U.S. Refinance Fix Viewed as Unlikely to ‘Shock and Awe’ Economy
Nevada homes
An aerial shot of homes in Nevada
An aerial shot of homes in Nevada
U.S. President Barack Obama, who tours foreclosure-ravaged Nevada and California this week, may face homeowners demanding bolder action as regulators prepare to release details of new housing proposals as early as this week.
Lawmakers and analysts briefed on plans by the independent Federal Housing Finance Agency estimate they will help less than 1 million borrowers -- and perhaps as few as 600,000 -- of the 11 million whose mortgages are higher than the value of their homes.
Edward J. DeMarco, acting director of the FHFA, is preparing to unveil changes to the Home Affordable Refinance Program, a three-year-old effort that allows borrowers to take new loans for as much as 125 percent of their home value. DeMarco has said his fix will be more of a tune-up than an overhaul, with reduced “frictions” and “enhancements.”
“To have true shock and awe that would jump-start the economy you need a lot more than 600,000 additional refis,” said Jaret Seiberg, a Washington-based financial policy analyst with MF Global Holdings Ltd.
Almost three years into his term, Obama has failed to halt the slide in home prices and the rising tide of foreclosures that began in 2007 and reached a record 2.9 million filings last year.
The prospect that Obama himself may announce the FHFA move is “sure to fuel speculation that the plan will be bigger than people are pricing in,” Edward Mills, an analyst with FBR Capital Markets Corp. in Arlington, Virginia, wrote in a research note last week.
‘Taking Credit’
“Our Washington contacts believe that presidential announcement or not, the refi program is still going to be modest and this is just Obama ‘taking credit,’” Mills wrote.
Obama introduced HARP in 2009 in a bid to prevent defaults among borrowers who have little or no equity in their homes and thus can’t qualify for refinancing. The goal was to stimulate consumer spending by allowing those homeowners to lower their interest rates and reduce their monthly mortgage payments.
Fewer than 895,000 borrowers have been helped by the program, far short of the nearly 5 million originally targeted. Most of those who got help had equity in their property.
While details of the program’s improvements remain under wraps, DeMarco told lawmakers this month that he was considering expanding HARP to borrowers who are more than 25 percent underwater.
Raising the 125 percent loan-to-value ratio may have limited impact, because fewer than 20 percent of HARP borrowers have loans worth between 105 percent and 125 percent of their property values, according to FHFA data. The rest have equity or are only slightly underwater, according to the FHFA data.
Fannie, Freddie
The program extends to loans owned or guaranteed by Fannie Mae and Freddie Mac, the two government-controlled mortgage companies that DeMarco oversees.
Lenders don’t have to make loans even if Fannie Mae and Freddie Mac have promised to guarantee them, and most aren’t, said Bose George, an analyst with Keefe, Bruyette & Woods Inc. in New York.
“Originators are afraid of these loans,” George said. “It’s almost by definition a high-risk loan.” They fear refinancing higher-risk borrowers could trigger scrutiny from the government-sponsored enterprises, which can revoke guarantees if a loan sours or flaws are discovered.
A waiver from such potential violations would be needed to get lenders on board, George said.
Political Risk
“There is a political risk to just waiving them. It could be seen as a gift to the banks,” he said.
Investors, nonetheless, are braced for change. Returns on Fannie Mae and Freddie Mac mortgage-backed securities have trailed those on Treasuries by about 2 percentage points since the end of June, according to Barclays Capital index data.
Homeowners in Nevada, meanwhile, are hoping for relief, said Lon DeWeese, chief financial officer of the state’s housing division.
“Bold action by the president would be warmly received,” DeWeese said in a telephone interview.
To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.
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