Dennis' Mortgage Blog

Today President Obama announced the lasted plans from his Administration to deal with the housing market.  Getting the most attention is the latest refinance plan to help home owners who are upside down on their mortgages, i.e. they owe more than their homes are worth.  With plans already in effect that assist many upside down borrowers who received loans from Fannie Mae or Freddie Mac prior to April 2009 and all FHA mortgagees, the new plan aims to also assist home owners with mortgages that were non-conforming (i.e. not Fannie or Freddie) or FHA loans.

The basic part of the plan is that eligible home owners, broad stroke eligible being FICO scores of 580 or higher and no late payments in the last six months, could refinance using FHA mortgages up to 140% loan to value and the maximum loan limit for their area.  With FHA rates below 4% for many home owners this plan will save them money even with the high cost of FHA mortgage insurance. As an additional incentive for those who agree it appears the latest Obama plan would have the government paying closing costs for the transaction if the homeowner agrees to continue making their same payments on the new mortgage to accelerate principal reduction. 

The estimated cost of the plan is $5 to $10 billion, which is where the first major problem comes into play on the plan.  Where does the money come form to pay for refinancing all these home owners?  The Administration is proposing a tax on major banks to fund the costs. 

Already this year we saw Congress have new home mortgage applicants pay for the temporary payroll social security tax reduction by raising fees charged by Fannie and Freddie, now the President is asking Congress to legislate that "major banks" pay for refinancing their current paying customers and lose that loan revenue by paying a special tax.  If this is passed guess who ultimately pays the tax that will be charged?  If you said the banks customers you are correct.

The second problem is the use of FHA for the program.  FHA currently has approximately $1.1 trillion in mortgages it is insuring and capital reserves against unexpected losses of only $1.2 billion.  Under Obama's plan hundreds of millions of new mortgages that are upside down would be added to FHA's balance sheet, making it even more undercapitalized according to its charter from Congress which would most likely result in another increase in mortgage insurance for future borrowers.  So not only would banks' customers be paying for the refinance plan but so would future home buyers who need FHA financing to purchase their new homes.

Two other announcements that will get lost in the reporting of the major refinance proposal are one that makes sense and one that adds yet more paperwork to an already burdensome process. 

The make sense idea is to allow Fannie, Freddie and FHA to have auctions blocks of foreclosed properties to investors who would maintain them as rental housing.  The bulk auctions would clear the balance sheets of the agencies, would not have major market impacts for local housing prices and would convert eyesore properties into liveable residences.  Slowly the investors would put their inventory on the open market as real estate prices stabilize and they can profit from their investments.

In 2010 HUD instituted a new  Good Faith Estimate that is intended to provide clarity to mortgage applicants and show the fees involved in a transaction.  The form replaced the old Good Faith Estimate that on a single page showed every fee applicants paid and created a three page form that is very confusing.  In his announcement today, Obama announced a borrower "bill of rights" that would include a newer and supposedly simpler form for borrowers to understand their loan terms.  Currently in California we have the California Mortgage Broker Disclosure Agreement of three pages outlining every fee and terms of the mortgage, the Truth In-Lending form which shows the APR for mortgages and the terms, the Good Faith Estimate which shows fees aggregated in separate sections and the loan terms and is three pages and the Fee Worksheet which is one page and shows all the fees on the loan, the total funds to close and breaks down the monthly payment.  Evidently this is not enough so another simpler form will be created by government bureaucrats to aid home loan applicants.

The refinance plan as it stands now is, to quote Rep. Scott Garrett (R-NJ) who heads the House subcommittee on capital markets, "dead on arrival."  The House has said it will not pass any legislation that includes taxing banks to pay for it, and members are very concerned about adding more risk to FHA's undercapitalized balance sheet.  Knowing the plan is DOA in the House, President Obama's announcement appears to, shockingly, have political overtones more than practical ones so he can go to the campaign trail and denounce a do-nothing Congress who refuses to help middle class Americans struggling to make their mortgage payments. 

In the meantime interest rates are incredibly low and opportunities are available for many to refinance and lower payments and interest rates.  Call me to discover if you are eligible under current programs to save on your mortgage.