Obama's Mortgage Relief Plan

     In line with their reelection strategy, Operation Tank the Economy, the Republicans have not moved forward on Obama's American Jobs Act. This strategy, however may see limited success in the future as there are signs the economy is coming back. They're recession dividend could be declining.

     However Obama has thankfully used the power of his office to pass those things which can be done without a vote of Congress; most recently, this week he put through measures for mortgage relief as well as student loan modification-another very pressing need.

      As to his mortgage relief plan, the centerpiece is the strengthening and expanding of HARP-Home Affordable Refinance Program. On Oct 24 the Federal Housing Finance Agency (FHFA) its plans to strengthen and extend HARP till December 2013.

      To be sure, HARP has existed for 2 years but there are several reasons that it was not effective and saw only a fraction of those eligible use the program:

   

1. Low public awareness combined with homeowner fears of being rejected.
2. Fears by mortgage originators that the housing agencies may “put back” these new loans if they subsequently move into default, which leads them to apply unduly high underwriting standards.
3. Refusal by some holders of second liens to subordinate their claims to the refinanced first mortgage.
4. Restrictions on applying the original mortgage insurance policy to the refinanced loan, particularly if the refinanced loan has a different servicer.

     "The Administration plans to improve HARP in several dimensions, most notably by removing the 125 percent loan-to-value ceiling, by eliminating the need for a new appraisal in many cases, by lowering fees for borrowers, and by waiving some representations and warranties that lenders are required to make to the housing agencies."

      
http://www.piie.com/realtime/?p=2456

      To deal with the very pressing problem of public awareness:

      "the FHFA should direct the housing agencies to write to all mortgagors whose loans are eligible under HARP to inform them of their eligibility to refinance at current market rates."

        According to Joseph Gagnon, the writer of this article, the macroeconomic effects of this restructuring could be huge:

       "Remy, Lucas, and Moore (2011) estimate that a program similar to the one described above would result in $428 billion additional refinancings with annual savings to household borrowers of $7.4 billion. They estimate that the program would have a small positive effect on the net worth of the housing agencies, but that it would have a small net cost to the federal government (in present value, not annual, terms) of less than $1 billion. This cost is entirely accounted for by losses in the Fed’s portfolio of existing MBS that would be prepaid. However, they do not include any positive effect on federal tax revenues from the additional stimulus implied by the fact that the program beneficiaries (indebted households) have far higher marginal propensities to consume than the existing MBS investors, who are mainly financial institutions and foreign governments. If the program increased US GDP by as little as $1 billion per year for two or three years, the additional tax revenues would exceed the costs."


      "The annual savings to borrowers would be about 0.5 percent of GDP. Because of the long-lasting nature of these savings, the total effect on household spending would be greater than that of an equivalent but temporary tax cut.⁴ In addition, the availability of record-low mortgage rates for a fixed period of time likely would spur potential new home buyers into the market and boost home building and sales."

      "Even more important, if the Federal Reserve supported the refinancing boom by purchasing $2 trillion of new MBS, for example, the existing MBS holders would have to find another market in which to invest $2 trillion. This avalanche of money would surely push up stock prices, push down bond yields, support real estate prices, and push up the value of foreign currencies. All of these financial developments would stimulate US economic activity. Based on a recent Fed study (Chung et al 2011) Fed purchases of this magnitude would increase US GDP by more than 2 percent after about two years, creating nearly 3 million additional jobs. This estimate includes only a small part of the effects operating through the mortgage refinance channel discussed above, so that the total effects on the economy would be even larger, perhaps creating 4 million extra jobs or more."

      Clearly Operation Tank the Economy is hitting a snag.