In his State of the Union address last night, President Obama proposed a national mortgage refinance program designed to cut red tape and save the average homeowner about $3,000 per year. The President offered few details about the plan, except that the interest rate would be historically low, loan-to-value would not be a limiting factor, and a bank fee will help offset the costs of the program. The government has the responsibility to lead the nation out of the housing mess, but any government-sponsored program must avoid these five pitfalls to be successful.
- It Cannot Be Another Bank Bailout in Disguise. Banks still hold a large amount of mortgage debt, especially second mortgages, on their balance sheets. Thanks to the repeal of mark-to-market accounting, the banks can list these mortgages at full value on their balance sheets, even if the home is underwater. By allowing homeowners to refinance regardless of loan-to-value, the banks could receive a windfall.
- It Cannot Reward Overleveraged, Irresponsible Homeowners. The housing mess exists because homeowners borrowed beyond their means. Today, banks make loans based upon fundamental metrics, so fewer borrows qualify and the loan proceeds are often not enough to pay off existing debt. The President’s solution appears to allow overleveraged, irresponsible homeowners to continue borrowing beyond their means because sticking to the fundamentals has not worked. Why else eliminate a loan-to-value requirement and allow historically low interest rates?
- It Cannot Be a Hidden Tax on Renters. A national plan cannot place an undue burden on renters, which is a large and growing segment of society. The home ownership rate is falling fast from a high of about 67% to a potential low of about 58% in a few years, if you back out the number of distressed mortgages. Almost half the population rents. Face it, renting makes sense for today’s mobile workforce. A national housing plan should consider today’s household demographics and the way that people live and work. The nuclear family is a minority of households today. More hard-working, sophisticated people now choose to rent instead of own. A better plan might be to force the liquidation of the enormous inventory of bank-owned properties to private investors, so that those homes could be added to the rental stock and reduce rental rates. Eager investors are waiting for the chance to buy these properties.
- It Cannot Increase the Size of the Government. A responsible national mortgage plan should accomplish its goal without increasing the bureaucracy or the deficit. How exactly is the government going to administer a national mortgage program that could refinance 10 million or more mortgages without doing this? Perhaps the banks themselves will help administer it. Will the banks receive a closing fee in addition to their troubled loans being paid off?
- It Cannot Have Ambiguous Terms. Past programs have failed due to cryptic terms and arduous qualifications standards. To be successful, the terms of the program must be black and white and applicable to the majority of the marketplace. Many questions must be answered. What is the maximum loan size? Can you get multiple loans? Will the program include investors? Do those who have been foreclosed but still reside in their home qualify? Are the millions who were foreclosed over the last few years just out of luck? Who will own the mortgages? These underwater loans will be assumable by a future buyer on a non-recourse basis, right? How else does an underwater borrower exit the program? The more questions you ask, the more you can see that the program cannot be administered equitably.
What we really need is a clear and consistent market-driven solution. Stop changing the rules of the game. Investors demand consistent rules, otherwise they wait on the sidelines. Although painful, the system in place will resolve the matter in the shortest timeframe. To make it work, we must resolve to hold each party accountable for its actions. Doing so will promote the values that are needed to prevent another crisis.
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