Analysts: Refinancing Plan ‘Dead on Arrival’?

White House officials are optimistic that the new refinancing plan outlined by President Barack Obama on Tuesday night will be enacted into law. There are few details so far, but Mr. Obama said in his speech that he would send Congress a plan “that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates.”

Most analysts, however, are skeptical. They don’t give the refinancing plan much of a chance of winding its way through a deeply divided Congress, especially during an election year.

Here’s a sampling of their views:

Edward Mills, analyst, FBR Capital Markets: “We believe that this program would be dead on arrival in Congress, as congressional Republicans are opposed to additional intervention in the mortgage market and are philosophically opposed to a bank tax. This should be confirmation that the administration realizes that a mass-refinance program can only be achieved by legislation and not by regulatory fiat.”

Jaret Seiberg, senior policy analyst, Guggenheim Securities: “The question is whether Congress will enact this into law. To us, that is a very high hurdle in an election year. Republicans will be loathe to give the president a political win and we expect they will portray this as a policy that rewards the irresponsible at the expense of the responsible. Yet one should not dismiss this idea outright. We believe it may be far less expensive for the government than the market may believe. That could make it difficult for Republicans from states still suffering from housing woes to object.”

Alec Phillips, economist, Goldman Sachs: “While the universe of eligible borrowers isn’t entirely clear, this implies that the legislation might go beyond refinancing loans backed by Fannie Mae and Freddie Mac and could also allow refinancing of loans held by investors or banks. Given the stalemate in Congress on most housing-related issues at present, the fact that the president is seeking congressional approval should probably be interpreted as a sign that the administration has taken its own refinancing efforts as far as it can without legislation.”

Issac Boltansky, policy analyst, Compass Point Research & Trading: “While the details of the plan were almost nonexistent, the broad contours of the plan lead us to believe that the likelihood of successfully enacting it are exceptionally low. We are concerned that the proposal would have to be enacted legislatively, that it would call on the government taking on much more mortgage risk, and that the corresponding proposed bank tax will serve as a political wedge.”

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Six Questions on Obama’s Mortgage Refinance Proposal

Reuters

President Barack Obama said Tuesday night in his State of the Union address that he would send a plan to Congress to allow all homeowners who are current on their mortgages to refinance. Here’s a quick look at the proposal:

How is this program different from the refinance initiative that was announced three months ago?

In October, the White House said it would change an existing program that allows homeowners with mortgages backed by Fannie Mae and Freddie Mac to refinance. That program has been up and running for years, and the White House was able to make the changes administratively, meaning they didn’t have to go to Congress for approval.

The latest initiative will not be limited to borrowers with Fannie and Freddie backed mortgages, though the full details of what loans will be eligible have yet to be released. It isn’t clear, for example, whether loans that don’t meet the criteria for the existing Home Affordable Refinance Program would be eligible for this new plan.

When will borrowers be able to refinance?

Unlike some previous efforts, this program will require Congress to pass legislation, and that’s a tall order given the current gridlock in Washington. Senior Obama administration officials said they believe there could be bipartisan votes for such a measure, but recent comments from some Republicans about the prospect for any major legislative proposals this year suggest otherwise.

How would refinancing work under this program?

Details haven’t been announced, but the most likely venue for such refinancing is the Federal Housing Administration. The latest idea would allow any borrower that has been current on their mortgage to refinance, regardless of whether they owe much more than their home is worth or whether their income has fallen since the last time they refinanced. To refinance those borrowers through FHA will require Congress to change the current requirement that borrowers have at least a 3.5% down payment.

Haven’t similar programs been tried before?

Yes. But those programs put in place a series of rules designed to ensure that government entities weren’t taking on more risk by allowing investors and financial bank to offload risky mortgages onto the government.

In 2010, for example, the Obama administration rolled out a program to let underwater borrowers refinance through the FHA, but that program required banks to first write down loan balances so that borrowers could qualify under existing rules. Fewer than 1,000 loans have refinanced through the program. Congress approved a more complicated version of this idea in spring 2008 called Hope for Homeowners, but it also resulted in just a few hundred refinances. The latest incarnation of this program seeks to vastly streamline the refinance process by eliminating many of the wrinkles that policy makers and banks enacted in previous versions.

How much would such a program cost?

President Obama said the cost of his plan would be covered by a tax on the largest financial institutions that he initially proposed in 2010 but that didn’t pass through a Democratic-controlled Congress. These fees on financial institutions would presumably offset the cost that government-guaranteed mortgages would default.

Some analysts have called for “automatic” refinancing of borrowers—is that what this is?

No. Borrowers under this plan would still have to apply to refinance and pay the normal upfront fees.

Check the Developments blog for future updates on this program.

Follow Nick @NickTimiraos

Mr. President, it’s Time for a National Housing Policy

Please Mr. President, enough with the one-off responses, it’s time for a National Housing Policy.

The only thing more predictable than the fact that the President will deliver to Congress a State of the Union Address each year is the speculation that precedes it regarding what “Big” announcements the President’s speech will contain.

This year is no different, and a great deal of current speculation surrounds the topic of housing and whether the President’s speech will include some grand proposal intended to relieve those American homeowners who continue to suffer under the weight of a housing economy that remains stuck in neutral.

One plan getting a great deal of attention would involve the government granting debt forgiveness to borrowers whose mortgages are underwater, meaning that the amount currently owed by them on their mortgage exceeds the current value of their home.

To date, the Federal Finance Housing Finance Agency (FHFA) – the primary regulator of Fannie Mae and Freddie Mac – has resisted calls from Congress to approve principal forgiveness. In a report circulating today, we now understand why. According to that report, the cost of such a plan to Fannie and Freddie could well exceed $100 Billion! That $100 Billion would be in addition to the $151 Billion already owed by the two enterprises to the US Treasury. And to be clear, that means owed to US taxpayers.

Hopefully, current speculation is wrong and the President’s address includes no such proposal. Its not that we don’t sympathize with underwater homeowners, we most certainly do. We too look forward to the day when the American housing economy is once again growing and functioning well – and by extension, when the challenges facing homeowners are far less. When that day arrives, that will be a sure sign that the American economy generally has returned to a healthy condition.

Our objection is broader and goes to the fact that since 2009 the policy response to the housing crisis by the Administration has involved one tactical reaction after another – or as we have said before … “a series of one-off reactions …” and, unfortunately, little more.

And while certain tactical reactions were appropriate and even required in 2009 and even into 2010, the time is long passed for the development and introduction of a comprehensive National Housing Policy. Such a policy would lay out in clear terms the goals to be achieved through the Nation’s support of housing; the economic costs and benefits of such a policy; as well as the anticipated intangible benefits of such a policy. Finally, such a plan would identify the likely costs and risks of the failure to implement such a plan.

With such a plan in place (or at least proposed), the uncertainty that today plagues this industry would begin to lift and Congressional policy makers, regulators and business leaders alike would be better equipped to address the important considerations that must still be resolved if we hope to develop an enduring solution to the Nation’s housing crisis.

And for those who would ask, “Why should a housing policy be a priority?”, consider the following written in 2003 – perhaps the last time we had a legitimate National Housing Policy in this great Nation – by the Millennial Housing Commission:

“… housing matters. It represents the single largest expenditure for most American families and the single largest source of wealth for most homeowners. The development of housing has a major impact on the national economy and the economic growth and health of regions and communities. Housing is inextricably linked to access to jobs and healthy communities and the social behavior of the families who occupy it. The failure to achieve adequate housing leads to significant societal costs.”

Until these sort of deliberations and debate occur and a National Housing Policy is in place, it is impossible to know what we as taxpayers get (and give up) for another $100 Billion spent in this manner in support of the housing crisis.

It seems to us, that the time to answer the important question: “What do we get?” … before we give more … is long overdue.

…(read more)

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DeMarco: Principal Write-Downs Expensive, Benefits Uncertain

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Edward DeMarco, acting director of the Federal Housing Finance Agency

How far should the federal government go to stabilize the housing market?

Many Democrats say more should be done. That’s why there have been a series of calls of late from Democratic lawmakers on Capitol Hill and Federal Reserve officials to have government-controlled mortgage finance companies Fannie Mae and Freddie Mac reduce the value of borrowers’ mortgages for homeowners who are “underwater,” meaning that they owe more on their properties than their homes are worth.

Fannie and Freddie and their regulator, however, have resisted doing so, despite pressure from the highest levels of government.

Last week, the acting director of the Federal Housing Finance Agency, which regulates Fannie and Freddie, sent lawmakers a detailed analysis of why cutting loan balances doesn’t make sense from a financial standpoint, given the regulator’s mandate to “preserve and conserve” Fannie and Freddie’s assets.

The letter was requested by Rep. Elijah Cummings, the top Democrat on the House Oversight Committee.

Edward DeMarco, acting director of the FHFA, argued that doing so would cause taxpayers to spend more money on the mortgage giants’ rescue than other foreclosure-prevention strategies. Fannie and Freddie have been propped up by taxpayer support for more than three years, a rescue that’s cost taxpayers about $151 billion

“Any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action,” DeMarco wrote in the letter.

About 3 million borrowers with loans backed by Fannie and Freddie owed more on their homes than their properties were worth as of last summer. That’s about 10% of the loans they own or guarantee. A write-down of all 3 million of those mortgages would cost taxpayers $100 billion, Mr. DeMarco estimated.

Fannie and Freddie do offer forbearance plans, in which lenders don’t require any payments on a portion of the loan for up to 12 months. What they don’t offer is forgiveness, where that portion of the loan is wiped out.

Mr. Demarco, in his letter to lawmakers, said FHFA’s analysis concluded that “forbearance achieves marginally lower losses for the taxpayer than forgiveness, although both forgiveness and forbearance reduce the borrower’s payment to the same affordable level.”

In addition, Mr. DeMarco noted that Fannie and Freddie would face significant up-front technology and training costs to launch a principal write-down program.

“Unless there is an expectation that principal forgiveness will reduce losses, we cannot justify the expense of investing in major systems upgrades,” he wrote.

This position has put Mr. DeMarco at odds with many Democrats and some Federal Reserve officials. In a paper earlier this month, the Fed noted that, “Some actions that cause greater losses to be sustained by the [companies] in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

However, Mr. DeMarco’s letter noted that “our determination has been based on projected economic costs to taxpayers, not short-term accounting considerations.”

Fannie and Freddie would also risk giving up money if they reduced loan balances because they could no longer recover money from mortgage insurers, which cover some losses for borrowers who have a down payment of less than 20%.

Ten Predictions for the Housing Market

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Construction underway in September at a Lennar Corp. project in Miami.

Last year, David Goldberg, UBS’s home-builder analyst, issued 10 predictions for the housing market.

So, how did he do? “I never pat myself on the back, but I think we were pretty close,” Mr. Goldberg tells Developments. “We had a good year.”

As predicted, tough underwriting standards constrained demand and home prices remained weak. There was indeed a lot of “blustering about” for the need to reform mortgage giants Fannie Mae and Freddie Mac and the FHA, but not much happened. He said he didn’t expect much to happen with the mortgage-interest deduction — and nothing really did.

Mr. Goldberg says 2012 should include a modest recovery. “I’m more bullish today than I have been in the last five years,” he says. Here are his predictions for this year (along with our thoughts on a few):

Prediction: Single-family housing starts will grow by approximately 5% to 10%, marking the first year in the last seven that starts will have grown meaningfully. Multifamily starts will accelerate at a faster pace.

Developments says: Yes, although it’s worth noting that multifamily starts were down in December.

Prediction: With community-count growth ranging from 5% to 10% year-over-year, builders will see order growth as high as 20%.

Developments says: Some builders have already reported that orders are up — Lennar’s fourth-quarter orders jumped 20% — as buyers slowly move off the sidelines. Remember that these gains come off of low levels.

Prediction: New-home prices will be flat in 2012, while distressed prices have basically bottomed.

Developments says: With some home values down more than a third from the peak, stable prices would be good news. Builders have had to cough up thousands of dollars of freebies to entice buyers.

Prediction: Mortgage standards won’t loosen until 2013 at the earliest; when they do, look for private lenders—as opposed to the GSEs or the FHA—to lead the way.

Prediction: Government support for the new-home market will be slightly better than “do no harm”. … Even if efforts are more robust than expected, they will be focused on the existing-home market.

Developments says: Home builders, which make up a small percentage of the overall sales market, are quietly grumbling that they aren’t receiving much attention these days. Keep in mind, of course, that they received large tax refunds and got a tax credit for buyers.

Prediction: While many believe that record affordability should drive sales, mortgage availability will constrain owner-occupied demand over the next couple of years. (This seems similar to #4.)

Prediction: With volumes growing and prices stable, Mr. Goldberg doesn’t forecast significant book value — essentially the assets minus liabilities — loss in 2012. … In some of the better-positioned companies, book value could increase for the first time since the downturn.

Prediction: Shares of home builders will see higher highs and lower lows as expectations reset.

Prediction: There won’t be public-to-public M&A activity in the coming year.

Developments says: This makes sense — with the exception of the Pulte/Centex debacle — since mergers have been rare. Builders have been more focused on surviving and returning to profitability.

Prediction: There are trends that will work against an acceleration in home ownership in the near term. “We’re often confronted by perma-bulls focusing on long-term demographics—which we actually believe in,” Mr. Goldberg writes.

Developments says: For now, many Americans still don’t have jobs, lenders remain picky with applicants and plenty of people remain afraid to buy homes.

So, how will Mr. Goldberg do?

Follow Dawn @dwotapka