Six Questions on Obama’s Mortgage Refinance Proposal


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.

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Distressed Properties Nearly a Quarter of 2011 Real Estate Sales

Sales of
distressed real estate made up nearly a quarter of all single-family
residential sales both in the fourth quarter of 2011 and the entire year
according to information released today by RealtyTrac. Homes that were in some
stage of foreclosure or lender-owned (REO) comprised 24 percent of the market
in the fourth quarter compared to 20 percent in the third quarter.  Pre-foreclosure sales and sales of REO
represented 23 percent of all sales during the year compared to 25 percent in

the Irvine, California company that tracks foreclosures nationwide, reported
that 204,080 residential properties in some stage of foreclosure or held in REO
were sold to third parties during the fourth quarter, down 8 percent from the
third quarter and 2 percent from the same period in 2010.  Total foreclosure related sales in 2011
totaled 907,138, down 2 percent from 2010.

“Sales of foreclosures in the fourth
quarter continued to be slowed by questions surrounding proper foreclosure
paperwork and procedures
,” said Brandon Moore, chief executive officer of
RealtyTrac. “Even so, foreclosures accounted for nearly one in every four sales
during the quarter and for the entire year. We expect to see
foreclosure-related sales increase in 2012, particularly pre-foreclosure sales,
as lenders start to more aggressively dispose of distressed assets held up by
the mortgage servicing gridlock over the past 18 months.

Homes purchased pre-foreclosure,
i.e. short sales, totaled 88,303, about one-third of foreclosure related
sales.  This was down five percent fewer
than in the previous quarter but a 15 percent year-over-year increase.  Pre-foreclosure sales were 10 percent of the
market in Quarter Four and 9 percent over the course of the year.

Distressed sales had an average
price of $164,944, little changed from Quarter Three and down 5 percent from
one year earlier.  Distressed properties
typically sold at a 29 percent discount compared to a sale of a non-foreclosure
related property during the quarter.  The
discount in the third quarter had averaged 34 percent and one year ago it was
35 percent.  Pre-foreclosure sales sold
for an average of $184,221 in the fourth quarter, 21 percent below the average
price of a non-foreclosure home.  REOs
sold for an average of $149,686 in the fourth quarter, up 2 percent from the
previous quarter but down 2 percent from the fourth quarter of 2010. The
average sales price of a bank-owned home in the fourth quarter was 36 percent
below the average sales price of a non-foreclosure home, while the discount on
bank-owned homes for the entire year was 40 percent.

“We continued to see a shift toward
pre-foreclosure sales
, or short sales, and away from REO sales in the fourth
quarter,” Moore continued. “Nationally, pre-foreclosure sales increased 15
percent from a year ago while REO sales decreased 12 percent.  Pre-foreclosure sales outnumbered REO sales in
several bellwether markets, including Los Angeles, Miami and Phoenix, where REO
sales had outnumbered pre-foreclosure sales a year ago. That trend will likely
show up in more local markets in 2012 as lenders recognize short sales as a
better option for many of their non-performing loans.” 

Pre-foreclosure sales increased
dramatically year-over-year in several states, more than doubling in Michigan (+103
percent.)  Other states with big
increases were Georgia (+59 percent), Arizona (+48 percent), and Washington
(+36 percent.)  Year-over-year increases
in REO were less striking but several states did see significant jumps.  Sales in Minnesota increased 65 percent,
Wisconsin 23 percent, Washington 21 percent, and Illinois 20 percent.

Homes that sold pre-foreclosure in
the fourth quarter had been in the foreclosure process for an average of 308
days compared to an average of 237 days in the fourth quarter of 2010.  REOs that sold in the fourth quarter took an
average of 175 days to sell after completing the foreclosure process, compared
to 171 days in the fourth quarter of 2010.

During 2011 the states with the
highest percentage of real estate sales that were foreclosure related were
Nevada (54 percent), California (43.5), and Georgia (36 percent).   

…(read more)

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