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.

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Applications Fall 5% during Holiday Shortened Week

Mortgage applications were down during
the week ended January 20 according to the Weekly Mortgage Applications Survey
conducted by the Mortgage Bankers Association (MBA).  The Market Composite Index, a measure of
application volume fell 5 percent on a basis that was adjusted seasonally and
to account for the week shortened by the Martin Luther King holiday.  On a non-seasonally adjusted basis the
Composite fell 13.8 percent from the previous week which ended January 13.

The
seasonally adjusted Purchase Index was down 5.4 percent and the unadjusted
Purchase Index 9.7 percent.  The latter
was 6.5 percent lower than during the same week in 2011.  The index measuring applications for
refinancing was down 5.2 percent. 

The
four week moving averages for all indices remained positive.  The Composite Index was up 4.12 percent, the
Refinance Index increased 4.85 percent and the seasonally adjusted Purchase Index
rose 0.47 percent.

Refinancing
continued to represent the majority of mortgage activity, falling slightly from
82.2 percent of all applications the previous week to 81.3 percent.  Applications for adjustable rate mortgages
were at a 5.3 percent level compared to 5.6 percent a week earlier. 

Looking
back at the month of December, MBA found that refinancing borrowers applied for
30-year fixed-rate mortgages (FRM) in 56.6 percent of cases and 24.3 percent of
applications were for a 15-year FRM.   ARMs represented 5.3 percent of applications in
December.  The
share of refinance applications for “other” fixed-rate mortgages with
amortization schedules other than a 15 or a 30-year term was 13.8 percent of
all refinance applications.

Purchase Index vs 30 Yr Fixed

Click Here to View the Purchase Applications Chart

Refinance Index vs 30 Yr Fixed

Click Here to View the Refinance Applications Chart

The average contract interest rate for 30-year FRMs with
conforming loan balances of $417,500 or less increased to 4.11 percent from
4.06 percent with points down one basis point to 0.47 point.  The effective rate increased from the
previous week.  The rate for jumbo
30-year FRM with balances over $417,500 decreased from 4.40 percent with 0.37
point to 4.39 percent with 0.40 point. 
The effective rate also decreased. 
The rate for FHA-backed 30-year FRM rose to 3.97 percent from 3.91
percent while points were down from 0.59 to 0.57 point.  The effective rate increased.

The
average rate for 15-year FRM increased to 3.40 percent from 3.33
percent, with points increasing to 0.40
from 0.39 and the effective rate increased as well. The rate for the 5/1 hybrid ARM was
up one basis point to 2.91 percent with points decreasing to 0.41l from
0.45.  The effective rate increased.

All
rates quoted are for 80 percent loan-to-value mortgages and points include the
application fee.

 The
MBA survey covers over 75 percent of all U.S. retail residential mortgage
applications, and has been conducted weekly since 1990.  Respondents
include mortgage bankers, commercial banks and thrifts.  Base period and
value for all indexes is March 16, 1990=100.

…(read more)

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Mortgage applications surge amid record-low rates

Mortgage loan applications surged 23% last week, according to the Mortgage Bankers Association, as record-low interest rates convinced many homeowners it was time to refinance into lower-cost loans.

Refi Activity Hits Highest Level Since August

By Drew FitzGerald

The number of mortgage applications filed in the U.S. last week jumped 23% from the prior week, the Mortgage Bankers Association said Wednesday, as a surge in refinance applications drove new loans.

Refinance activity climbed 26%, its highest level since August, according to the MBA’s weekly survey, which covers more than three-quarters of all U.S. retail residential mortgage applications. Purchasing rose by a seasonally adjusted 10% during the week ended Friday.

Interest rates reached new lows near the end of 2011, but the flow of new mortgages has varied from week to week.

MBA Vice President Michael Fratantoni said ongoing worries about the economic situation in Europe continued to push down U.S. interest rates last week. ”With mortgage rates reaching new lows, refinance volume jumped,” he said. “Purchase activity also increased as buyers returned to the market after the holiday season.”

European Pressphoto Agency
Low mortgage rates have helped spur refinancing activity. Shown here are rates advertised in December.

The four-week moving average for all mortgage applications is up 6%, mostly due to last week’s volume jump.

The share of applications filed to refinance an existing mortgage increased to 82.2% of total applications, from 80.8% the previous week, the highest level since October 2010.

Adjustable-rate mortgages made up 5.6% of activity last week, up from 5.4% a week earlier.

The average rate on 30-year fixed-rate mortgages with conforming loan balances dropped to 4.06% from 4.11%, while rates on similar mortgages with jumbo loan balances increased to 4.4% from 4.34%. The average rate on FHA-backed 30-year fixed-rate mortgages slipped to 3.91% from 3.96%.

The average for 15-year fixed-rate mortgages fell to 3.33% from 3.4%, while the 5/1 ARM average stayed flat at 2.9%.