Obama Answers Bernanke Plea With Refinancing Plan: Mortgages

President Barack Obama answered Ben S. Bernanke’s appeal for more action to fix the U.S. housing market that’s restraining the economic recovery by proposing a plan to help borrowers reduce their monthly mortgage payments.

Obama is sending Congress legislation that would allow homeowners to tap record-low borrowing costs, potentially boosting housing as he seeks re-election this year. The proposal could save participants about $3,000 a year, Obama said in his State of the Union speech to Congress.

Even with unemployment at the lowest level since February 2009 and housing sales increasing, homeowners have been blocked from refinancing by house prices that are 32 percent below their 2006 peak and tightened bank lending. While parts of the plan may face opposition in a divided Congress, and it’s important to see details, the approach is “a big step forward,” said Christopher Mayer, a Columbia Business School professor.

“It’s going to help homeowners who are struggling and it’s likely to be a first step to really opening up the market to more normal credit standards,” said Mayer, who along with fellow Columbia professor Glenn Hubbard first proposed a mass refinancing program in 2008.

The proposal follows Federal Reserve Chairman Bernanke’s call for lawmakers and the Obama administration to offer more aid for housing as the U.S. central bank helps to push down rates on 30-year loans to 3.88 percent for homeowners who can qualify. The Fed, which is holding short-term borrowing costs near zero and buying government-backed mortgage bonds, said in a paper sent to Congress this month that a previous administration effort to make refinancing easier had failed to go far enough.

‘No More Runaround’

Last night, Obama promised to eliminate obstacles that prevented homeowners from refinancing.

The program will give “every responsible homeowner the chance to save about $3,000 a year on their mortgage by refinancing at historically low interest rates,” Obama said. “No more red tape. No more runaround from the banks.”

Costs would be covered by a fee on financial companies with more than $50 billion in assets, according to two senior administration officials who briefed reporters on the plan. Obama said “a small fee on the largest financial institutions will ensure that it won’t add to the deficit.”

The initiative will also apply to all borrowers, whether or not their loans are currently government-backed, with details still to be worked out, according to the officials, who spoke on condition of anonymity.

The plan “sounds close to impossible to get passed,” said Bryan Whalen, co-head of mortgage bonds at Los Angeles-based TCW Group Inc. which oversees $118 billion.

Election Cycle

“The president clearly understands the chances of passage this year are close to zero because there’s no appetite to increase the credit risk at the government,” said Joshua Rosner, an analyst at the New York-based research firm Graham Fisher & Co., in a telephone interview. “Welcome to the election cycle.”

Obama’s speech came as Republican Presidential candidates campaign in Florida for next week’s primary. The state had the seventh-highest rate of foreclosure filings per household in 2011, at one in 49, according to RealtyTrac Inc., an Irvine, California-based data seller.

Obama also called for the highest U.S. earners to pay at least 30 percent of their income in taxes, building on his election-year focus on what he terms economic fairness.

The U.S. economy is forecast to grow at a 2.3 percent rate in 2012, according to the median estimate of 70 economists surveyed by Bloomberg News.

Property Values Slide

Housing’s share of gross domestic product, including household spending on related services like utilities and rent, declined to 15 percent in the third quarter from 18.6 percent in 2005, according to the National Association of Home Builders. An S&P/Case-Shiller index of property values in 20 cities dropped 32 percent from its peak in July 2006.

In 2009, Obama created the Home Affordable Refinance Program, or HARP, for loans guaranteed by government-supported Fannie Mae and Freddie Mac with little or no home equity. After the initiative reached less than a quarter of the 4 to 5 million homeowners projected by Obama, the president pushed the companies for adjustments. The resulting changes, including lower fees and lessened risks for lenders, started last month.

While the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, said the changes might double HARP’s reach, the Fed paper said policy makers should consider expanding it further.

Trade Off

As many as 2.5 million loans not guaranteed by the two companies could otherwise be eligible to refinance under the program, according to the paper. About 11 million U.S. homeowners owe more than their properties are worth, with roughly 8.5 million of making their mortgage payments on time, according to Credit Suisse Group AG research.

The Fed’s paper suggested Fannie Mae and Freddie Mac could provide the new loans, with the trade-off being that they would be taking on more risk and policy makers could find it harder to later scale back their roles in the market.

The government may also rely on the Federal Housing Administration to help implement the plan, said Alan Boyce, head of the George Soros-supported Absalon Project. Boyce has been advocating for mass refinancing of government-backed loans, saying it would lower defaults and aid consumers.

While taxpayers should only take on additional credit risk if they get paid appropriately for doing so, policy makers should keep in mind that if enough defaults are avoided through lowered payments, housing could be revived, further limiting the costs the government is already set to bear, he said.

“That’s the elephant in the room,” Boyce said.

Republican Support

Boyce said he believes Republicans lawmakers may support Obama’s legislation because their constituents are among those who would benefit the most.

“Some of them are from California,” which is among the states that have suffered the most-severe home-price declines “and they appreciate the issues,” Boyce said in an interview in Las Vegas at the American Securitization Forum’s annual conference. Boyce is also a former executive at Countrywide Financial Corp., the top-ranked home lender bought by Bank of America Corp. in 2008.

Mayer at Columbia said that more than 10 million borrowers could be helped if Obama lifts barriers for refinancing mortgages owned or backed by Fannie Mae and Freddie Mac.

Obama has twice in the past two years proposed fees on financial institutions similar to the ones he wants to use to fund his refinancing plan. Both times, the proposal wasn’t taken up by Congress.

Damage High-Coupon Bonds

If enacted, the effort may damage investors in government-backed mortgage bonds by more quickly paying off securities with high coupons and limited default risk, while aiding holders of other home-loan securities and banks.

Word that Joan Milligan, a homeowner who has used HARP, was invited by Obama to the speech, yesterday roiled the market for Fannie Mae and Freddie Mac securities, according to a note to clients by Bank of America Corp.

Fannie Mae’s 6 percent securities, whose underlying loans’ rates average about 6.5 percent, yesterday trailed similar Treasuries by 0.1 cent on the dollar, according to data compiled by Bloomberg. Government-backed mortgage bonds had outperformed Treasuries by 0.4 percentage point this month through Jan. 23, the best excess returns since June, Barclays Capital index data show.

Prices on Fannie Mae’s 6 percent securities fell 0.1 cent to about 109.7 cents on the dollar, as of 10:54 a.m. in New York, according to data compiled by Bloomberg. That’s down from 110.3 cents on Jan. 10 and is at the lowest level since Dec. 6 based on closing prices.

Reducing Principal

Government-enabled refinancing could boost securities without government backing tied to so-called Alt-A loans by between 7 cents and 9 cents on the dollar, according to a Jan. 19 report by Glenn Schultz, head of residential-mortgage bond research at Wells Fargo & Co.’s securities unit. Alt-A loans fall between prime and subprime in terms of expected defaults.

Obama didn’t propose reducing principal on mortgages to aid borrowers, an initiative backed by Federal Reserve Bank of New York President William C. Dudley, Amherst Securities Group LP analyst Laurie Goodman and California Attorney General Kamala Harris.

The FHFA said this week that principal forgiveness on Fannie Mae and Freddie Mac loans would cost the companies almost $100 billion, while Amherst’s Goodman reiterated during the gas conference her projection that distressed property sales may swell to 10 million without widespread use of the tactic.

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