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.

harp.jpg

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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Comments
31 comments so far

This has Geithner’s paw prints all over it.

I was almost on the point of deciding that Peter Orszag was the poster child for #OWS.

But Timmeh is proving he’s even stupider than anyone could have imagined, even knowing his inability to find a capable accountant, or run the FRB NY as if it were an important job instead of an excuse to sup at the knees of Jamie Dimon.

At this point, he’s taking down Brad DeLong’s credibility with him. Which is probably minor, compared to the abject destruction of the greatest money-making country in history.

Posted by klhoughton | Report as abusive

What’s this obsession with being underwater? I get it that if you knocked $50,000 off someone’s mortgage balance and they refinanced the reduced amount, they would have more cash to live with. If you gave a renter $50,000, well they would have more cash to live with too. Ditto a non-underwater debtor. News flash: giving money to people makes their finances better. Why would the criterion of the value of an asset willingly pledged to secure a loan (long since spent) be how you go about deciding who to give money to?

Posted by Eric377 | Report as abusive

On the cover of the soon-released book “Way Too Big to Fail,” by Bill Frey and edited by me, we have a cartoon of Uncle Sam playing Mortgage Crisis Strategy Whack-a-Mole. The hammer is labelled “Loan Mods,” and Uncle Sam is frantically swinging that hammer at every issue that pops up. This is another example of the U.S. Government swinging the hammer of loan mods at a problem without fully understanding the issues at play. One of those issues is that the banks will not voluntarily participate if they hold second liens on the same property or it will otherwise be counter to their economic interests. The time for attempting voluntary compliance has long passed, and yet the feds continue to act as though they can induce drastic behavioral changes using the carrot rather than the stick. In “Way Too Big to Fail,” we detail the reasons that government fixes have failed and lay out in detail what must be done to fix the negative equity overhang on the housing market and overall economy. Hopefully, the book will find its ways into the hands of policymakers interested in actually having an impact.
- Isaac Gradman, The Subprime Shakeout, http://www.subprimeshakeout.com

Posted by igradman | Report as abusive

Felix doesn’t understand that the real world runs on cash flow. Net worth is a grossly artificial measure — really only of interest when you are trying to take a loan or sell an asset. All that really matters to most people is how much is left in their pockets after they pay their bills.

That is also true of businesses. A long-term shareholder should care far more about the underlying health of the business than about whether the stock is trading up or down this week.

Does HARP improve the household cash flow? If so, then it helps homeowners. They can refinance into a better deal than they had when they originally bought.

If living in your home more cheaply than before isn’t enough, then walk away from the loan. That is the perfect fix to the negative equity problem, no?

Posted by TFF | Report as abusive

banks must marvel at the fact that underwater homeowners keep, illogically, paying the mortgage.

until more homeowners with a (non-recourse) mortgage that is underwater just walk away, the banks will not consider principal reductions.

walking away immediately improves the (former) homeowners finances. it also forces the bank into a larger principal reduction, in a foreclosure sale, than they would have had to give to the former homeowner.

Posted by arrgh | Report as abusive

So they’ve refinanced nearly 1million homes and that is “pathetic”?

Doing major policy is so easy when one has a magical blog.

Posted by rootless_e | Report as abusive

Blaming Obama and the govt for trying to do something to help the people is not pathetic. I for one appreciate the fact that they are trying to do something to help people who couldn’t re-fi earlier. This is a start and I hope for better things to come.. I understand its your job to critique, but what would be more useful is if there was more ‘layman’ interpretation of the new initiative to help everyone understand it better.
Cheers
PS: (a slice of lime in the soda) really? that is quite pathetic

Posted by ninjakris | Report as abusive

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

Millions of these people have done everything right”

They did everything right? Really??

Are you trying to tell me ALL or MOST of these people dropped a 20% down payment on their house and got financing for loans with decent interest rates and buying a home they could actually afford??

I’ve heard a different story from people I actually know.
Most of them had NO down payment, limited income and ended up buying a home at sky high, artificially inflated prices anyway. Am I suppose to feel sorry for these people?

It seems as though the only way out of this mess is for housing prices to keep going up and up and up so they can make money. I’m sorry, but this is NOT sustainable even in a good economy.

A new generation of first time home buyers should be able to purchase a home that they can afford with a 20% down payment. How much do you think a 20% down payment is on a $350,000 house which is the average price in my area? How much do you think a mortgage payment is on that kind of money? These people are handing nearly ALL of their income over to a mortgage company and they wonder why people are broke?

I hope the banks stand firm on requiring a 20% down payment and the people work toward buying a home that they can actually afford. Yes, they bought an over priced home a few years ago but I find it impossible to believe that these homes will be worth less than the purchase price by the time they are done paying it off. They’re just going to have to stay in their homes for a little while longer.

Posted by 2Sly4U | Report as abusive

Well, well, well, if it isn’t America’s stupid, ignorant commentariat weighing in on something they know nothing about.

I can’t guarantee I’m the guy responsible for this – but I DID fax the White House (which ordinary folks can do) with this very suggestion.

How immoral is this refinancing of underwater properties with no appraisal and limited documentation? Very immoral!

So much so, it has been an option for any FHA or VA mortgage holder FOR DECADES. The appraisal isn’t required by reason of the borrower servicing his mortgage properly. The application is all of two pages long, and all the lender need to is run a credit report and and a couple of other simply verifications, and the rate is dropped.

Some tartlet was on Brian William’s Nightly News complaining that it wouldn’t restore confidence, wouldn’t put a floor under housing prices, wouldn’t restore the housing market or ANYTHING!

Posted by Flocktard | Report as abusive

“I find it impossible to believe that these homes will be worth less than the purchase price by the time they are done paying it off.”

So what if it is? If they make their payments faithfully for 30 years, they will own that home free and clear. The exact home they bargained for, at the exact price. Resale value is only important when you sell.

Posted by TFF | Report as abusive

Well, it wasn’t designed to. What it DOES do is help a few hundred thousand folks deleverage, which is the key to reviving the economy, because until the average American stops being leveraged to the tune of 120% of his income, I’m afraid this drag-ass economy isn’t going to go anywhere for a long, long time.

As far as 2sly4u is concerned, we’ve had low down payment mortgages since 1956- that was the year the Mortgage Guaranty Assurance company was formed, and people have been putting down 5% for home purchases since then. And since housing always correlated well with inflation over the years, no one got hurt, until a bunch of idiots at Goldman started feeding Fremont and New Century, and a whole bunch of other thugs billions of dollars and then got the SEC to drop their Net Capitalization rules.

GOING TOO FAST FOR YA, FELIX?

Anyone who lumps those folks in with the GSEs doesn’t know squat about the mortgage business. So most of these borrowers were probably legit, and that is the reason the program is being limited to agency paper. Not sub prime or non-conforming product.

This could free up 10s of billions in spending power or additional deleveraging. If the refinanced borrowers are REALLY smart, they’ll apply their monthly savings to pay down principle. (No one can charge you interest on principle you don’t owe)and they will wind up paying less for their homes than someone who bought years before the price run-up.

Whose pathetic now?

Posted by Flocktard | Report as abusive

Here’s another great complaint from Felix the Genius:

“If your mortgage was sold to Frannie after May 31, 2009, you’re out of luck.”

Who the hell is underwater on their mortgage if they bought their house after May 2009? Jesus, what a yapper!

Posted by Flocktard | Report as abusive

“Who the hell is underwater on their mortgage if they bought their house after May 2009?”

LOL! Well put, Flocktard.

Posted by TFF | Report as abusive

Flocktard, could that be referring to mortgages that might have been made in 2008, but sold to Frannie by the originating lender after May 31, 2009? If that’s the case, then there’s a good chance the mortgage could be underwater.

Posted by KenG_CA | Report as abusive

“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”

Felix,

You are being irresponsible for writing this as you are clueless about the issue with the mortgage crisis.

Most of those people CHOOSE to take out loans for homes that were way, way over priced. Their payments are high because they bought a house that was overpriced with no money down. WHAT PART OF THIS DON’T YOU UNDERSTAND??

Wake up Felix and face reality. You should be happy that Obama is doing anything at all. IMO, these people need to throw in the towel and go to foreclosure. There is no reason why us as tax payers, or me as a real estate investor should have to pay for their problems. I live within my means – they should too.

Posted by 2SLYFORU | Report as abusive

Could you provide some source for the claim that 11 million homeowners are underwater. It seems to be about 3 million higher than the number routinely quoted. You might want to visit Calculated Risk for some valid data.

Posted by TomLindmark | Report as abusive

@ KenG_CA

There are several issues that would prevent your scenario.

First, by 2008, the market had already declined sharply in price, and the kind of toxic lending that was going on dried up.

Second, for a lender to sell a loan one year after origination would have to mean that the lender held the loan in portfolio. Again, kind of remote at that stage of the game. I don’t think there were any left after the securitization racket got amped up earlier on.

Which brings us to a pet issue here. After the crash, everyone spoke eloquently about the dangers of “pro-cyclicality,” the tendency of the markets to fuel bubbles by ever increasing leverage, funding, and promotion. Now that most of the downside has melted away, and prices are at rock bottom, what are the banks doing now? They’re being “pro-cyclical.” Just as they recklessly fueled the market bubble, they are now fueling its decline by turning down anyone with a FICO score of less than 775. That is preposterously restrictive, and we will never clear the housing backlog and gain equilibrium if they continue doing this.

@ 2SLY4U

I would be careful about making accusations of “cluelessness” as your posts don’t seem to indicate any kind of knowledge of the market or the mechanics of the crisis.

Again, this program is limited to agency paper, which still has the lowest foreclosure metrics of any mortgage asset class. Non-agency lenders’ foreclosure rate is well over four times that of agency. You are accusing F&F of reckless underwriting that they did not do. While the GSEs weren’t perfect, like those borrowers, a lot of their problems were made FOR them, not BY them, and it wasn’t the borrowers fault that Bear, Lehman and Goldman had turned the housing market into a giant “pump and dump” scheme. Cheering borrowers into foreclosure is just plain asinine.

Again: the administration is deploying an option that has been available to any FHA or VA borrower for years- it is called a “Streamline Refinance” and it has been a commonly used tool for decades. Expanding this option to agency mortgages makes a huge amount of sense, and the more people who take advantage of it, the better off they, and the economy will be.

Mr. Salmon’s complaints about principle reduction ring hollow. While the banks were wholly complicit in creating and nurturing this disaster, along with enablers like Greenspan and Bush’s idiot SEC, there is a limit to what you can ask of them unless you want to liquidate them altogether. Its not enough to scream out demands like a street corner loon. Mr. Salmon often acts like the obnoxious drunkard who invades your conversation at your dinner table.

Posted by Flocktard | Report as abusive

It’s an even worse deal than you suggest here.
HuffPo: A key new condition in the plan would shift the financial liability for refinanced loans from Wall Street banks to the American taxpayer.

***

The newly expanded program would expunge legal liabilities associated with mortgages refinanced through the program for the original lenders of the mortgages. Each time a bank sent a loan to Fannie and Freddie, it certified that the loan met Fannie and Freddie’s safe lending criteria. But many loans sent to the mortgage giants did not, in fact, meet those criteria. Currently, when borrowers default on those ineligible loans, the mortgage giants can “put back” the resulting losses onto the banks that pushed the loans.

Under the modified plan, “put back” liability at banks will be erased for any underwater mortgage that is refinanced through HARP, eliminating Fannie and Freddie’s ability to sack lenders with losses in the event that the mortgage does not pan out.

If borrowers go through HARP, but decide after several months that the modest monthly savings do not outweigh owing tens of thousands of dollars more than their home is worth, taxpayer-owned Fannie and Freddie will have to take the full loss. Even if the original loan was sent to Fannie and Freddie with false or fraudulent guarantees from the bank — promises that may directly be tied to the borrower’s current financial problems — banks will be immune from liability. Fannie and Freddie plan to charge banks “a modest fee” to extinguish this liability, but the administration has yet to determine what that fee will be.

“In most cases people would probably be better off walking,” said economist Dean Baker, co-director of the Center for Economic Policy and Research.

Posted by Foppe | Report as abusive

KenG_CA, you beat me to it. Flocktard, Frannie are still buying loans, in fact they currently make up virtually all the market.

Posted by Danny_Black | Report as abusive

“Could you provide some source for the claim that 11 million homeowners are underwater.”

Feldstein’s article claims 15 million:
http://www.nytimes.com/2011/10/13/opinio n/how-to-stop-the-drop-in-home-values.ht ml?_r=2

Of course it depends on how you value the houses. It has no immediate impact on the people living in them and paying the loans.

Posted by TFF | Report as abusive

Regarding Foppe’s post, you have to take the reality into account here-it’s almost 2012, folks. If they haven’t walked by now, chances are the overwhelming majority are not going to, and the lowered payments surely incentivizes their staying. Some of the savings may not be “modest” at all. Again: the GSE foreclosure run rate is 6.2%, and the non-agency rate is over 28%, according to the FCIC.

And you’re never going to be able to put back every bad mortgage found back to the banks.

Posted by Flocktard | Report as abusive

@ Danny Black: The mortgage loan would not be held for a year. Aside from the fact that there are almost no portfolio lenders left in this country, although they may come back in the future, any loan originated these days is sold IMMEDIATELY.

Time was, if the loan was a bit of a stretch, the bank would hold on to it for a year, the first 12 months of a mortgage being the most default-prone statistically. This technique is called “seasoning.”

Posted by Flocktard | Report as abusive

The way my wife and I look at it, which is the way everybody should view it, is this.

Until you sell the asset, be it whatever, you haven’t lost money, nor are you losing money. It’s only paper until that point.

My house is now worth 100k less than what I owe. I bought in 2002, the market went up, I borrowed against the principal when high. The market went down. Now that second, 135k, is not supported by the value, but, I’m not looking for someone to bail me out. I’m not planning on selling my home. Unless you are, you’re tilting at windmills looking for free money.

I make every payment on time, but my house is worth less than the liens. Does that mean I’ve lost all that money? NO!! Does that mean that the guvmint should make me ‘whole’? NO!!

Why is no one out there explaining to these naifs that they should just keep making their payments, and shut up?
(rhetorical question)

I fail to grok the rationale for principal reductions in the open market. I don’t say free market for obvious reasons.

Should we and should we have held the banks to the same standard? Uh, yeah. but that doesn’t mean every swinging dick with a mortgage should get paid.

Posted by ostrom808 | Report as abusive

The way my wife and I look at it, which is the way nobody else should view it, is that we should be selling overpriced things to ostrom808. He believes that until he sells the asset, be it whatever, he will not have lost money until he sells it, nor is he losing money. It’s only paper. If he likes paying $100k more for something than its worth, I’m gonna sell him my used car — it’s a great investment at only $100k until he sells it. Of course, if I were making payments on a $100k loan for my car, I would tell the bank to come get it, buy a new car for $30k, and put the $70k in savings to better use. In fact, I would save so much, I could pay cash (which I’d have to do after ruining my credit) but I would be richer so who cares? But don’t anybody else try to sell things to ostrom808 until I get to him to buy some stuff first. Oh, and if he complains, tell him to keep making his payments and shut up.

Posted by erphous | Report as abusive

erphous, you have the wrong analogy.

Suppose you buy your new car for $30k, on loan, but (due to weak demand) the manufacturer begins a $5k rebate program the following month. Do you:

(A) Continue making payments on your $30k loan, happy to have a luxurious car to ride in. (At that price I *hope* it is nice.)

(B) Complain to the dealer that you deserve to get the lower price too.

(C) Stop making payments and hand the keys over to the dealership.

(D) Complain to the government that you deserve $5k of government assistance to help you pay the higher price.

Clearly the CORRECT answer is (D). Any right-thinking American would do the same. After all, we live in the “land of the free”. Which means, as I understand it, that we should be given whatever we want for free.

Posted by TFF | Report as abusive

Banks and the finance industry paid Millions and Millions to get Obama elected. He puts key banker Tim Geitner into position. Banks pull illegal foreclosures (robo signing) and don’t properly transfer title into CDO’s. But, government does not object. Instead, government bails them out to How much money. While homeowners, whose houses have devalued due to the financial mess caused by said banks. Banks don’t want to write down principal.

Elections are coming up, you need money. What would you do? Put stipulations on banks getting bailed out, or do what banks want?

Posted by pm94933 | Report as abusive

“Since Congress won’t do as they oughta
For folks who have homes underwater,
As Lender-in-Chief, I
Will back ev’ry refi
Allowed by executive order.”

Posted by DrGoose | Report as abusive

1 million refies in two years is pathetic when you consider there are 15 million underwater homeowners and it’s getting worse every week. I guess if your an Obama apologizer, it’s your ‘out of body experience’ that is to blame.
Lower the debt (really, not with gimmicks) and increase employment and the housing will recover on it’s own, but socialist don’t think that way.

Posted by EagleDriver | Report as abusive

@Eagle- I think there would be a huge problem reducing the interest rate for non-agency lenders. I’m no lawyer, but being that Fannie and Freddie are, in fact, government sponsored, it allows them to deploy this tool that again, was ALWAYS available to FHA and VA loans. Its a lay-up.

Lowering the Federal debt will not create one job. This is utter nonsense, and I don’t understand why people believe it. If you lower the PRIVATELY held debt held by the American consumer, that will help spur demand, which is what we need to get the economy going again.

Lastly, housing prices in many areas will never recover to their 2006-2007 peak levels, even if there are no socialists living in them.

(sheesh-how does this country survive?)

Posted by Flocktard | Report as abusive

People need to read deeper into this whole thing too. This program takes people’s non-recourse mortgages, which they could get out from under in bankruptcy some day if need by, and makes them recourse loans. This makes the banks very very happy!!! That means they can pursue these loans until they day you die, even garnishing social security payments. Also, Fannie and Freddie are going to remove all bank liability for improper underwriting or fraud on the original mortgage if the refinancing goes through. This makes the banks very very happy!!! Thousands of crimes will be wiped clean and any future liability will shift to the taxpayer. Wow, Obama really is the ultimate 21st Century Fascist.

Posted by chuckroste | Report as abusive

Wow, that last statement would make you the ultimate 21st centurty political illiterate!

First, whether loans are recourse or non-recourse is a matter for each individual state. Only 12 states are non-recourse. Secondly, if the loan has been serviced on time by the borrower for the past 12 months, and they’ve made it through the recession this far, I wouldn’t worry about the lack of putbacks. The damage has been done, and whatever fallout you’ve seen is all she wrote. It’s ALMOST 2012- there’s been more than enough time for a shakeout. If the borrower has been paying on time at this stage, its more than a good bet that the loan was originated properly.

Posted by Flocktard | Report as abusive
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