A Hail Mary
Monday, September 5, 2011
Obama’s Refi Plan May Not Work For Local Market
Glut Of Underwater Borrowers, Desire To Shorten Terms May Sink Nascent Strategy
By Colleen M. Sullivan
Banker & Tradesman Staff Writer
The Obama administration is floating a new backdoor stimulus plan, pushing Fannie Mae and Freddie Mac to allow more people to refinance at today’s low rates. But even mortgage brokers say the idea may fizzle.
It’s easy to see why the plan might appeal to the administration, according to Northeastern University economics professor Barry Bluestone. The two mortgage giants carry about $2.4 trillion in loans on their books at rates above 4.5 percent; if all the homeowners with such mortgages were to refinance into today’s 4 percent rates, collectively they could save upwards of $80 billion.
And the savings wouldn’t come at the expense of Uncle Sam’s balance sheet – instead, any hit would be to investors who own the mortgage-backed securities insured by Fannie and Freddie. When the loans were refinanced, investors would get their original money back – but they’d then have to go looking for new bonds to buy at today’s much lower interest rates.
“The thinking is, ‘It may not be the strongest stimulus we can imagine, but most of the strong stimuli we can’t get through Congress, so let’s see if we can’t find one that potentially has bipartisan support,’” explained Bluestone. “The only way it actually stimulates the economy is by leaving consumers with a little bit more money in their pockets, after they refinance.”
Saving Vs. Spending
But if the plan does not perform as strongly as hoped, it won’t be for lack of demand, mortgage brokers and industry professionals told Banker & Tradesman.
“I tell you, we’re swamped,” said Jonathan Asker, CEO of North Atlantic Appraisal in West Bridgewater. “The rates are so low right now, you’re starting to tap into the people who might have said last summer, ‘It doesn’t make sense to do this for three-quarters of a point,’ but who might be willing to refinance for a rate cut of 1 or 1.25 percent.”
But the problem for the feds is that many such borrowers are seizing the opportunity to get a loan with a shorter term, looking to pay more to pay down debt now rather than save a little over the longer term.
“What we’ve seen is a lot of people going from a 30- to a 20- or a 20- to a 15-year fixed rate loan,” said Craig Tashjian, vice president at Fairway Independent Mortgage in Needham. “People are trying to get rid of debt as opposed to add debt on.”
While potentially helpful for their own households, those kinds of refinancings wouldn’t have much effect on the broader economy, said Bluestone.
If consumers take the money they save on their mortgage and go out and spend it on other things they need, that creates demand. But if they sock away those savings, “it has virtually no effect whatsoever on the economy,” said Bluestone.
“People who are employed, people who are doing relatively well – they’re kind of pulling in their consumer horns, not going out and spending a lot of money,” he told Banker & Tradesman.
Good On Paper
And other homeowners – those scrimping to make their current payments, and who therefore might spend any refinancing savings on other things they need – are still finding it tough to get deals done.
“I find more of the people that are stuck are those who did 80-10-10 [loans], or 100 percent financing, and because they are now upside down, they can’t subordinate or get rid of their second mortgage,” said Jaclynn Sulfaro, president of the Massachusetts Mortgage Association and vice president of operations at Medford-based Constitution Financial Group. “That seems to me like more of an issue.”
Plus, Fannie and Freddie already have programs in place open to borrowers with good credit who have high loan-to-value ratios, she points out.
But even such programs can’t do much for those who are completely underwater – and their numbers have been on the increase as home values remain shaky and appraisals are pushed lower by distressed comparable sales figures, inexperienced appraisers and skittish lenders.
“I have a borrower right now who bought a house in 2009, for a little less than $300,000. When I tried to help him refinance last year, the appraisal came back in at about $270,000, so he couldn’t refinance,” said Geof McLaughlin, a broker at Mortgage Master in Walpole. “Now, there’s a dip [in the rates] again, so I looked, hoping that the values came back a little bit, and actually the appraisal came back even lower.”
“On paper it sounds good to bring everyone down to 4 percent,” said Tashjian. “But from a practical standpoint…the banks are doing their regular process in terms of underwriting, appraisals and all that. That hasn’t gone away. So I don’t know if it will have much impact.”
All of these problems are a drag on the housing market. According to Bluestone’s latest analysis “we’re now talking about a cycle that might last 12, 13, or more years [before prices return to 2005 levels]. That is a very long time for home prices to return, and that’s in Greater Boston, where they only fell 15 to 20 percent. All the glaciers will unfreeze before [prices] return in Florida.”
