State of the Union Address 2012

State of the Union Address 2012

The Obama Administration unveiled details today of a broad refinancing program affecting non- Government Sponsored Enterprise (GSE) residential mortgage loans, which program was first announced by the President in his State of the Union address last month. Under the refinancing program, which requires congressional approval, borrowers with qualifying non-GSE mortgages who are current on their payments for at least the last six months, who have not missed more than one payment in the prior six months, and who have a minimum credit score of 580, will be eligible to get their loans refinanced through the Federal Housing Administration into a 4.25% 30-year loan. The program could save homeowners approximately $3,000 per year on their mortgage payments.

The cost of the program, estimated by the Administration to be in the $5 to $10 billion range, would be paid by using a portion of the Administration’s proposed Financial Crisis Responsibility Fee. This fee also requires congressional approval to implement, and would be assessed on approximately 50 of the nation’s largest financial institutions with assets in excess of $50 billion.

The refinancing program would fit within the proposals made by the Federal Reserve in a recent white paper to Congress entitled, “The U.S. Housing Market: Current Conditions and Policy Considerations,” in which the Federal Reserve detailed an economic recovery strategy based on repairing the ailing housing market.

The paper highlighted several potential solutions, including:

  • Converting foreclosed properties into rental units;
  • Offering the bulk sale of foreclosed properties to investors;
  • Providing investor debt financing;
  • Loosening mortgage lending and re-financing criteria for creditworthy borrowers;
  • Aggressively implementing loan modification, short sales or deeds-in-lieu of foreclosure to reduce foreclosed inventory;
  • Offering principle reduction plans to minimize future probability of default;
  • Setting up consistent metrics for loan-servicers;
  • Implementing a deed-for-lease to homeowners to circumvent the foreclosure process completely.

Whether the Administration’s proposed refinancing program would actually do much to help solve the country’s troubled housing sector may be beside the point. Republican opposition to both the proposed refinancing program and fee that would pay for it is already apparent, and GOP opposition to practically any White House proposal is likely to intensify as this election year progresses. The most likely scenario is one of continued political stalemate with respect to proposals to address weakness in the country’s housing market; at best, the passage of small-bore legislation or mere executive branch actions will do little or nothing, certainly in the short-term, to strengthen the housing industry.

Therefore, housing is likely to continue to suffer through the rest of this year from both actual economic weakness stemming from the mortgage and financial crisis of 2008, as well as from continued uncertainty as to whether – and if so, to what extent – the federal government will take concrete action to stabilize the housing market.