The initial verdict on the administration’s new mortgage-refinancing plan was that it will have a fairly modest impact. Yes, it would likely help out struggling homeowners in states like Nevada and Florida, where home prices have plunged so deeply that many people now owe more than 125 percent of what their homes are worth. But it’s hard to see how the plan can boost the economy to any noticeable degree.
— Joe Gagnon of the Peterson Institute for International Economics strikes a a more optimistic note than most studies do (especially the CBO one I mentioned yesterday), arguing that the new refi plan could actually save households some $60 billion to $80 billion per year, or about 0.5 percent of GDP. That’s a big oomph. But Gagnon’s estimate depends on a few assumptions. The Federal Reserve, for one, would have to commit to keep mortgage rates low for at least 12 months. What’s more, Gagnon notes, the Fed could spur a really massive refinancing wave if it purchased $2 trillion in mortgage-backed securities, flooding money into the broader economy. That’s a big “if,” though.
— Over at the Center for American Progress, Sarah Rosen Wartell, David Min and Jordan Eizenga argue that the refinancing plan’s success will hinge on getting the fine print just right. For one, they note, the Federal Housing Finance Agency needs to make it easier and cheaper for homeowners to get their homes appraised before refinancing. That’s been a big barrier to date. They also suggest ways for the FHFA to entice (or arm-twist) banks into participating. One suggestion: establish explicit targets for refinancing that must be met by any mortgage-servicing companies that does business with Fannie and Freddie.
— For a sour take, see Felix Salmon, who calls the plan “pathetic” and notes that, by the FHFA’s own estimate, the pace of refinancing won’t rise much over the current rate. What’s more, because the plan does nothing to reduce the principal of home loans, it can only help so much: “if you’re underwater when you get your HARP refinance, you’ll be underwater afterwards, too.” Then again, Salmon does concede that this is probably the best the administration can do, given that nothing more ambitious can eke through Congress.
— David Dayen raises a different concern. What the FHFA is now saying is that banks who participate in the program won’t be forced to buy back their old loans, even if those loans were improperly originated. When Fannie and Freddie get sold bad loans, they normally can force the bank that originated the loan to take it back. Now, the banks can avoid that risk for a modest fee. Dayen argues that this move could weaken the FHFA’s ongoing lawsuit against 17 banks over this precise issue. “A mass refi plan like this may be worthwhile as stimulus,” he notes, “but as far as the rule of law is concerned it pretty much stinks.”