Updated with latest details about the refinancing plan
NEW YORK (
TheStreet) - The Obama administration on Wednesday unveiled details of
a broad refinancing program
, first announced by the President in his State of the Union address last month.
Analysts are already calling
President Obama's refinancing proposal "dead on arrival"
arguing that it will not get congressional approval in an election year.
The program, which would require congressional approval , is directed at helping "responsible" homeowners, including those who owe more than their homes are currently worth, save an average $3,000 a year by refinancing their mortgages at attractive interest rates.
Borrowers with standard non-GSE mortgages (not jumbo loans) who have been current on their payments for at least the last 6 months -- and not skipped more than one payment in the 6 months prior -- and who have a minimum credit score of 580 will be eligible to get their loans refinanced through the Federal Housing Administration (FHA) into a 4.25% 30-year loan.
To determine a borrower's eligibility, a lender need only confirm that the borrower is employed. The borrower will not have to submit a new appraisal or tax return.
Obama also proposed legislation to allow underwater borrowers to rebuild equity in their homes. Borrowers will have to agree to refinance into a shorter term loan of no more than 20 years with roughly the same monthly payments, which would allow them to pay down a greater portion of their principal and restore equity in their homes.
Bank of America
are the biggest mortgage originators and stand to gain from a refinancing wave and any reduced Rep & Warrants liabilities that could be a part of the deal, but might lose from the proposed bank tax.
Observers say the plan is unlikely to get Congressional approval as Republicans are unlikely to support a bank tax and are against further government intervention in housing.
"We've done this at least four times, where there's some new government program to help homeowners who have trouble with their mortgages. None of these programs have worked," said House Speaker John Boehner (R., Ohio) according to a Wall Street Journal report. "And I don't know why anyone would think that this next idea is going to work."
Still, while Republicans might balk at the plan, the more than 8 million borrowers with underwater mortgages who are current on their payments would likely welcome a proposal that would allow them to take advantage of low interest rates. These borrowers have been unable to take advantage of lower rates because they have negative home equity.
There are many pundits who back a massive refinancing program by the government. President Obama's latest proposal is far smaller in scale to the one proposed by Columbia University economists Glenn Hubbard and Christopher Mayer that would allow all homeowners with a Fannie or Freddie-backed mortgage to refinance at a fixed rate of 4.2% or less if they have been current on their payments for at least three months.
The typical borrower would reduce his or her principal and interest payments by about $350 dollars a month, a total reduction in mortgage payments of nearly $100 billion per year, according to Hubbard. It is expected to help 30 million borrowers refinance $3.7 trillion in mortgages and would come at an immediate fixed cost of $121 billion to the government.
But the savings would help lower the default rate and boost spending, which will have a salutary effect on the economy, the proponents argue.
" It is worthwhile to encourage even more refinancing activity as the president has proposed," Mark Zandi, chief economist for Moody's Analytics argued in the Washington Post last month. "Over 30 million homeowners are current on their mortgages and could profitably refinance at the current mortgage rate, which now average less than 4 percent for a 30-year fixed rate. The macroeconomic benefit could be significant. If, say, half refinance in the next six months, then this would save homeowners over $20 billion in mortgage payments this year and double that next year. Homeowners' extra cash will quickly find its way into the economy."
And it might be in Republicans interest to support refinancing programs considering some battleground states such as Florida, Nevada and Arizona have been severely impacted by the downturn in housing
But critics argue that such proposals merely transfer income from bondholders to homeowners. Banks, the Fed, Fannie Mae, Freddie Mac and foreign investors are the biggest holders of agency mortgage-backed securities.
Fannie Mae and Freddie Mac, whose bailout in 2008 has cost $150 billion to date, have resisted pressure to aggressively refinance loans and offer principal reductions as they look to limit losses to taxpayers. Both impose fees for refinancing, which critics argue are steep.
Separately, the Treasury is investigating a ProPublica
that said Freddie Mac, which has tighter restrictions on refinancing than Fannie Mae, have a multi-billion dollar investment in a product called "inverse floaters" that would lose money if borrowers refinanced at lower rates.
"Freddie Mac is actively supporting efforts for borrowers to realize the benefits of refinancing their mortgages to lower rates," the agency said responding to the report, adding that refinancing accounted for 78% of its loan purchases in 2011.
Moreover, lowering mortgage payments is not a "cure all" that it seems, some analysts argue. A good proportion of borrowers who have availed of mortgage modifications in the past have defaulted. That's because the severely troubled borrowers face mounting debt from other avenues such as medical bills and student debt.
Free market believers are also tired of government intervention in housing and would just rather let the housing problems resolve on their own.
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--Written by Shanthi Bharatwaj in New York
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