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.