Obama’s mortgage refinance plan, announced Wednesday, is unlikely to produce the benefits the president anticipates as it probably will never get off the ground.
The plan requires congressional approval, which is essentially an impossible task in the turbulent political environment. If that wasn’t enough, the administration can’t even get the FHFA to bend to its will – and it doesn’t require congressional approval to act.
Congressional Republicans are already reacting negatively to the proposal, and for several reasons.
First, the proposal places risk squarely on the FHA, which already has an enormous share of the mortgage market and may not be prepared to take on more risk.
Second, the program won’t have a major effect on default rates, since it’s targeted at homeowners least likely to default.
“[Those that would qualify] are all current on their payments, presumably employed, and are no more than 40% upside down,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings. “The program will do nothing to stimulate more home buying activity, nor will it have any impact on deteriorating home prices.”
Third, and probably most salient, is that Obama has proposed paying for the plan (which will run anywhere from $5 to $10 billion) with a new tax on major lenders, which the GOP will certainly not approve.
The tax would cover closing fees for borrowers who refinance into a loan with a 20 year or shorter term with a comparable mortgage payment, and would cover the risk taken on by the FHA. And while new taxes are already guaranteed a big “no” from congressional Republicans, Barclays Capital research points out that most homeowners won’t even take advantage of the paid-for closing costs.
"While on the margin some seasoned borrowers will find it advantageous to do so, in general we expect few to adopt it as payment reduction is usually more attractive, in our opinion," they say.
All things considered, Sharga said he believes the refinance program to be nothing more than “political theater,” and I tend to agree. It’s difficult to imagine that the president actually believes this can pass through Congress. This may just be a political strategy to make it seem like the administration is fighting for homeowners instead of an actual attempt at remedying the floundering housing market.