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Obama Wants to Ease Mortgage Credit, But He Can't Say How

NEW YORK ( TheStreet) -- President Barack Obama renewed his push for easier refinancing options for borrowers and highlighted the need for easier access to mortgage credit in his State of the Union address Tuesday.

But he was vague on what policy measures will be used to ease credit conditions.

Compared to his speech last year, housing got a relatively small mention this time around. Perhaps it is because a recovery in home prices has made housing a less urgent issue for Congress.

"The good news is, our housing market is finally healing from the collapse of 2007. Home prices are rising at the fastest pace in six years. Home purchases are up nearly 50%. And construction is expanding again," Obama said in his speech.

Still, he said tight mortgage credit conditions and the inability of many families who are current on their payments to refinance was holding back the economy.

"We need to fix it," he said. "Right now, there's a bill in this Congress that would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today's rates. Democrats and Republicans have supported it before. So what are we waiting for? Take a vote and send me that bill. Why would that be a partisan issue, helping folks refinance?"

It is not entirely clear what bill Obama was referring to as there is more than one refinancing plan currently in Congress awaiting approval.

Earlier this week, Senators Bob Menendez (D, N.J.) and Barbara Boxer (D, Calif.) reintroduced legislation aimed at removing barriers that prevent borrowers with government-backed loans from getting the lowest possible interest rates.

The Responsible Homeowners Act of 2013 aims at improving upon the government's current Home Affordable Refinance Program (HARP) by eliminating appraisal costs, reducing upfront fees on refinances, ensuring consistent standards for all lenders and providing equal access to refinancing options to all borrowers.

That plan was first introduced last year but failed to win approval in Congress. Analysts expect the bill to pass in the Senate but face resistance in the Republican-controlled House. Read more on that plan here.

But what Obama is likely referring to is the "Universal Refinancing" plan he mentioned in his State of the Union address last year.

That plan proposed to allow borrowers with standard non-government-backed mortgages, including those who were underwater, to refinance at lower rates via the Federal Housing Administration. The administration calculated that the plan would save borrowers $3,000 annually.

But the proposal was widely declared as "dead on arrival," because the White House wanted it to be funded through a small tax on banks, which Republicans strongly opposed.

Given the financial woes at the FHA -- the agency in November said it had a more than $16 billion shortfall in its reserves -- most analysts believe the proposal still has little chance of passing.

There has been talk of other alternatives such as allowing Fannie Mae and Freddie Mac to purchase private loans and refinance them or lowering interest rates through the government's Home Affordable Modification Program, which won't require legislation. However, there was no mention of these ideas in Obama's address.

The president also referred to "overlapping regulations" that kept "responsible young families from buying their first home." He urged Congress to "streamline the process and help our economy grow."

Banks have said that a number of regulatory and legal uncertainties prevent them from extending mortgage credit. JPMorgan Chase CEO Jamie Dimon has notably highlighted this problem and called for more coordination between regulators.

New capital rules require them to hold more capital against riskier mortgages. Fear that investors would force them to repurchase mortgages that default has made banks overly cautious, extending loans to only those with pristine credit.

The Consumer Financial Protection Bureau's qualified mortgage rule will require banks to extend credit only to those borrowers who can meet tough criteria on debt-to-income limits and who can provide documentation on income.

The CFPB's new rules could remove half of today's mortgage market, by Core Logic's estimate.

The problem is all these regulations are designed to create a more responsible lending market. Few would want banks to go back to the lax lending standards of the past.

While the pendulum may have swung too far in the other direction, it is unclear what policy makers can do to ease credit without relaxing regulations on banks.

The fact is the government has already laid the groundwork to ease access to credit. The Federal Reserve is keeping interest rates at rock bottom. Fannie Mae, Freddie Mac and the FHA continue to play an outsized role in the housing market, backing nine out of 10 mortgages.

The problem is lawmakers are also simultaneously prosecuting banks for reckless lending practices at the height of the boom. That does not help loosen credit.

Perhaps that is why Obama steered clear of bashing Wall Street in his speech Tuesday.

And that may be more welcome news for banks than for borrowers.

-- Written by Shanthi Bharatwaj in New York

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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