Posted by Suzy Khimm and Ezra Klein
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President Obama unveiled a new plan on Wednesday that the administration says would give 3.5 million underwater homeowners the ability to refinance their homes. We asked a group of experts across the political spectrum to weigh in on Obama’s proposal. Here are their e-mailed reactions:
Mark Zandi, chief economist at Moody’s Analytics:
“I think it is a very good plan on paper, the question is how much of it will be implemented and how quickly. The part of the plan with the most near-term promise is the effort to juice-up more refinancing activity through the expansion of the new HARP rules to all Fannie/Freddie borrowers and the more attractive FHA streamlined refi plan. The greater monetary incentives in the HAMP for principal writedown modifications also have the potential for providing some meaningful help to stressed homeowners this year. Of course, the FHFA is key to implementing this effectively. It should enthusiastically take up the HAMP and HARP expansions and the REO to rental effort. Given the added monetary incentives under the President’s plan, it is increasingly difficult for the FHFA to argue these kind of proposals don’t satisfy their fiduciary responsibilities as the GSEs’ conservator. They would certainly be a meaningful plus for the housing market and broader economy.”
Douglas Holtz-Eakin, president of the American Action Forum:
“The President’s proposal appears to be more politics than policy. As structured, an expansion of FHA subsidies to refinance does not appear likely to pass Congress, so its policy effectiveness is in doubt. Moreover, even if passed, $10 billion or so would have no serious impact on underwater homeowners when the overall negative equity exceeds a half trillion dollars. The White House must know this, leading one inevitably to conclude that this is campaign rhetoric and not real help for real people. The remainder of the ideas are nibbling around the edges of programs already in place and might help some people on the margins. In the end, real help for homeowners will come from getting the macroeconomy growing faster, generating jobs and income, and transforming a demographic need for housing into actual housing construction and purchases.”
Christopher Mayer, professor at Columbia Business School:
“The plan the President proposed Wednesday has many positives, but also some appreciable questions. This would undoubtedly help the housing market and economy. The biggest upside was the push to eliminate barriers and encouraging competition to refinance the estimated 30 million outstanding government guaranteed mortgages, a program that Glenn Hubbard, Alan Boyce and I have pushed for years. While take-up rates are a question, I believe at least 10 million borrowers might take advantage of this opportunity, saving $2-300 per month and potentially preventing hundreds of thousands of defaults that would ultimately be paid for by taxpayers. The plan also has some great new ideas, including a simple straightforward application process and the opportunity for borrowers who are willing to put the interest rate savings into paying down their mortgage to avoid closing costs altogether, helping to get rid of debt and any negative equity at an accelerated rate.
The plan to allow all privately held mortgages to also apply through the FHA as long as they are current (late on no more than 1 payment in the last year and none in the last 6 months), have a FICO score above 580, and an LTV below 140, however, would be a much riskier action. Some of those borrowers still have appreciable risk of default. While previous versions of this plan had a very low take-up (Hope for Homeowners), one might expect that private lenders will push hard to refinance their riskiest borrowers this time because this plan does not appear to require any writedowns or other costs by the existing lenders. While the proposal added $5-10 billion of revenue to help cover the higher losses from a new bank tax, the prospects for any new tax in Congress look dim. As well, such cost estimates might turn out to be low if take-up is high for risky borrowers.”
David Stevens, president and CEO of the Mortgage Bankers Association and former head of the Federal Housing Administration (2009-2011):
“The mass refinance proposal will have appeal to those that are sitting in homes, underwater, and feel like they have been left on the sidelines during this interest rate rally that has brought mortgage rates to near historic lows. I think the refinance announcement’s biggest hurdle is going to come when it faces the reality of needing congressional approval. The funding mechanism, the moral hazard, the re-default risk, and the role of government intervention in housing will likely create divides on both sides of the debate that will make the likelihood of this moving forward an uphill climb.”
Joseph Gagnon, senior fellow at the Peterson Institute for International Economics:
“The Administration’s new proposals for housing finance enable households who are meeting all their mortgage obligations to take advantage of today’s low interest rates at essentially no cost to the taxpayer. The proposals also improve the incentives for banks to work with households who are behind in their payments in order to reduce socially harmful foreclosures without providing blanket bailouts. These proposals should appeal to members of both parties equally, as they are fiscally conservative and financially sensible, and they will create jobs.”
Dean Baker, co-director of the Center for Economic and Policy Research:
“This is a positive plan that is mostly simple common sense. Why shouldn’t we want underwater homeowners to benefit from the low-cost financing available to everyone else?
However, there are a couple of areas where we could be benefiting the banks more than the homeowners. If we let someone who owes 40 percent more than the home is worth refinance from a private loan to a GSE loan, we are effectively buying out a loan with a high potential to go bad at 100 cents on the dollar and transferring the risk to the government. In the same vein, it triples the incentive for principle reduction, going as high as 63 cents on the dollar. In such cases, you have to wonder if [it wouldn’t be better] just to give the money to the homeowner.
I am also disappointed that the proposal doesn’t push letting foreclosed homeowners stay in their homes as renters. This has to beat selling the foreclosed homes off as rental units to a new tenant. But on the whole, I think it is the best proposal the administration has put forward thus far on housing.”
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