortgages are already guaranteed by Fannie Mae and Freddie Mac. They also say it makes those loans less likely to go into default and ultimately foreclosure.
Still, the Times adds, there may be opposition from the Federal Housing Finance Agency, which oversees Fannie and Freddie.
Klein, of the Post, thinks the refi plan is going nowhere because of practical and political problems that have made other, similar efforts ineffective.
"The likeliest outcome seems to be something between nothing and a diluted refinancing initiative that does much less than advocates hope and homeowners need," Klein says.
In short, don't wait for this refi rabbit to be pulled out of the hat. It may or may not happen. You may or may not qualify.
Better to seize what's available now. Consumer Action today published a thorough guide to every available foreclosure-prevention program, public and private. Included are links to legal resources, mediation and foreclosure alternatives, creative alternatives and last-resort options.
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