Obama Refi Plan Raises Doubts About Its Effectiveness

WASHINGTON — A proposal by the Obama administration to help more struggling borrowers refinance into cheaper loans is prompting a familiar question: Is this a program that can relieve the housing crunch, or just another band-aid?

The plan — announced in President Obama's third State of the Union address Tuesday — so far lacks much detail, although it would be paid for with a fee on large banks, and some expect it could even target loans not backed by Fannie Mae and Freddie Mac. But while some see benefits in such a broad scope for the program, others say it could be an administrative nightmare.

"Once you set off that rush to refinance, today's low rates just went away. There's no way there's processing capacity to handle that rush, so the only way a lender can manage that pipeline is to temporarily close the doors or raise their rates to reduce demand," said Pete Mills, a principal at Mortgage Banking Initiatives.

"There are some major operational challenges that will need to be dealt with for this program to work, like processing capacity, long term rate locks, and a secondary market to buy them."

But despite the need to iron out details, some observers are more optimistic about the stimulative effect for the housing sector of such an ambitious plan to avert foreclosures, as well as a boon for large originators who could handle the heightened demand.

"Such a massive refinancing would be positive for the major originators as they not only would profit from the fees associated with a refinancing, but they would be relieving themselves of representation and warranty claims that could be associated with the original loans that are being refinanced," Jaret Seiberg, a senior policy analyst for Guggenheim Partners' Washington Research Group, said in a research note.

Obama offered very few details about the plan, which would require congressional approval. He said it would be designed to help "every responsible homeowner" who wanted to benefit from today's low rates, saving them on average $3,000 a year. More details are expected to be included in a legislative proposal released in a few weeks.

"While government can't fix the problem on its own, responsible homeowners shouldn't have to sit and wait for the housing market to hit bottom to get some relief," he said in Tuesday's speech.

But the idea is just the latest in a long string of plans aimed at aiding distressing homeowners and reviving the real estate market. Just Friday, administration officials announced another effort to expand participation in the separate Home Affordable Modification Program, designed to provide servicers with federal resources to do loan workouts. And late last year, the government — as conservator to Fannie and Freddie — announced steps to boost refinancings for loans backed by the two mortgage giants.

Among the changes announced Friday for the mortgage-modification program — known more commonly as HAMP — officials said they were extending the deadline to apply to the program by a year to the end of 2013 and borrowers who were initially not eligible for HAMP could go through a secondary evaluation process.

Officials briefing reporters about the changes said the various administration program should be viewed for their cumulative effect. "We believe very strongly the sum of the parts will be greater than the parts alone," Gene Sperling, director of the White House's National Economic Council, said on a conference call.

But while each plan has had limited effect, the overall impact on the housing sector has been lackluster.

"Anything that reduces the payments for borrowers, and certainly for distressed underwater borrowers, is positive," said Brian Harris, a senior vice president at Moody's Investors Service. "To date, though, while the various programs have been a help, it's hard to say they've been a resounding success."

Heavy foreclosures and negative equity continue to be a serious drain on the economy, to the point that even the Federal Reserve Board recently released a white paper stressing the need to policymakers of taking action sooner rather than later.

There was some speculation that the administration wanted to announce in the State of the Union progress in pending settlement negotiations over servicing flaws. But absent news like that, some saw President Obama's refinancing proposal as rushing out yet another plan with few details or signs that it can be an improvement on earlier programs.

"The administration knew it needed to talk mortgages and knew it needed to bash big banks, this was plan B," said Karen Shaw Petrou, a managing partner at Federal Financial Analytics Inc.

Meanwhile, industry observers are concerned such a comprehensive refinancing push overlooks the costs taken by investors of mortgage-backed securities, who would be hit when so many borrowers were placed into new loans.

"Somebody's got to pay for it," said Mills. "It's not free. It's people who own those (mortgage-backed) securities that are being refinanced in their pension funds and 401(k)s. They're going to pay for it. The value of their securities will be diminished as they prepay."

Others have criticized the administration's plan to collect fees from the large banks to help fund greater loan financings for trouble borrowers.

"Why would taking money from the industry and applying it to yet another government program be desirable and hopefully effective? I think that's a question mark," said Chip MacDonald, a partner with the law firm Jones Day in Atlanta.

MacDonald questioned the whole notion of the public sector trying to solve the problem.

"It would be better if it were coming from the private sector than from the government, because the government hasn't been effectual in the process," he said. "Wouldn't each individual bank in a competitive environment be better off making those decisions based upon credit metrics and on a case-by-case basis, rather than trying to do some universal program?"

Under the administration's refinancing programs through Fannie and Freddie, close to a million borrowers have been helped, and about 800,000 more are expected to benefit from new changes that were announced in October. But that is still less than the 4 million underwater borrowers that Fed officials estimate could be eligible for aid.

Some say there is just not enough political momentum to support serious action to make a real impact.

"They're all out there, everybody's talking. There are all these good, bad and sideways ideas at various stages of formulation," said Shaw Petrou. "The market's fundamental challenge is uncertainty. One or another of these programs needs to be put into place. That's the real hurdle."