President Obama detailed his administration’s new housing plan in Virginia today, a little over a week after announcing it in his State of the Union address. The crux of the plan is providing help to underwater homeowners—which, in turn, could also boost the economy.
The plan works like this: everyone who has a mortgage with a non-government sponsored enterprise (GSE), like Fannie Mae and Freddie Mac, is eligible to refinance under this plan if they meet the government’s criteria. (There are also features to further incentivize help for those with GSE loans—more on that later). Non-GSE homeowners must be current on their payments, meet a minimum credit score and be a single-family, owner-occupied home within FHA loan limits to get help under the new plan. (The idea is to target aid to families that aren’t already quite wealthy and are trying to stay in their current homes).
Crucially, however, it doesn’t matter if the homeowner is underwater on their mortgage (meaning they owe more than their home is worth). This is important because underwater homeowners typically can’t refinance, which creates a vicious economic cycle for the country: with high mortgage payments, people have less money to spend and so the economy suffers. But a suffering economy pushes home prices downward, meaning underwater homeowners are sunk even deeper.
Obama’s plan would allow homeowners to refinance at current rates, which are quite low. In the hypothetical distributed by the White House, say there’s a family with a $300,000 mortgage that they took out in 2005 at 6 percent. They’d have a balance of $272,000 with monthly payments of $1,800—but their home is only worth, say, $225,000. This means they’re underwater and can’t refinance at today’s lower rate. The administration plan would allow them to refinance at 4.25 percent, which would reduce their monthly payments by $460 per month. This extra money should help revive the economy—Matthew Yglesias wonders if perhaps this is a job-creation “game-changer.”
I spoke with Dean Baker, co-director of the Center for Economic and Policy Research, who said the plan got it “mostly right” but was bearish on the economic impact. He noted that even if 3 million to 4 million homeowners participated, and received $3,000 in annual benefits—both high-end estimates—that would be about $12 billion, or less than one-tenth of 1 percent of the country’s GDP.
Baker said in his view, the plan’s merit is helping people, not the economy. “The main thing is, Is it helping homeowners directly? Is it helping communities?” he said.
In any case, it would cost the government between $5 and $10 billion to implement—certainly an amount worth borrowing, if the plan provides the intended benefit. But the administration wants to pay for it instead by implementing a small fee on banks. This not only disables the inevitable Republican argument that the plan adds to the deficit but also would paint their opposition as an act of protection for Wall Street banks.
The initiative, as Greg Sargent notes, is an unabashed case for government involvement in fixing economic troubles, and contrasts well with Mitt Romney’s earlier statements that the housing market should be allowed to bottom out. (Though in recent weeks, as he heads to foreclosure-plagued Nevada for a primary, Romney has said he’s open to getting the government involved).
But there are other ways to get the government more deeply involved, and which the administration isn’t attempting. For people with GSE loans, the new plan simply adds incentives for write-downs and refinancing.
But it’s within the government’s power to simply engage in a mass write-down program, without worrying about “incentives” for banks—it’s just that Edward DeMarco, the current head of the Federal Housing Finance Agency, has declined to do so. Many House Democrats want DeMarco to resign, and have urged Obama to use his recess appointment powers, as he did with Richard Cordray and the National Labor Relations Board nominees, to put someone in place who’s much less recalcitrant. The new “incentives” in this plan make it clear the administration has no interest in doing that.
Furthermore, the incentives might end up giving undue help to the banks. Under the new plan, the administration aims to triple the incentives for principal write-downs under the Home Affordable Mortgage Program (HAMP), from a range of six to twenty-one cents on the dollar to a range of eighteen to sixty-three cents.
If the average federal incentives handed out are closer to sixty-three cents, Baker notes, that’s pretty generous to banks—especially since they’re holding a lot of mortgages that are probably going to fail anyhow, and that they might not even fairly hold the papers too anyway. “We’re giving a lot to the bank” in that scenario, he noted.
The plan must first pass Congress, and Republicans are—wait for it—skeptical. But if it does, despite its flaws, the plan will no doubt provide much-needed financial relief to a lot of homeowners.