Obama’s pathetic refinancing initiative

By Felix Salmon
October 24, 2011
announced with great fanfare today:

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HARP II is being announced with great fanfare today:

Across the country, nearly 11 million owe more than their property is worth.

Millions of these people have done everything right. They’ve paid all their bills and kept current on their home loans. But right now, they’re stuck with higher payments because their mortgages are underwater. They’re not eligible to refinance because the decline in home prices have made their property worth less than what they owe. And that’s a problem President Obama knows must be addressed…

Today, President Obama is taking action.

Sounds impressive, eh? It is, until you read the official FHFA press release. At which point you learn that

  • If you’re a homeowner whose mortgage isn’t owned or guaranteed by Frannie, you’re out of luck.
  • If your mortgage was sold to Frannie after May 31, 2009, you’re out of luck.
  • If you want to get out of negative-equity hell by doing a principal reduction, you’re out of luck.
  • If your bank doesn’t feel like participating, for whatever reason, you’re out of luck.

All of which is likely to result in not-very-much, as the FHFA itself concedes:

For many reasons it is very difficult to project the number of mortgages that may be refinanced under the enhancements to HARP, including the future path of interest rates, borrower willingness to undertake a refinance transaction and the number of lenders and servicers who choose to offer the program. Given current market interest rates, our best estimate is that by the end of 2013 HARP refinances may roughly double or more from their current amount but such forward-looking projections are inherently uncertain.

First, by the end of 2013? Never mind mortgage relief now, we’ll try and get you mortgage relief in two years’ time?

Secondly, the current pace of HARP refinancings is pathetic. This chart comes from the FHFA press release, and it shows that over the most recent four months for which we have data, we’ve been managing to do less than 30,000 HARP refinancings a month. And in the 28-month history of HARP, we’ve managed a grand total of 894,000 HARP refinancings, which works out to about 32,000 per month. Interestingly, the chart ends at August 2011, which means it represents exactly half of the total timeframe from the beginning of HARP to the end of 2013.

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In other words, the FHFA is projecting that the pace of HARP refinancings won’t increase at all as a result of this plan. We’ll still average out at about 30,000 per month — maybe a bit more, maybe a bit less, but you’re never going to make a dent in the mountain of 11 million underwater mortgages at that rate.

This whole exercise is so obviously pathetic that even above-the-fray central bankers are sneering at its inadequacy. Here’s NY Fed president Bill Dudley, today:

Problems in the housing market are a serious impediment to a stronger economic recovery…

Obstacles to refinancing and access to credit for home purchases are limiting the support provided by low rates to house prices and consumption. Meanwhile, the large supply of foreclosed homes for sale—and the prospect that unemployment and negative equity will continue to feed the foreclosure pipeline—continues to put downward pressure on home values. The risk of further house price declines in turn discourages would-be buyers from entering the market.

Continued house price declines could lead to even more defaults, foreclosures and distressed sales, undermining wealth, confidence and spending. Breaking this vicious cycle is one of the most pressing issues facing policymakers…

Stabilizing the housing sector is particularly important because housing equity is an important part of household wealth. This calls for a comprehensive approach to housing policy, starting with an urgent effort to remove the obstacles that make it difficult for all borrowers to refinance at today’s low mortgage rates, but extending beyond this to tackle other problems weighing on housing.

The best that Dudley can bring himself to say about HARP II is basically that it’s a start. Most importantly, it doesn’t do principal reductions — if you’re underwater when you get your HARP refinance, you’ll be underwater afterwards, too. The FHFA itself, in its press release, helpfully points out that for someone with a loan worth 25% more than their house, they won’t start building equity in their home for ten years if they refinance into a 30-year fixed-rate mortgage.

But the sad fact is that anything more substantive than this is likely to require Congressional approval, and therefore be a political non-starter between now and November 2012. The government’s done almost nothing to address the housing mess, and will continue to do almost nothing for the foreseeable future. Which, as Dudley says, bodes very ill for the economy as a whole.

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