Federal Officials: No Plans for Expanding Refinance Programs Wall Street Journal By Nick Timiraos 08-05-2010

Federal Officials: No Plans for Expanding Refinance Programs
The Wall Street Journal
By Nick Timiraos
August 5, 2010

Obama administration officials knocked down rumors on Thursday about any plan for new programs–dubbed an “August Surprise” –to streamline refinancing or cut mortgage balances for homeowners in a bid to stimulate the economy without asking Congress for money ahead of the midterm elections.

Speculation has intensified over the past week as some economists have proposed that the government put cash in more Americans’ pockets by making it easier to refinance. A news report on Thursday suggested that such stimulus might also include a plan to lower mortgage balances for some homeowners.

These reports have worried mortgage investors, sending prices down. But elements of the so-called surprise programs already exist in far more modest forms and there are no plans expand them, administration officials said. The Obama administration said in March that it would create a pair of programs later this year that would allow mortgage servicers and investors to voluntarily reduce loans balances.

One of those programs—which hasn’t been finalized yet but will be soon—will allow mortgage investors to refinance current homeowners who are underwater, or owe more than their homes are worth, into loans backed by the Federal Housing Administration if investors are willing to take a haircut.

And it already has had for more than one year a separate program that allows some homeowners to refinance underwater loans. That initiative—called Home Affordable Refinance Program, or HARP—has fallen short of its initial goals.

Administration officials dismissed the idea that something bigger might be in the works. “The Administration is not considering a change in policy in this area,” said a Treasury Department spokesman.

What about a program to “streamline” refinance borrowers without regard for their credit scores or equity position? “There is not any plan for expanding into a high [loan-to-value] refinance program at this time,” said FHA Commissioner David Stevens.

Economists and mortgage analysts have suggested that the government could easily create economic stimulus by removing barriers to refinancing. Mortgage rates continue to reach record lows: the weekly survey of 30-year fixed-rate loans by Freddie Mac averaged 4.49%, an all-time record. Rates on 15-year fixed-rate loans averaged 3.95%, also a record.

But millions of borrowers haven’t taken advantage of those rates because they can’t qualify—their incomes have fallen, their credit score isn’t pristine, or they don’t have much or any home equity—or because they don’t want to pay higher refinance fees. Morgan Stanley economist David Greenlaw last week said that the government could produce $46 billion in savings by refinancing 37 million loans held or guaranteed by Fannie Mae, Freddie Mac, or government agencies.

But there are reasons to be skeptical that the government would adopt such a program now. First, it would be hard to make it work, and the administration knows this all too well. Both HARP and the companion modification program, HAMP (Home Affordable Modification Program), have had numerous frictions that have hindered their effectiveness. Banks have struggled to implement the program and borrowers haven’t participated near the levels expected. Rather than create an entirely new program—which could take weeks if not months to get running—the administration is more likely to make tweaks to the programs it has already built.

And it’s still not clear how much economic punch such a program could pack. Analysts at Goldman Sachs and Credit Suisse say such a program would generate an average annual savings of $15 billion, about one third of Mr. Greenlaw’s estimate, while analysts at Barclays Capital say the actual savings would be even lower, at around $6 billion annually.

Another problem, this type of stimulus isn’t free. Even though the government wouldn’t pay for it, mortgage investors would because the loans they thought had a certain return would pay off sooner than expected, leaving investors with money to invest at lower rates.

“It would be far from costless for the banks, [Fannie and Freddie], mutual fund investors, sovereign portfolios and other institutions now holding agency [mortgage-backed securities]. They would be the providers of the windfall,” writes Deutsche Bank analyst Steven Abrahams. “Given the substantial resources invested in rebuilding bank capital and bringing the sector back to full strength, the impact of ruthless refinancing might give policymakers reason to pause.”

Ultimately, investors would price that uncertainty into mortgages, raising rates for future borrowers. Mr. Abrahams estimates that such a program could raise future borrowers’ rates by 0.4 percentage points.

In addition, such a proposal would ostensibly be designed to improve the economy before the midterm elections, but the politics aren’t as obvious at they seem. Helping some homeowners could breed resentment that another favored political class is getting a bailout. And if any of those moves were to create bigger losses for Fannie Mae and Freddie Mac, that puts an even brighter spotlight on those wards of the state, whose futures are about to be addressed by the administration.