President Obama announced today a move that could allow millions of homeowners—including underwater homeowners— a chance to refinance their mortgages into lower-interest federally insured loans, saving an average borrower in the area of $3,000 a year. According to a report in the Wall Street Journal, the program would extend to roughly one-third of all mortgages that “aren't backed by federal entities and instead are owned by banks or were bundled by private firms that sold them off to investors as mortgage-backed securities.” The FHA would guarantee the new loan.
The Journal goes on to report that program eligibiliy requires homeowners to be current on their last six mortgage payments and have no more than one deliquency in the last six months. President Obama first made reference of this plan in his State of the Union address last month where he also announced a special foreclosure investigative task force to look into abusive lending and packaging of risky mortgages.
The White House has also since tripled the incentive for lenders to conduct princpal writedowns through HAMP.
The administration's efforts to unilaterally prod the housing market come as a report by NPR and ProPublica raises new concerns about how Freddie Mac keeps liquidity in the mortgage market and how it attracts investors to buy mortgage backed securities. Those practices, the article says, could preclude homeowners from refinancing their mortgages at lower rates by bringing in investors for higher-interest loans at a time when mortgage rates were falling to new lows. This, the article concludes, puts the mortgage giant at odds with the homeowner.
Treasury has announced that it would look into the practices outlined in the report since the story broke, but the report's implication that Freddie “bet” against the homeowner has been met with the assertion that these practices are not really nefarious and are also pretty commonplace. Quoted in DSNews.com, Celia Chen, a senior director at Moody’s Analytics said there is a known conflict, but, as indicated in the NPR/ProPublica piece, “employees who make investment decisions are 'walled off' from those who decide the rules for homeowners.
Chen did speak to the larger conern that when Fannie and Freddie are neither fully public nor fully private, saying “they serve neither interest well,” and adding that “Congress needs to chart a course for the agencies’ future, and the sooner the better.”
David Stevens, the former FHA comissioner who now heads up the Mortgage Bankers Association, echoed Chen's sentiment in a blog post, even adding that the availability of the 30-year fixed-rate mortgage product depends on practices like Freddie's:
While many investors may want to buy only government guaranteed bonds such as Treasuries, GNMA, of Freddie/Fannie MBS, most do not want to lock up their funds into a long term investment for 30 years. This “structuring” keeps money flowing into mortgages but, more importantly, keeps 30 year fixed rate mortgage product avaliable for consumers to buy homes.
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