Obama announces new housing refinance plan

[struggle4progress]

By Zachary A. Goldfarb and David Nakamura, Published: February 1

... The centerpiece of the effort is legislation that would make it easier for homeowners who have been paying their mortgages on time to take advantage of today’s ultra-low interest rates, perhaps saving thousands of dollars a year. Millions of homeowners, including many who owe more than their properties are worth, have been unable to refinance ...

White House officials estimated that the proposal, which requires congressional approval, would cost taxpayers between $5 billion and $10 billion. To offset that cost, Obama reprised his previous idea of imposing a new tax on the profits of financial firms. Republicans pledged to oppose the proposal.

To help the economy get more of a boost from low interest rates, Obama proposed that almost anyone who has a credit score above 580 and has been paying his or her monthly mortgage bill on time for the past six months be able to refinance. It wouldn’t matter under Obama’s proposal whether borrowers had government-backed mortgages or loans owned by banks and other private investors.

The only major limitation to the program would be on borrowers who own very expensive properties, relative to where they live. The maximums range from $271,050 to $729,750. A new program run by the Federal Housing Administration would be set up to refinance mortgages that are not backed by federal mortgage giants Fannie Mae or Freddie Mac ...

http://www.washingtonpost.com/business/economy/obama-to-announce-new-housing-refinance-plan/2012/02/01/gIQAw8YghQ_story.html

[zipplewrath]

1. I don't understand this part

The government also is willing to pay closing costs for those who agree to use their savings to pay down the principal of their mortgages, rather than reducing their monthly payments, the administration official said.

I'm not sure why a homeowner would choose to do that right now. Many of these folks will be taking on a debt larger than the value of the home. Why would they want to "pay it off faster"? Better to pay it off with inflated dollars in the future. Especially considering they can borrow this money at insanely low rates.

Yes, the usual advice is if you actually plan on paying off the loan, better to do it faster. But do most of these people really expect to do that? Furthermore, you can pay off a 30 year loan faster, just make bigger payments each month than required. You'll pay it off faster. But if you take out a 15 year, and can't keep up those payments, you're stuck. And since this may be in effect a "one time offer" at that point you may not be able to get ANY loan, much less a 30 year.

[Demeter]

2. It's more of the same old con game

If the President told you to jump off a cliff, would you do it?

Caveat emptor.

[zipplewrath]

3. Incentives against the borrower

It seems like the government is lining up against the interests of the borrowers. I'd expect that from banks, I don't expect it from my government.

[Yo_Mama]

4. Not really

If you are well underwater and want to keep the home and know that you are going to be in that area for a long time but can't save, it makes sense to extend the term (that's where a lot of these savings are coming from - the payback period in the example given on the article is now 35 years) to lower the payment.

Otherwise, you will lose the home because you can't keep it up. When you need a big repair, like a roof, you won't be able to pay for it and you won't be able to finance it, because you have no collateral. If AND ONLY IF you then use the monthly savings to build up a maintenance fund, you may be able to keep the home.

But if you have savings and can do the maintenance on the home with the savings, taking a shorter mortgage at a lower rate makes sense, because it lowers your lifetime payments on the home a lot. With savings returns so low now, paying down debt is the best investment for many borrowers.

But that brings up the stupidity of the proposal as it stands. This thing comes from WS - it is a proposal I was reading last year from Steet pundits who know nothing about mortgages.

FHFA looked at such proposals and figured they would result in large losses for the taxpayers. Many will take the lower payment/longer term, won't be able to keep up the home, will lose it anyway, and the home will be degraded at that point and will inflict a larger loss on the creditor than if the borrower just gave up now.

And in such a case, it hurts the borrower to do it. So for many people, this will be a lose/lose proposition. Borrower and creditor lose.

If you are making principal payments on an underwater house you can't keep, you are probably taking a pretty large loss.

It's also worth noting that blight takes over and hurts other homeowners when that happens - a neighborhood with decaying houses usually causes more depreciation and more defaults.

[zipplewrath]

5. Many scenarios

There are all manner of scenarios, but it only seems a few are worthy of short term loans. Truth is, as you suggest, if you are WELL underwater, it isn't clear that you have much incentive at all. You'd at least be taking a heck of a risk. Someone well underwater doesn't have much to lose so to speak, so walking away makes more monetary sense. If you are just a little bit underwater, it probably is still worth it to refi. However, it is still a bit dubious to refi for say 15 years. Get the 30 year, and make double payments or something. And that's probably only if you think you'll actually end up owning it.

[PassingFair]

6. I just refinanced.

Went from 5.875 to 3.875.

Knocked $60 off my payment per month and
TWO YEARS off of the 22 left on my original mortgage.

Didn't make sense for me NOT to do it, but I learned
that many people don't qualify for the refi.

Can't get one if you're underwater, can't get one
if you had a short-sale in the past 4 years, etc.

This isn't going to help people on the verge of foreclosure,
they will need principle modification to stay in their houses.

This looks like it's strictly to reduce the interest rate.