President Barack Obama's latest effort to tackle the housing crisis—unveiled Monday in Las Vegas—is as much about politics as it is economics. Frustrated by Congress in his attempts to boost the economy with new legislation, Obama instead is using his executive authority to tweak rules governing home refinancings. Under the new plan, the Federal Housing Finance Agency, the overseer of mortgage giants Fannie Mae and Freddie Mac, announced that the Home Affordable Refinance Program would undergo a series of changes aimed at encouraging more borrowers to refinance their mortgages. The new rules open the gates for more homeowners to refinance by removing the 125-percent loan-to-value ceiling for refinancing, meaning that some new borrowers whose loans exceed the value of their homes may now take advantage of historically low mortgage rates. But given the strict requirements that homeowners will still have to meet, the program's effectiveness might still be limited.
HARP went into effect in the spring of 2009, with the expectation of helping 4 million to 5 million troubled homeowners refinance their mortgages. Thus far, fewer than 1 million have done so. While the pool of eligible borrowers will no longer be limited by diminished home values, HARP refinancing will still only be available to people who are current on their mortgage payments and who have had no more than one late payment in the last year. "There's a class of homeowners that are severely underwater that are current on their payments that this will help," says Morris Davis, academic director of the James A. Graaskamp Center for Real Estate at the University of Wisconsin-Madison, but that's a small group. "I don't think this is going to help many people," he adds.
There are other new changes aimed at making refinancings easier. The new rules eliminate some fees, waive appraisal requirements in some cases, and extend the HARP program's end date to December 31, 2013. Altogether, FHFA estimates that by the end of 2013, HARP refinancings "may roughly double or more from their current amount," according to an FHFA press release announcing the changes.
Nearly one-quarter of U.S. homeowners owe more than their homes are worth. But just how many of those people will now be eligible for HARP is up for debate. Guy LeBas, chief fixed investment strategist at Janney Montgomery Scott, estimates that there are around 220,000 loans in the United States that are above the 125 percent threshold and that satisfy the other HARP eligibility criteria, expanding the pool of HARP-eligible homes by roughly one-seventh.
"It's not nothing," says LeBas, but he also points out that "not everybody, of course, will pay attention." Even if all newly eligible homeowners did pay attention, the potential macroeconomic boost from the policy could still be minimal. LeBas says that the average home loan is around $350,000, and a decrease in interest from 4.5 percent to 3.5 percent would mean monthly payment savings of roughly $200. In the unlikely event that all 220,000 eligible homeowners decide to take advantage of the new rules, the annual boost in savings would be roughly $530 million dollars—pocket change compared to $10 trillion in U.S. annual consumer spending.
On a personal level, of course, the program could make a big difference for those homeowners: $200 a month could be a life-saver for plenty of borrowers. And the Obama administration is not billing this initiative as a cure-all for the U.S. economy but rather one in a series of steps that show the president taking action while lawmakers on Capitol Hill squabble among themselves. "These steps aren't a substitute for the bold action we need to create jobs and grow the economy, but they'll make a difference," said White House Communications Director Dan Pfeiffer on the White House blog today.
The program is also clearly designed to make a difference for President Obama himself. The new rules are a part of economic initiatives the administration is billing under the tagline "We Can't Wait." Later this week, the administration will also announce new measures to help graduates manage student loan debt. However economically successful they may ultimately prove, the programs are also aimed at showing that the White House is taking whatever actions it can without the approval of an often-gridlocked Congress. As Pfeiffer also wrote, "The issues facing Americans require serious bipartisan solutions, yet the Republicans in Congress have decided to put party before country and block legislation that would create jobs and grow the economy."