Tonight, the president announced that he is sending the Congress a plan to allow for the refinancing of the mortgages of every responsible homeowner. Conventional wisdom in Washington has it that little if any serious legislation will pass this year. But this issue may and should be different. Many of the primary beneficiaries of this streamlined refinance policy are Republican voters in Tea Party districts. Broad based refi represents a market based approach that doesn't require significant taxes or an increase in the deficit, but will strengthen the real estate market. Shouldn't Republicans line up?
This move could save tens of millions of households more than $200 a month in housing costs by giving responsible homeowners who are paying their bills the opportunity to benefit from record low interest rates. Most of these mortgages are already guaranteed by the government; lowering the interest rate will increase the likelihood that they get repaid. A large scale refi program will put money into the economy, prevent unnecessary foreclosures, and help stabilize the real estate market. It has been well and repeatedly argued by many from across the ideological spectrum that this is good economic policy and good for the real estate market.
It is also great for Republican-represented districts. The top ten Congressional Districts that could benefit from refi are all, 100%, Republican represented --- and 40 of the top 50 districts are Republican represented. Newt Gingrich's old district could get 176% the national average number of refis.
House Refi Congressional Data
In Florida alone a broad refi plan would allow two million households in Florida to lower their annual costs by an average of more than $2,500 this year, strengthening the economy, reducing foreclosures, and building confidence. Nine of the top ten Florida CDs in terms of the numbers of refis are now represented by Republicans. The Florida district that would benefit most - with 112,000 potential refis - is that of Representative (and Republican Senate Candidate) Connie Mack.
Nationwide, districts represented by members of the Tea Party Caucus would get significantly more refis than the national average. Consider the area around St. Cloud, Minnesota, represented by Michele Bachmann. 115,000 households in her District could get an average of just under $200 per month extra in their pockets. There's more than one voter in many of these households. Representative Bachmann won her last election by fewer than 40,000 votes, with a total of 160,000 votes.
And so it is across the nation. 84,000 households in Allen West's district in Florida. 102,000 in Eric Cantor's district in Virginia. If you look at the top 20 districts to benefit from streamlined refi, nearly half of them are represented by Tea Party partisans.
And it is not just the numbers, it's the narrative. We all know that the Tea Party supposedly began with Rick Santelli's CNBC rant against bailing out those who over-bought, over-built, and over-borrowed. Many have drawn the mistaken inference that repairing real estate finance is thus a political loser. Forgiveness of principal paid for by taxpayers aimed at helping people facing foreclosure is a tough sale. But giving homeowners access to borrow from willing lenders at current low market interest rates is an entirely different matter.
There's no complete free lunch here; the gains to tens of millions of households will come largely at the expense of the people and entities that originally lent the money or bought the mortgages later - the banks and bondholders now receiving very much higher than market interest rates. Instead of receiving 6 or 7 percent interest, these bondholders will get paid what they are owed on the loans - and the homeowner will now owe money to someone else, who is perfectly willing to lend it to them for less.
The bondholders were fully aware that there was a risk that interest rates might fall and assumed that homeowners would prepay if interest rates fell. They have been protected from these market forces by poor policy. Starting in late 2008, Fannie and Freddie actively made it harder for responsible homeowners to refi by raising their fees for most borrowers, even when taxpayers already guaranteed the loans. Poorly thought out restrictions on and interpretations of who can be refinanced further limited refis of already government guaranteed loans. This has been bad for the homeowner, bad for the taxpayer, bad for the housing market, and a bonanza for bondholders.
Expanding refis to cover all mortgage holders -- not just those with a guarantee -- will involve some extra risk for the government, but this can be easily paid for by economic fees - leaving the borrower way ahead and the taxpayer no worse off. But existing bondholders will indeed lose their protected, above-market interest rates.
Ask a focus group if people who over-borrowed should be bailed out by the rest of us, and the answer will be a resounding no. But that is not the question at hand. Properly played, the politics here can reflect reality - the streamlined refi proposal is ending a gargantuan regulatory-facilitated subsidy to bondholders that comes at the expense of responsible homeowners who are paying their bills. These families should be able to exercise their right to prepay and refinance - as businesses and others do.
On its economic policy merits, large scale refi should make a fast track through Congress. On political merits, it is hard to see how Congressional Republicans will oppose it, but for the formidable ability of opponents.
For the sake of good policy, let's hope the hardball political calculations are made by members of Congress, and that swift legislation passes to facilitate broad based refinancing of performing mortgages.
Housing Refi Congressional Data (Senate)
[Both tables are from the work of Alan Boyce, R. Glenn Hubbard, Christopher Mayer, and James Witkin. These estimates represent the original version of their proposal, which included a process for streamlined refinancing of non-GSE loans, creating to up to 30 million eligible mortgages. The President's language tonight strongly suggested he will propose such a broad based program.]
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The president's idea to refinance these mortgages is a good one. Money is cheap right now. Banks are borrowing at zero percent and lending it out at 3-5% depending on the type of loans. I think the American people deserve a break especially the ones who have been paying their mortgages. Better that these mortgages get refinanced that foreclosed on. The president did not even suggest a reduction in principle. Under TARP (created by Bush's Paulson), Banks got a nice no strings bailout which was necessary to avert a financial collapse (which many people still don't get). Many people say - we should just let the market sort things out or walk away, well then that hurts everyone from the banks, the bondholders, the next door neighbor (who loses home value), to the renter who sees his community filled with abandoned homes. Given the lower interest rates, there is no reason for not pushing this kind of program. The main problem is the banks - will they actually participate since they were largely responsible for the less than successful HAMP and HARP programs.(banks don't do much voluntarily).
The federal govt would be backing the riskiest mortgages known to mankind however ....lol
Mortgage pools are based on risk based pricing that is arrived at by a matrix of credit score and LTV of the mortgage. There was a market mechanism where by the banks would negotiate for the price of these mortgage pools. As part of the modelling of these mortgage pools that was an assumed default factor as part of the price. (a certain amount of losses were already assumed). A key component of this transaction process was the blesssing from the credit rating agencies. This was a sacred trust that the industry relied on, the credit rating agencies broke that trust by overrating mortgages that should have been considered risky, but were rated as AAA. The credit rating agencies committed fraud. And should be held accountable for this financial debacle. PERIOD. This was not Fannie and Freddies fault - they were given false information from the rating agencies.
Now Obama wants us to do it again.
peter and paul
The banks made huge profits by first originating the loans, then packaging them for sale to others in order to get the loans off their books so that they could sell more such loans. If the government made war on the banks it was by giving them all the ammunition they needed to destroy themselves. And they were more than too happy to receive those gifts because they knew that their tentacles were in every part of our economic structure so as to force the government to rescue them from their own destruction in order to avoid a total collapse of the entire economy. All that this proposal does is to create a level playing field for homeowners who are stuck in higher than market financing. So stop with the conspiracy theory.
Mortgage bankers already have the ability to refi these loans if they want. What is their incentive to do so now? Who really pays?
The article mentioned, "Expanding refis to cover all mortgage holders -- not just those with a guarantee -- will involve some extra risk for the government, but this can be easily paid for by economic fees - leaving the borrower way ahead and the taxpayer no worse off. But existing bondholders will indeed lose their protected, above-market interest rates." The phrase "...can easily be paid for by economic fees - " is what bothers me here. Ambiguity such as this must be "cherry-picked" out of any statement and followed with a question, "Please explain...."
Nearly everyone has lost bubble 'value' in their real estate. Some more than others depending on location.
Why should only 'underwater' mortgage holders recieve a write down of either interest or principle.
Nearly everyone has lost 'value'.
that's what these schemes are
I know far too many people paying outrageous interest on huge mortgages for homes that are so far underwater, you couldn't see daylight with a periscope.
These people are burning their savings, their 401k's, the kids college money and their futures for a busted business deal that the bank insured, charged a premium for, and even got a bail out for.
Just walk away.
I remember my dad owning our home in a community. He worked for the same company for over 30 years. His brother worked for a company for 45 years. I have rarely stayed with the same company for more than 4 or 5 years. One of the cruelest ironies right now is that even when the unemployed find work, they often are unable to accept the position because they have an anchor around their necks called a mortgage.
I don't know anyone who buys a new car every 2 years much less a home. Home ownership used to mean stability and security. It is just as likely these days that home ownership is the worst investment a person has ever made. And the only solution Washington can think of is to double down on that lousy investment. Instead of refinancing a $250,000 mortgage on a $200,000 house; walk away. Rebuild your savings. Come back into the market and buy that house back and save $50,000 plus interest.
http://youtu.be/zp-Jw-5Kx8k
No it seems you don’t believe in helping your fellow citizens that are hurting…. But ok to bail out the fraudulent banks though eh?