President Obama held a rally yesterday in Falls Church, Virginia, where he provided more details concerning his plan, mentioned briefly in his state of the union speech, to stabilize the housing market. The centerpiece of the plan is a new program that would expand HARP to many homeowners whose loans are not backed by government-owned Fannie Mae and Freddie Mac, enabling them to refinance even if they don’t qualify under traditional lending standards.
The new program would be run out of the Federal Housing Administration and would be open to all non-Fannie- and Freddie-backed borrowers who meet the following criteria:
- Are current on their loan for the past six months and missed no more than one payment in the six months prior to that;
- Have a FICO score of 580 or better;
- Have a loan that is no larger than the FHA conforming loan limits in their area;
- Have a loan for a single family, owner-occupied, principal residence; and
- Have a loan-to-value ratio of 140 or less (what they owe can be no more than 40% more than what their home is worth).
Those who are more deeply underwater would need lenders to write down some of the value of their mortgage before qualifying for an FHA-backed refi. The thinking is that the probability of default is particularly high when a mortgage is that far underwater, giving the lender far more incentive to reduce the principal in return for an FHA guarantee.
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The plan, as outlined by the White House, represents an expansion of the existing HARP program to all “responsible” homeowners who have been unable to refinance through no fault of their own. By helping homeowners refinance, the administration hopes it can prevent potential foreclosures and give an added jolt to the economy by putting extra money in consumer’s pockets. The President estimated the total cost of the initiative would be between $5 and $10 billion, paid for by a tax on the nation’s largest financial institutions.
In a somewhat new twist, Obama’s plan will incentivize homeowners to refinance into shorter-term mortgages that maintain similar monthly payments but would help the homeowner build up equity in their homes faster.
Another new initiative included in the plan is a “Homeowners Bill of Rights” which would set a single, federal standard for mortgage forms and fee disclosures and create safeguards against abusive or manipulative practices by servicers. In his speech the president presented the audience with a three-page mortgage form that would be the model that all lenders must follow.
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Though these proposals are by no means unserious, they call for a new tax on large financial firms and further government intervention in the mortgage market — both non-starters for congressional Republicans. As a result, they are likely to be more effective as a political tool than at fixing the housing crisis.