Mortgage refinancing to get easier under revised U.S. program

The plan could help 1 million to 2 million people get significantly lower monthly payments in hopes of stabilizing the real estate market.

By Jim Puzzanghera, Don Lee and Alejandro LazoLos Angeles Times Staff Writers
The Obama administration is launching yet another high-profile campaign to shore up the housing market — and with it, the economy — by making it easier for some struggling homeowners to refinance underwater mortgage loans at today’s ultra-low interest rates.

The federal government’s new rules will encourage borrowers to secure new loans no matter how much value their homes have lost during the nation’s housing crisis, with the hitch that they can’t have missed any mortgage payments for the last six months.

The plan could help 1 million to 2 million people get significantly lower monthly payments in hopes of stabilizing the real estate market. On top of that, it would boost the economy by putting about $2,500 more in a typical homeowner’s pocket each year, administration officials said.

But given the huge problems that continue to plague the real estate market, the plan is less a solution to the foreclosure crisis than a firebreak to try to prevent things from getting worse, analysts said. In particular, the program won’t help the 3.5 million borrowers who are seriously delinquent on their loans or are already in default.

“It’s a step forward, but what we need is a leap forward,” saidJohn Taylor, president of the National Community Reinvestment Coalition, an association of organizations that promote access to affordable housing.

The Obama administration has struggled to find a fix for the housing crisis. A program to lure banks to permanently modify mortgages has fallen so far short of its goals thatRepublicans have pushed to kill it. And the refinancing program, designed to help millions of homeowners, has been revised several times in hopes of making it more effective.

Separately, Federal Reserve officials have hinted in recent days that they could launch another program to buy up mortgage-backed bonds in an effort to pull home loan rates lower.

“They keep trying to find something that’s going to work and so far they haven’t found the silver bullet. Arguably there’s no silver bullet,” Bert Ely, an independent banking analyst, said of the Obama administration’s attempts to help the housing market.

“More moderate approaches haven’t worked, so now they’re trying something that frankly is more radical,” he said.

The plan could help borrowers such as James Perry, 36, an editor for a television show who owns two properties that are underwater, meaning he owes more on the mortgages than the homes are worth.

Perry bought a condominium in Santa Monica in 2005, near the height of the market, and rented it out after he couldn’t sell it. Its value has dropped about 6%, he said. He owns a larger home in Tarzana for his growing family, and its value has plunged nearly 20%.

Refinancing both properties could save him about $400 a month, Perry said. “I am not a rich guy, so $400 a month will help,” he said. “I have two kids. I would like to put that toward some college savings, and it would just make for a little more breathing room. We are not in any sort of trouble, but an extra $400 a month will obviously make us happier.”

Perry said he tried refinancing the Santa Monica home about a year ago, paying about $500 for the appraisal, but the home’s value didn’t allow him to qualify for a low rate. Given that experience, he didn’t bother trying to refinance the Tarzana home.

The plan announced Monday amounts to a sweeping overhaul of the 2½-year-old Home Affordable Refinance Program, easing rules and reducing fees to allow many more homeowners potentially to take advantage of historically low mortgage rates. Through August, the program had helped 894,000 homeowners refinance.

The revisions include lifting a ceiling that barred participation by borrowers who owed more than 125% of the value of their homes, and using a controversial modeling method to replace costly appraisals that are among the fees that have kept some homeowners from refinancing.

“These are important steps that will help more homeowners refinance at lower rates, save consumers money and help get folks spending again,” President Obama said in touting the changes during an appearance in Las Vegas on Monday.

Nevada, California and Florida are among the states hit hardest by the subprime housing bubble crash.

About 14.6 million mortgages nationwide were underwater at the end of the first quarter, about 29% of the nearly 51 million residential mortgages nationwide, according to Moody’s Analytics andEquifax. The rate was higher in California, where about 2.1 million mortgages are underwater, a third of the state’s 6.3 million mortgages.

Perry’s refinancing problems were typical, mortgage experts said. Even though HARP allows underwater homes to qualify, banks usually won’t refinance a loan in which the borrower owed more than 105% of the value.

The new rules, including waiving some key legal liabilities banks can have if the loans go bad and no longer require a new appraisal, should help considerably, said mortgage broker Jeff Lazerson, head of Mortgage Grader in Laguna Niguel, who is working with Perry.

“It is actually going to work,” Lazerson said.

Obama and administration officials tried not to oversell the effect of the new refinancing program, having been sharply criticized for projecting that another initiative — the Home Affordable Modification Program — would help 3 million to 4 million homeowners. That program has permanently modified the mortgages of about 816,000 homeowners since it started in 2009.

The changes in the refinancing program were announced by the independent Federal Housing Finance Agency, which has been working with the White House to find ways to help more homeowners.

HARP is for homeowners with mortgages owned or backed byFannie Mae or Freddie Mac, the housing finance giants that were seized by the federal government in 2008 as they teetered near bankruptcy. The firms own about half of all U.S. mortgages.

Detailed new rules will be issued Nov. 15 and the Federal Housing Finance Agency estimated that they could result in the number of refinances through the program doubling by the end of 2013.

Rep. Dennis Cardoza (D-Atwater) said that’s not nearly enough help. “I think it’s a step in the right direction, but a baby step,” he said. Cardoza would like to see every homeowner be enabled to refinance.

Housing and Urban Development Secretary Shaun Donovan said the additional money in the hands of consumers would help stimulate the economy, which in turn would help stabilize the housing market. “It’s the equivalent of a substantial tax cut for these families,” he said.

But even by the most optimistic projections, analysts said the program was unlikely to provide much of a stimulus to the overall economy. Based on the White House’s estimate that each refinancing would save a borrower an average of $2,500 a year, the program would add $2.5 billion to $7.5 billion in annual consumer spending — a pittance in an economy exceeding $14 trillion.

“This is not going to turn around the economy, stabilize the housing market or reduce the unemployment problem,” said Phillip Swagel, a University of Maryland professor and former chief economist at the Treasury Department in the last Bush administration.

He and other analysts say federal officials could have gone further and made deeper changes to boost refinancing activity even more. For example, officials could have done away with borrower fees entirely. As it is, Mark Zandi, chief economist at Moody’s Analytics, estimates that closing costs will drop from about $3,500 currently to $2,000 under the new program.

“Another impediment to even more refis is that many of these potential [borrowers] will be very reluctant to participate given their concerns about their incomes and jobs,” Zandi said.

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