In his recent State of the Union address, President Obama laid out a “Blueprint for an America Built to Last,” calling for, among other things, action to help responsible borrowers and support a housing market recovery.
In October of 2011, the Federal Housing Finance Agency announced changes to the dragging Home Affordable Refinance Program in an effort to attract more eligible borrowers to participate. HARP’s refinance program enables borrowers who owe more than their home is worth to take advantage of low interest rates and other refinancing benefits. This program is only applicable to homeowners with mortgages backed by Fannie Mae and Freddie Mac. In the last two years, HARP has only accounted for $1 million in refinances.
In President Obama’s new blueprint, he is proposing that HARP be expanded to include 3.5 million additional homeowners with mortgages owned or backed by banks, hedge funds and other non-government institutions. Herein lays the problem…In order to make the proposed expansion work, the Federal Housing Administration would have to change its existing refinancing guidelines so it could guarantee those new mortgages to include privately backed loans.
This proposed expansion may sound good but is President Obama looking through “rose colored glasses” again? When the administration implemented the HARP changes last fall it did not need congressional approval since it was only applicable to Fannie and Freddie (i.e., government) backed loans. Since the FHA (a government entity) will be backing non-government loans in the new plan, it will require congressional approval; and that is not likely to happen. But wait, there are even more kinks in the plan. First, even with the expansion, HARP will do nothing for homeowners who are currently on the verge of losing their home. Second, the proposed expansion may ultimately cause the FHA to need a bailout. The price tag for this new expanded HARP is estimated to cost between $5 billion and $10 billion. The loan reserves to cover the increased risk to the FHA would come from a fee on the largest banks and financial institutions, but is that enough? An independent audit currently puts the FHA’s current loan loss reserves at 0.24%, which is far below the target of 2% for the existing $1.1 trillion in insured mortgages. With reserves already below safe levels, the addition of non-government backed loans increases the risk faced by the FHA. Potentially, should housing prices decline further and borrowers continue to default, the FHA may need a government bailout, resulting in a crushing blow to our already hemorrhaging housing industry as well as increasing the country’s dangerously high deficit.
In his recent remarks on housing and the Homeowners Bill of Rights at the James Lee Community Center in Falls Church, Va,, President Obama stated, “The housing plan we launched a couple years ago has helped nearly 1 million responsible homeowners refinance their mortgages. And they’re saving an average of $300 on their payments each month—$300—which is great. But I’ll be honest—the programs that we put forward haven’t worked at the scale that we hoped.” That’s a gross understatement of what people in the housing industry are painfully aware of. Granted helping 1 million homeowners stay in their homes is admirable. But, when compared to the 11 million households currently underwater that were eligible to take advantage of the administration’s initiatives, the results are painfully inadequate. The outlook does not appear much brighter, as 7.6 million residential properties have been foreclosed on since the housing crisis started and another 7.4 million are predicted through 2016.
While it is likely Congress will dig their heels in and disagree about HARP expansion, sadly once again at the expense of underwater and/or out of work homeowners and taxpayers, all hope is not lost. What is needed in this election year is someone to step up and introduce a bold new plan of action.
Diane Gozza is executive vice president, business development, Integrated Mortgage Solutions, Houston.