This week’s big news was the plan to expand refinancing eligibility. I’m devoting this week’s post to explaining which problems this plan will and won’t solve, and which other policies being kicked around might solve the problems that easier refinancing won’t. But first, a quick look at the latest home price numbers.
Home Prices Up and Down Depending on Where You Live
Two different home price indexes reported this week that prices have fallen nationally about 4% this year up to August 2011. But prices were relatively stable over the last three months after slipping earlier this year, with Case-Shiller reporting a -0.3% drop and the Federal Housing Finance Agency (FHFA) reporting a +0.6% bump. Nationally, this is a sign that prices might finally be leveling out, which could be the cue that everyone’s been waiting for – the cue for builders to start planning to build single family homes and for banks and home sellers that it’s time to start putting more of their vacant or distressed properties on the market. As always, location matters: this past summer, prices went up the most in Detroit, followed by Chicago, Washington DC, Minneapolis and Boston. So what’s going on here? Well, Detroit’s price rise is a bounceback from the big price decline during the recession – the largest drop among big metros outside the Sunbelt. The other cities’ price increases were helped by a combinationrelatively low vacancy rates and stable job growth. In Atlanta, where jobs are disappearing, home prices fell most, followed by Phoenix, where there are still a ton of vacant homes. Sellers in those cities hoping to unload will have to wait.
The Federal Government’s Re-Fi Plan: The Good, The Bad and The Ugly
Now on to politics and policy. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, announced an expansion in refinancing eligibility through the Home Affordable Refinance Program (HARP). The official notice is here.
So here’s what’s new: some people who are seriously underwater are now eligible to refinance their First: what does it mean for you? You might be able to refinance if your loan-to-value is more than 125% — which used to be the ceiling for eligibility – and you might be able to pay lower fees to refinance. Also, under these new rules, your lender might be more willing to refinance because it makes refinancing less risky for them. BUT, your loan must be owned or guaranteed by mortgages.
First:what does it mean for you? You might be able to refinance if your loan-to-value is more than 125% — which used to be the ceiling for eligibility – and you might be able to pay lower fees to refinance. Also, under these new rules, your lender might be more willing to refinance because it makes refinancing less risky for them. BUT: your loan must be owned or guaranteed by Fannie Mae or Freddie Mac and you need to be current on your mortgage payments, have no late payments in the last six months, and no more than one late payment in the last twelve months. That’s a big “but” and will disqualify many people who want to refinance, but those who do qualify might save a lot. A rough rule-of-thumb is that lowering your mortgage rate by a point will lower your monthly payment by around 10%, but the effect on your payment depends on the details of your loan.
Next:what does it mean for the economy and the housing market? Since borrowers have to be current on their payments to qualify, lots of people on the verge of losing their homeswon’t be helped. And, a lower mortgage rate doesn’t mean a lower loan principal balance right away (even though some borrowers might use the lower rates to shorten their loan and start paying down) – so really underwater borrowers will stay really underwater and still at risk of default and foreclosure. And of course easing refinancing doesn’t help people buy homes because you need to own a home already in order to refinance. So what will this plan do? Stimulate the economy – somewhat. Qualifying borrowers will have lower monthly mortgage payments and therefore more money in their pockets to spend on other things. Who pays for this? Investors in mortgages or mortgage-backed securities – which includes government agencies – who will receive reduced mortgage payments from borrowers. On balance, it’s stimulus because the borrowers will increase their spending more than the investors will decrease theirs. In short, the refinancing expansion is an economic stimulus that avoids the messy politics of trying to get Congress to approve more stimulus plans.
Since the ReFi plan leaves many problems unsolved, debate is brewing on other housing policies. No formal proposals in these areas have come out yet, so treat this as a viewer’s guide to what might be coming next from Washington on housing policy. Grab your beer and chips, and here we go:
1) Principal reductions: The most direct way to prevent future defaults and foreclosures is to reduce mortgage principal balances – in order to get underwater borrowers closer to air. These proposals typically call for the government or whoever the mortgage-holder is to absorb the cost of the reduction. But there’s no free lunch for the borrower.Economist Marty Feldstein proposed that borrowers could have principal reductions in exchange for the lender having “recourse” – which means that a borrower who defaults after a principal reduction could lose not only their house but other assets. Earlier principal reduction proposals called for borrowers who benefited to share any future increases in home value with the government or whoever absorbed the cost of the loan reduction.
2) Renting vacant, foreclosed properties: Bank and government agencies own vacant properties, which aren’t earning them any money – and vacant properties pull down neighboring home values, too. At the same time, as fewer people want to own their own homes, the demand for rentals is rising, leading to lower rental vacancies and sky-high rents. This “plan” aims to kill all birds with one stone, and give owners of vacant properties – or investors who would buy them – incentives to rent them out? Sounds great in theory. Could work in practice if the investors can spruce up these homes and manage them as rentals. The hitch is that lots of the vacant, foreclosed homes are in the outer suburbs (or what you could call, the middle of nowhere), where so much construction during the housing boom took place, but the tight rental markets tend to be in big, dense cities. If we could only figure out how to take a vacant, foreclosed single-family home in Modesto and rent it out as a one-bedroom apartment in San Francisco ….
3) The mortgage interest deduction – just about every economist wants to tackle this, but just about no politician does (can we say, election suicide?). The two hotly debated questions are (1) if the government is going to spend $100 billion annually to support homeownership, is the mortgage interest deduction, as it’s currently designed, the right way to do it? and (2) should the government spend $100 billion annually to help people buy homes in the first place? This is a big, messy question that affects tens of millions of homeowners and all taxpayers. I’ll take this on in a future week.
3) Do we need Fannie Mae and Freddie Mac? – do these institutions help keep mortgage rates low and expand homeownership, or do they deserve blame for the housing mess we’re in? Politicians will ramp up this debate as the housing market moves out of intensive care and can begin to walk on its own with less government support. This, too, I’ll take up in a future week.
- FHFA announcement about HARP expansions