Real Estate & Mortgage Insights

More Government Mortgage Help Around the Corner

The Obama Administration may unveil new changes next week to its existing foreclosure prevention programs. These modifications may help more homeowners refinance into lower rates.

Reports last week speculated on plans for allowing borrowers with guaranteed loans by Fannie Mae and Freddie Mac to refinance into today’s rock-bottom rates.

However, sources familiar with the situation are saying that nothing too dramatic is in the works. "The kinds of things that are likely are ones that are going to have a modest positive impact," Michael Barr, a former top Treasury Department official who teaches at the University of Michigan’s law school, said in an interview with the Wall Street Journal. "They’re worth doing, but they’re not game-changers."

Those "worthwhile" changes could include things like asking Fannie and Freddie to lower their fees on banks for riskier loans, in hopes that banks would pass on those savings to their customers. By some estimates, eliminating those fees could result in as many as 1 million extra refinanced loans over the next year.

Another tweak to the program might be allowing homeowners who owe more than 25 percent of the value of their homes to refinance into current interest rates. Last week, the average rate on a 30-year fixed rate mortgage was at a 50-year low of 4.22 percent, according to Freddie Mac. These borrowers have previously been locked out of new loans and mortgage modifications, perhaps because they are the most likely to go into foreclosure. Proponents say that allowing seriously sunken homeowners to refinance into lower rates would free up some of their income to stimulate the economy. Federal Reserve Governor Elizabeth Duke said that "finding different approaches to the policies that are hindering refinancing would likely provide some support to the economic recovery while improving the circumstances of homeowners." Others, though, say that low rates would not be enough to keep such borrowers from strategically defaulting to get out from under their crushing debt load.

It is hard to say if either of these changes would truly make a dent in the suffering U.S. housing market. The Obama administration’s foreclosure prevention efforts to date have had lackluster results. For example, the Home Affordable Refinance Program started in 2009 was designed to save 4 million to 5 million struggling homeowners from losing their homes, but has only helped 810,000 borrowers refinance into lower rate thus far. That number, while significant for the individuals involved, is barely a drop in the market’s bucket.

Any major changes could be hard to push through at this point as Fannie and Freddie are not directly under the control of the Obama administration. Their regulator, the Federal Housing Finance Agency, is very wary of actions that could potentially produce more losses for the companies (who were placed in government conservatorship in 2008). Anything that smacks of greater risk would face stiff opposition from the FHFA.

Perhaps more mortgage market stimulation is not even the answer. Christina Romer, a former top economic advisor to Obama, said in a Reuters article that other measures could be more helpful and less expensive. "A bold jobs program might be just as effective and better targeted to those who need help the most," she said. "Also, healing the economy is as likely to heal the housing market as programs aimed directly at housing."

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