Refi Plan More About Stimulus than Housing

The Administration will release details on its mass refi proposal today, which is a bid to increase funds in the hands of homeowners at a low cost to the government.

Notice I didn’t say that it’s a housing policy. Because it isn’t. This is a stimulus policy, which could be effective depending on the scale. But refis do not save people’s homes, and certainly not underwater homes. That’s especially true because this is a program for current borrowers:

The plan aims to help borrowers who are current on their mortgages refinance into lower-interest federally insured loans. Borrowers would qualify even if they owe more than their homes are worth or if they have trouble securing a new mortgage from a private lender.

The proposal, which the president mentioned in his recent State of the Union address, is likely to spur debate over how aggressively the government should intervene in the flagging housing market. Also at issue: how to fund the effort’s estimated $5 billion to $10 billion price tag. The White House is proposing a tax on large banks—something Republicans have said they oppose.

The bank tax is going nowhere, but since we’re talking about $5-$10 billion, I think that can be found somewhere in a way amenable to a majority in Congress. In fact, if the Administration so chose, they could use unspent HAMP funds designed to help the housing market and already authorized from Congress.

That $5-$10 billion doesn’t mean that only $5-$10 billion of stimulus would go to homeowners in this scheme. It basically insures the FHA, which would produce the refis, against losses. But the FHA is in poor financial shape, and Congress may be loath to put any more burden on them.

So I’m loath to even discuss this HARP for everyone (HARP is the program that was recently tweaked so the GSEs could refi underwater borrowers), because I don’t see it really going anywhere. I do want to stress that this is an economic policy and not a housing policy. You have to have been current for six months on your payments to qualify, with no more than one delinquency in the previous six months. It’s an effort to get lower interest rates to the majority of the housing market, with the idea that the money they don’t spend on mortgage payments can get cycled into the economy. I think that’s a decent enough idea from an economic standpoint, though there would be losses for bondholders that would partially offset the gains from homeowners (I’d say the gains outweigh the losses from a multiplier standpoint). It will allow for more deleveraging of households. But it won’t save anybody’s home, and I’d argue that’s the bigger crisis.

The other point is that this wouldn’t help all that many homeowners. The real benefit would be to refi everyone in an almost mandatory fashion. Most current borrowers can already refi into new loans. By opening this up to current borrowers who don’t already qualify, you’re talking about maybe 3 million refis. And that’s eligibility, it doesn’t mean all 3 million will actually refi. And that could be less, if Congress puts a ceiling – say 140% – on how underwater borrowers can be and still qualify.

There’s also this back-door principal reduction effort:

The administration plan would encourage homeowners to use the savings from the lower interest rate to pay down the principal on their loans, rather than reducing their monthly payments. The government would pay closing costs for those who agree, officials said.

That would reduce the economic impact while increasing equity for these borrowers. As equity will help as a bulwark against foreclosure, that would actually be a help on housing. But I don’t know how many current borrowers would actually want to increase their equity in that way.

The President will also probably announce a plan for bulk sales of foreclosed properties owned by the GSEs, to investors who would rent them out. I need a few more details on this before I can comment. It doesn’t seem like this would make sense for investors except in the really distressed areas.

UPDATE: Here’s the White House fact sheet.

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