This morning, on a conference call with reporters, HUD Secretary Shaun Donovan and Director of the National Economic Council Gene B. Sperling discussed the Federal Housing Finance Agency’s announcement on changes to help more homeowners refinance. As part of President Obama's executive action push on the economy, this is an effort to provide economic stimulus and stabilize the housing market.
This is not a loan modification plan, in that it doesn't create a direct mechanism for the home values to be realigned with actual market value—it doesn't include any principle reduction, but is instead intended to eliminate some of the barriers homeowners who are current on their mortgages but still underwater face when trying to refinance to take advantage of low interest rates. Using the existing Home Affordable Refinance Program (HARP), it will reduce many of the costs of refinancing, by either eliminating or reducing many of the closing costs and fees—appraisals, title insurance, loan processing—for homeowners.
But it also, critically, will waive the representations and warranties that lenders are required to provide in making new loans. Banks have been reluctant to take on refinances because the paper trail on so many mortgages is either lacking or potentially fraudulent.
"Removing reps and warranties has the potential to unleash competition for housing refinance," Sperling said on the call. It makes taking on loans less toxic, and opens up new potential business for banks.
Homeowners must be making on-time payments and be current on their mortgage that is owned or guaranteed by Freddie Mac/Fannie Mae. The loan also has to have been originated or have been sold to Fannie Mae or Freddie Mac before June 2009. The loan cannot have been refinanced under HARP previously, unless it is a Fannie Mae loan that refinanced under HARP between March and May of 2009. Additionally, the current loan-to-value (LTV) ratio for the property must be greater than 80 percent.
Donovan said that the administration estimates participating homeowners could save potentially more than $2,500 annually on interest payments, saying, "It's the equivalent of a substantial tax cut for these families." In that sense, this program is more economic stimulus than a housing program, which is key. Coupled with another administration initiative, Project Rebuild, the program could inject some life into the nation's housing market. The latter program is a $15 billion fund to rehab vacant and foreclosed residential and commercial properties. Its prospects are a little unclear, as it's part of the larger American Jobs Act Republicans have already rejected.
Sperling said that the administration wouldn't speculate on the number of homeowners who would participate, saying that "such forward-looking projections are inherently uncertain." That's a smart approach, given the relative failure of the existing HARP program until now and the very real failure of HAMP. He did, however, say that the Federal Reserve had estimated that as many as four million borrowers could potentially qualify for the program.
Both officials stressed that the number one issue for getting the economy moving again, and that includes the housing market, is putting America back to work. Donovan stressed that the "single thing pushing people into foreclosures is unemployment," and that action on jobs is critical. Sperling, saying that the administration "wants to attack" the issue "on all fronts," didn't rule out other legislative efforts.