The president's plan to refinance about 1 million borrowers to current mortgage rates though the Federal Housing Administration resembles a Super-Lotto drawing (or Publisher's Clearinghouse Sweepstakes) rather than serious legislation to improve foreclosures or salvage the struggling housing market. In fact, the president's plan for the FHA is similar to the plans he already signed by executive order to encourage Fannie Mae and Freddie Mac to refinance anyone who is current on their mortgage, regardless of credit score or negative equity. These plans are simply bad housing policy.
First, there is no evidence that giving loan modifications to performing borrowers will make any difference to mortgage defaults, other than being an election year gift from President Obama. Nor is there any evidence that principal write-down will reduce mortgage defaults or salvage the struggling housing market.
Government programs encouraging Fannie Mae and Freddie Mac to perform mortgage refinancing to all eligible borrowers is simply off-balance sheet fiscal policy. Personal consumption expenditures in the United States are around $3.7 trillion annually (about 70 percent of GDP). If 3 million homeowners refinance their mortgage for an average annual savings of $6,000, that is an additional $18 billion annually for consumers. Or less than one half of 1 percent increase in personal consumption expenditures. That is barely noticeable. The FHA plan, which is on-balance sheet, would add an additional $6 billion, or 0.16 percent to personal consumption expenditures. And that assumes that everyone who receives a mortgage payment reduction or principal write-down immediately spends it. If anything, we are seeing more households saving rather than spending (personal consumption expenditures were flat in December while personal savings increased). No matter how we massage the data, the economic impact of HARP 2.0 and the proposed FHA refi plan is virtually nonexistent.
HARP 2.0 and the FHA plan will be a winner for the select borrowers who receive the loan refinancing. But of the 12 million borrowers whose house is worth less than their mortgage balance, only a lucky 4 million may receive a payment and/or principal reduction. That is 1 in 3 borrowers at best.
The constant changing of the rules on who gets a refi and who doesn't is very unsettling to MBS investors. None of it helps reduce defaults, saves the housing market, or stimulates the economy.
But it is an election year, and so rather than a real economic plan, we get political poppycock.
About Anthony Sanders Real Estate Finance Professor at George Mason University
Mark Calabria Director of Financial Regulation Studies at the Cato Institute
Peter Tatian Senior Research Associate in the Urban Institute's Metropolitan Housing and Communities Policy Center
Ethan Handelman Vice President for Policy and Advocacy at the National Housing Conference