Though it was pronounced dead-before-arrival by opponents on Capitol Hill, President Obama’s new mortgage refinancing package contained far more than legislative proposals.
In fact, significant portions of it require no approval from a hyperpartisan Congress and could begin affecting consumers within weeks. Here’s a quick rundown on key pieces of the plan, with a handicapping of their likely impact this year:
●Going nowhere: If you’ve got an underwater mortgage that isn’t owned or guaranteed by Fannie Mae or Freddie Mac, the president’s marquee proposal to help you refinance into a 4 percent mortgage is not likely to be of assistance. The plan’s core concept of funding your rate cut by levying a fee on the largest banks — “based on their size and the riskiness of their activities” — would be a nonstarter politically even if this weren’t an election year. R.I.P.
●Moving fast: Refinancings can be speeded up by key executive branch agencies, and the new program directs them to do so within the next few weeks wherever possible. For example, the Federal Housing Administration will be removing a major barrier for lenders to “streamline” refinancings for current, nondelinquent borrowers who want to take advantage of today’s low rates. The FHA no longer will count streamlined refis — where some standard underwriting requirements are waived — against lenders’ performance ratings on delinquencies. The fear of getting a poor rating is a powerful deterrent for many lenders against doing streamlined refis because they can lose their eligibility to do loans for the FHA altogether. Removing ratings as a barrier should help significant numbers of FHA borrowers get into a better deal.
At the same time, the White House has ordered all the other federal agencies with homebuyer programs to clear the decks for streamlined refis of their existing customers. The Agriculture Department, which runs the third-largest and fastest-growing program — last fiscal year, its loan guarantees funded more than 130,000 home purchases in communities located on the fringes of major metropolitan areas — is expected to waive requirements for new credit reports, appraisals and other documentation for streamlined refinancings. The main requirement for thousands of existing USDA borrowers who want to switch to a lower loan rate: Just be on time with your current payments.
●Coming your way: Though some reforms already are in place, the White House is requiring all federal housing agencies to enforce minimum standards on mortgage servicers, including mandating immediate interventions with offers of forbearance or loan modification at the earliest hint that an owner is facing financial strains. For borrowers, the plan also requires continuous points of contact with a customer service employee of the servicer plus access upon request to all relevant documents the servicer maintains on the borrower’s account. For homeowners who are turned down for a modification or other assistance, the plan requires a right of appeal in “a formal review process” to give the borrowers a second chance.
●Long shot but could happen: The federal regulatory agency that oversees Fannie Mae and Freddie Mac in conservatorship disagrees, but the White House believes that both companies could eliminate all closing costs for large numbers of underwater borrowers who want to refinance into shorter-term loans and rebuild their equity. The idea is aimed at potentially hundreds of thousands of owners whose loans already are owned or backed by Fannie or Freddie.
To encourage them to use their refinancing savings to pay down their principal debt faster, the program would eliminate all closing fees for borrowers who opted for loan terms of 20 or fewer years. The refinancers generally would end up paying the same amount per month on their loans, but the compressed amortization schedule would reduce the principal much faster than a standard 30-year payoff schedule.
For example, say you’re underwater but still current on a 30-year, $214,000 mortgage you took out in 2006. The monthly payment is $1,350 and the remaining principal balance is $200,000. If you refi under the federal government’s Home Affordable Refinance Program, or HARP, into a 30-year mortgage at 4.25 percent, after five years your principal balance would be $182,000: still underwater. But if you refinanced into a 20-year loan at 3.75 percent, you’d owe $152,000 in five years: back into positive equity territory, according to the White House.
Don’t count this one out. It’s a potential winner for borrowers if the legal issues can be resolved.
Ken Harney’s e-mail address is firstname.lastname@example.org.