Obama Must Fix Housing, Say Experts

Now that President Obama no longer has to spend so much time and effort focusing on reelection, housing market experts hope he will dedicate more time to rehabilitating …

Now that President Obama no longer has to spend so much time and effort focusing on reelection, housing market experts hope he will dedicate more time to rehabilitating the country’s real estate woes. Although there is a recovery in process, most agree it will not survive on its own steam and needs more support through government action. Millions of people are still owe more on their homes and what they’re worth, and Fannie Mae and Freddie Mac are still too involved in the market as government-sponsored enterprises. Critics argue many federal aid programs could also use the kind of retooling that helped bring Home Affordable Refinance Program around in late 2011. For more on this continue reading the following article from TheStreet.

President Obama’s re-election Tuesday offers him a second shot at fixing the economy and, thereby, the housing market.

Or is it fixing the housing market and, thereby, the economy?

The two are inextricably linked, which is why the President cannot afford to put housing issues on the backburner, even amid signs of a recovery in home prices.

Housing data in recent months have been encouraging, with the S&P Case Shiller 20-city index showing a 2% rise in August on a year-on-year basis. Housing prices in September rose 5% over a year ago, according to Core Logic , the best showing since July 2006.

The supply of homes has tightened significantly, particularly in former housing bubble states, which have worked through the bulk of their foreclosures. Lower share of distressed sales has eased the pressure on home prices. Rock-bottom interest rates have stimulated demand for homes, though the bulk of the purchases are still investor-driven.

But mortgage credit still remains largely unavailable to home buyers, unless they happen to meet the most stringent of credit quality requirements. And more than 10 million borrowers remain underwater- owe more than their homes are worth- and are struggling to refinance their debt amid low interest rates or sell their homes even as the market rebounds.

The Obama Administration has over the past four years launched a slew of programs to help revive the housing market and offer relief to borrowers. But many of the early government programs to help borrowers modify their home loans or refinance their mortgages fell grossly short of targets.

In the fall of 2011, the Treasury revamped the Home Affordable Refinance Program to allow borrowers with loans backed by Fannie Mae (FNMA) and Freddie Mac (FMCC) who were current on their payments to refinance their mortgages, even if they were deeply underwater. Previously, borrowers could refinance only if their loan-to-value ratio was less than 125%.

The newly improved refinancing program has helped boost refinancing applications significantly. More than 1.6 million borrowers have refinanced under HARP to date, of which 618,217 refinances took place in 2012, according to KBW Research.

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Over the past two years, the government and federal regulators have also successfully managed to stave off a "tidal wave" of foreclosures, by imposing moratoriums on foreclosures following a robo-signing scandal and then pressuring big banks including Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) to pursue alternatives to foreclosure by way of principal reductions, forbearance and short sales through a $25-billion mortgage settlement.

But President Obama still has plenty of unfinished business in housing.

On the top of his agenda is a plan to make refinancing available to even those borrowers who do not have loans backed by Fannie and Freddie.

Under the proposed plan, borrowers with standard non-GSE mortgages (not jumbo loans) who have been current on their payments for at least the last 6 months — and not skipped more than one payment in the 6 months prior — and who have a minimum credit score of 580 will be eligible to get their loans refinanced through the FHA into a 4.25% 30-year loan.

The plan, which requires Congressional approval, could save borrowers upto $3,000 a year in mortgage payments. Republicans have balked at the plan, especially because the White House proposed it be funded by a "tax" on the largest banks.

With Republicans still in control of the House, Obama has a fight on his hands.

But he sounded hopeful in a recent address in October. " Let’s be honest – Republicans in Congress won’t act on this plan before the election. But maybe they’ll come to their senses afterward if you give them a push. So contact your Representative, especially if this plan will help you or someone you know. Tell him or her that American homeowners have waited long enough. Tell them that it’s time for Congress to stop standing in the way of our recovery and to start standing up for you."

Another controversial issue would be a proposal to eliminate the mortgage interest deduction as the U.S. works to reduce its deficit. In tackling deductions, President Obama would try to ensure that middle-class borrowers are not unduly affected.

Then there is the tried-and-failed attempt to get the Federal Housing Finance Agency- the regulator of Fannie Mae and Freddie Mac- to reduce principal on mortgages backed by the GSEs.

Acting FHFA director Edward DeMarco has remained steadfastly opposed to principal reductions because it will increase losses to the taxpayer, encourage strategic defaults and offer a backdoor bailout to banks who own second liens on the mortgages.

Proponents have argued that principal reductions in the long run will reduce loan defaults and thereby save the taxpayer from future losses.

There has been plenty of speculation that the President will replace DeMarco when Congress is in recess, in much the way he appointed Richard Cordray to the Consumer Financial Protection Bureau. So that is something to watch out for.

Of course, there is the $180-bilion question of what to do with bailed out mortgage giants Fannie and Freddie. Both Republicans and Democrats agree that the role of the GSEs needs to reduce, but neither parties have offered a concrete solution.

But perhaps Obama could focus on that in the second term. Some analysts contend that Obama will have more freedom to dive into the politically charged issue of mortgage finance and role of government in housing, when he does not face the pressure of being re-elected.

On the regulation front, the issue of defining "qualified mortgages" is still stalling credit. Dodd Frank requires banks to ensure borrowers have an ability to pay their mortgage. But the CFPB is still in the process of writing the rule. Defining what constitutes a safe mortgage too tightly might constrain credit.

There is also the government’s ongoing investigations into banks’ mortgage underwriting practice at the height of the boom. New York Attorney General Eric Schneiderman is just getting started as the chair of Obama’s mortgage fraud task force set up earlier this year, having recently filed a civil fraud lawsuit against JPMorgan Chase (JPM) over alleged mortgage fraud by its Bear Stearns unit.

But while there is enough demand on Main Street to see Wall Street "crooks" in jail, the truth is ongoing litigation is weighing heavily on banks’ willingness to lend.

And well intentioned government programs to reduce principal on loans and protect borrowers from wrongful foreclosures might backfire, as banks and investors may remain conservative if they cannot be confident of protecting their exposure to losses.

That’s a long list of issues to tackle.

The housing market may be mending, but it has done so largely through temporary fixes. Hopefully, in his second term, the President will focus on the long-term.

This article was republished with permission from TheStreet.


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