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The President's Newest Refinance Plan

Posted by:  Chip Poli
2012-02-08 17:16:13

"This plan, which is paid for by a financial fee so that it does not add a dime to the deficit"

In his State of the Union Address, President Obama introduced a proposal to include non-GSE mortgages in a HARP Supplement Program.

In November FHFA or the Federal Housing Finance Agency, laid out its proposal to overhaul the under-utilized Home Affordable Refinance Plan. HARP was designed to allow home owners who are underwater (owe more than the value of their home) to take advantage of historically low interest rates by significantly loosening the standards of Fannie Mae and Freddie Mac (the GSE’s or Government Sponsored Entities) refinances.

HARP would now allow a home owner who had a Fannie/Freddie owned mortgage to refinance regardless of their Loan To Value Ratio, but met certain other standards. Previously the program was only open to owners who were less than 105% LTV.

The President’s Newest Plan


The initiative which at this point seems to be named “Blueprint for an America Built to Last” lays out a series of initiatives, some will need approval from Congress and others are expected to go into effect by Executive Order.

The new plan appears to have 6 primary objectives. Some aspects of the plan are far more clear than others but here are the main objectives according to the Whitehouse Fact Sheet.

1) Extending HARP features to non-GSE owned mortgages


Inclusion of non-GSE loans:

The goal is to reward homeowners, who are current on their mortgage, with the ability to refinance at incredibly low interest rates. Currently HARP only includes mortgages that are owned by Fannie and Freddie, the new initiative will include all sorts of non traditional types of mortgages by implementing and mandating that lenders allow a streamlined refinance process for the mortgages.

It is estimated that these good borrowers, will save an average of $3,000 per year and they will not be required to get an appraisal of their property or provide tax documents or asset statements to do so. In essence they will be allowed to refinance into long term fixed rate mortgages at market rates.

This program will sound familiar to FHA Lenders as this program is being mirrored after FHA’s Streamline Refinance Program, which has been in existence for decades.

The program will fall into the hands of the FHA and HUD as they have significant experience with their existing program.

Accelerating Amortization:

The plan will put certain incentives in the program for lenders who successfully encourage borrowers to use the monthly savings to amortize their loans faster by shortening their terms.

For instance, the plan describes a proposal where a Borrower who originally owed $300,000 and has has been in their home for 5 years, they have been on time and paying an interest rate of 6%.

If they were to refinance into a 30 year fixed they would save approximately $460 per month, the government would prefer they move to a 20 year fixed and instead of pocketing that savings, they are now amortizing (paying down principle) far faster.

The idea here is sound, however, we’ll see how many decide to refinance and shorten their term. To sweeten the deal a bit, the government would pay their closing costs on their behalf, directly to the lender.

Standardized Underwriting Procedure:

As part of the plan, the President will require that lenders all use a global and consistent standard to refinance these loans. Many lenders were sitting on the sideline or putting heavy restrictions on HARP refi’s because they did not want to be left holding the risk in the event the government fails to guarantee the mortgages in the future.

2) The Homeowner Bill of Rights


This part of the plan sounds like it may overlap a bit with the recent changes in regards to how mortgages are disclosed to borrowers.

Very simple and easy to understand disclosures, full disclosures of all fees, guidelines that would prevent conflicts of interest and more oversight of the foreclosure process.

This area is very important and it makes a lot of sense however, it will need to be balanced with the recent changes which are far too many to list here.

3) A Pilot Sale of Existing Foreclosed Homes


President Obamas Newest Refinance Plan

The government has found itself with a lot of spare real estate over the last few years as it took over failed banks and mortgage lenders. Specifically the FHFA, HUD and the US Treasury, who now own hundreds of thousands of homes which have been foreclosed upon.

The Real Estate Industry’s worst nightmare was the “shadow inventory” which has been threatening to be released into the already struggling market.

The plan will include the sale of these homes to private investors who pledge to rehabilitate and re-rent these homes to families. The idea here is that the renovations will put thousands of tradesmen to work and it will rid inner city areas of blight and crime.

This aspect of the plan is solid, assuming they can monitor these sales and the rent up process to verify the program is not open to abuse.

4) Strongly Urging Lenders to Allow a Full Year of Forbearance for Out of Work Homeowners


This part of the plan sounds like it may be tough. The President wants “major lenders” who have loans out to struggling homeowners allow up to 1 full year off from mortgage payments, providing they are “Looking for Work”.

The press release does not expand too deep on this aspect and it just sounds like it will be hard to police.

5) Pursuing a Joint Investigation Into Mortgage Abuse


Another aspect of the plan that appears to be overlapping with previously announced initiatives. The President’s proposal here is that additional resources will be given to the agencies investigating wrongful foreclosures, predatory lending practices, unfair lending practices and such.

However, anything that rids the earth of the unethical lending practices which caused the entire bloody mess, sounds pretty good to us.

6) Rehabilitating Neighborhoods and Reducing Foreclosures


Reducing Foreclosures:

HAMP or, Home Affordable Modification Program, is a loan modification program which sets modification standards which major banks and lenders were required to adhere to upon notification to the bank by the borrower that they were either behind or about to fall behind on mortgage payments.

Under the program which assisted 900,000 homeowners, the process proved cumbersome and generally difficult for lenders to adhere to due to shear volume of requests coming in after the plan was announced.

The new plan would make a modification more attractive and theoretically improve the rebound rate of these homeowners. Today lenders are incentivized to reduce the principle balance on these mortgages that are being modified, the President seeks to triple these existing incentives in order to increase the number of occurrences where a borrowers balance is reduced to meet guidelines.

The President would seek to expand the program to be more standardized and increase certain incentives to the banks for modifying these struggling mortgages. Further, many modifications under existing HAMP rules added significant principle balance to the original mortgage, which proved to be counterproductive and recidivism (re-default) rates were incredibly high.

Another aspect of the existing plan which is slated to be overhauled is the debt to income ratio requirement of 31%, the President seeks to loosen this aspect of the HAMP program.

In its present state HAMP is only open to borrowers who occupy the home as their primary residence, the new plan would open the program up to struggling landlords for their investment properties.

Rehabilitating Neighborhoods:

As part of the American Jobs act, the plan is to introduce $15 Billion in funds to hire new tradesmen to rebuild entire neighborhoods that have been hardest hit by the housing crisis.

Areas that have been noted as having very high foreclosure rates would be targeted and the private sector would bring their expertise to the program and the focus would be on residential property types as well as commercial buildings.

An additional $1 Billion will be in the budget from the Housing Trust Fund which will be dedicated to improving the availability of affordable housing.

 

This Plan Makes Sense


On paper.

The unfortunate side is that this type of sweeping reform costs a lot of money. Money that the United States does not have right now. On top of that, when there is this much money floating around on the tax payer’s dime, it is unlikely that greed and crooked behavior won’t find its way in.

However, according to the White House Fact Sheet, the entire plan will be funded by moneys already in the budget and the majority of the necessary funding will come from additional fees placed on major lending and financial institutions.

There is no mention of exactly how these fees will be charged or who exactly they will charged to but, it is presumed that banks that engage in riskier behavior will pay more than those that don't.

Hopefully this doesn't lead to major lending institutions raising their interest rates and premiums higher to the point of near counter-productivity.
"This plan, which is paid for by a financial fee so that it does not add a dime to the deficit"

I guess we’ll see…at this point we can only be optimistic!

You can learn all about this plan in more detail at WhiteHouse.gov

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