The U.S. Treasury Department and members of Congress are preparing to move forward with plans to expand government-backed refinancing programs to underwater homeowners whose loans are packaged in private-label securities.
Sen. Jeff Merkley, an Oregon Democrat, is drafting a bill modeled on a proposal he outlined last year to set up a federal trust to purchase or guarantee refinanced mortgages, according to two people familiar with the discussions who asked not to be identified because the bill hasn’t been introduced.
The trust, as described in Merkley’s earlier proposal, would provide relief to borrowers with privately owned loans and would probably be set up under the oversight of an existing housing agency. If Congress doesn’t pass such a measure, the Treasury is planning to step in to pay for rate modifications for those homeowners.
“We must continue helping as many responsible borrowers as possible refinance into affordable mortgages by taking advantage of today’s historically low interest rates,” Michael Stegman, counselor to the Treasury secretary on housing policy, said during a speech in Las Vegas on Jan. 29. “We must expand streamline refinancing to families whose loans are not guaranteed by the government.”
Treasury also is poised to approve a pilot program in Oregon that would use federal housing aid to purchase mortgages from private securities and modify the interest rates, a model that could be used in other states, according to two people familiar with the plan, who asked not to be identified because it hasn’t been announced.
The efforts come a year after President Obama called for a universal refinancing program in his State of the Union address. They could prolong a refinancing boom that may be stalling by creating new opportunities for some of the nearly 11 million so-called underwater homeowners who owe more than their properties are worth but are current on their payments.
Underwater borrowers who purchased homes when rates were above the current historic lows can often save hundreds of dollars a month if they refinance, adding to their disposable income and potentially stimulating the economy.
Nearly 1.8 million borrowers have taken advantage of the Home Affordable Refinancing Program for mortgages backed by government-owned Fannie Mae and Freddie Mac since it began in 2009. The Merkley plan would create a similar avenue for an estimated 930,000 borrowers whose loans are in private-label securities and who are current on their payments, according to the proposal outlined last year.
The proposal called for creating a federal trust to buy or guarantee mortgages, enabling borrowers otherwise ineligible for refinancing to obtain new loans with terms of either 15 or 30 years at lower rates.
Legislative efforts to expand refinancing programs failed to gain traction last year, largely because of disagreements between Democrats and Republicans over whether those bills would include broader proposals for housing finance reform.
“It feels as though we’re finally at a point at which we could put one of these plans into motion, but I don’t think that it’s going to be legislative,” Isaac Boltansky, a policy analyst with Compass Point Research and Trading LLC said in an interview. “I just don’t see Republicans in the Senate moving on a refinancing bill unless there’s the ability to put amendments on the bill relating to housing.”
Treasury believes legislation creating a refinancing program would be the most effective way to help borrowers, Stegman said in his speech. Nonetheless, officials are preparing a backup plan, he said.
Under that option, the government would pay the difference between the new and original interest rates to the owners of the loans for five years. Investors in private-label securities have sometimes objected to mortgage modifications because of concerns their income could be reduced.
Borrowers who are current on their mortgage payments and who owe at least 25% more than the value of their properties would be eligible for the program, which would reset their loans to the average fixed rate as determined by a weekly survey by Freddie Mac.
The extent of either the Treasury plan or a congressional solution would be limited, senior managing director Laurie Goodman of Amherst Securities Group LP said in a Jan. 22 note to clients. Goodman estimated that the proposal Merkley outlined in his paper last year would reach only 575,000 borrowers, while a Treasury rate modification plan would reach far fewer, about 150,000.
Another avenue for aiding borrowers would be through the use of a $7.6 billion Treasury fund to fight foreclosures in 18 states with the worst home-price declines. The Hardest Hit Fund, paid for with dollars from the Troubled Asset Relief Program, will be tapped by Oregon for its pilot program.
Oregon will start with about 50 borrowers in one county. Other states may try similar efforts, according to the people familiar with the project.
New efforts to expand refinancing won’t be limited to aid for homeowners with privately owned loans. Sens. Robert Menendez of New Jersey and Barbara Boxer of California, both Democrats, plan to introduce as soon as this week a new version of a bill that didn’t advance last year. It would expand HARP by promising lenders they won’t be forced to absorb the loss on refinanced loans that default.
“We’ve come five plus years since the onset of the crisis, and we have learned a number of painful lessons about how the modification and refinancing processes work,” Boltansky said. “Now, we’re in a better position to take advantage of some of these refinancing programs.”