President Obama's address to the nation Thursday night on potential ways to stimulate the lagging economy gave implicit support to a nationwide mortgage refinancing program.
The president said his administration is planning to help responsible homeowners.
"We’re going to work with federal housing agencies to help more people refinance their mortgages at interest rates that are now near 4%," he said. "That's a step that can put more than $2,000 a year in a family's pocket, and give a lift to an economy still burdened by the drop in housing prices."
Critics quickly argued the plan does not go far enough to repair the ailing mortgage finance market. Mark Vitner, senior economist at Wells Fargo (WFC: 23.52 -3.61%) said "that's not the bold stroke that I want. It’s not just refinance; we want people to be able to sell their homes."
Further, such a program would be costly. The Congressional Budget Office estimates such a program, if enacted, would require the federal government to spend $600 million.
So while the program is already embattled, a research report being circulated within the industry, which some say may provide the blueprint to the Obama refi program, states the plan is problematic, but entirely possible.
The paper — written by Alan Boyce, CEO of Absalon Project, a joint venture between affiliates of VP Securities and Soros Fund Management to promote the Danish model of mortgage finance — outlines myriad problems and proffers appropriate solutions.
For example, the administration's plan would incentivize mortgage servicers to participate by eliminating representation and warranty liabilities from legacy mortgages.
Fannie Mae and Freddie Mac will be allowed to raise guarantee fees to a maximum of 40 basis points from 25 bps.
Title insurance will be streamlined and fees capped at "a few hundred dollars at most," the report states.
"Based on these computations, we expect mortgage payments to fall by about $70 billion, benefiting about 25 million borrowers," according to Glenn Hubbard and Chris Mayer, finance and economics professors at Columbia Business School and co-authors of the report.
One party that will suffer from the program is the mortgage bond investors of Fannie Mae and Freddie Mac. However, the report expects this will be muted, ultimately for many reasons. For one, massive refinancings are part of the callable nature of these issuances, so investors would understand the risk, the report states.
These investors, the research notes, already benefited greatly the past few years, due to the inefficiencies in the mortgage finance space.
The Obama administration would likely buffer any blows to investor confidence by declaring this massive refinancing program is a one-time-only affair. However, Anthony Sanders professor of real estate finance at George Mason University worries of the hazard associated with such an initiative.
"I disagree that the effects will be muted," he said. "Unprecedented intrusion in the market is not anticipated. Therefore, not welcomed and will hurt."
Write to Jacob Gaffney.
Follow him on Twitter @jacobgaffney.
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