My colleagues and I made a short podcast where we annotated President Obama’s State of the Union address. It’s worth a listen if you were not sitting next to a row of policy wonks during the speech.
Among other ideas promoted by the President was a proposal to help more homeowners refinance their mortgages. Here’s what he said (hit the buttom for the podcast to hear it in Obama's tenor voice:
And part of our rebuilding effort must also involve our housing sector. The good news is, our housing market is finally healing from the collapse of 2007. Home prices are rising at the fastest pace in six years. Home purchases are up nearly 50 percent. And construction is expanding again.
But even with mortgage rates near a 50-year low, too many families with solid credit who want to buy a home are being rejected. Too many families who have never missed a payment and want to refinance are being told no. That’s holding our entire economy back. We need to fix it.
Right now, there’s a bill in this Congress that would give every responsible homeowner in America the chance to save $3,000 a year by refinancing at today’s rates. Democrats and Republicans have supported it before. So what are we waiting for? Take a vote and send me that bill.
And here’s what I say:
Interest rates are indeed historically low and it is a good idea to help more people take advantage of them by allowing them to refinance their mortgages. Refinancing will allow families to keep more of their income, which they can then use to stabilize their balance sheets still weakened by the Great Recession. And if this is done on a large enough scale, this can strengthen the recovery by increasing disposable income.
The problem is that many homes are still underwater. The drastic declines in home values since the bursting of the housing bubble has left many families owing more on their mortgages than their homes are worth. Current rules lock out these homeowners from refinancing. The President supports streamlining the Refi process so that as long as you have been staying current on your payments, you can participate.
For each homeowner, thousands of dollars are at stake. In the example featured on the White House website, refinancing a $200,000 mortgage from a rate of 6.5% to 4% lowers monthly payments from $1350 to $900. That’s $5,400 a year. It’s less, obviously, for a lower mortgage but I have also recently seen rates that are even lower than 4% on a 30-year fixed rate. Whether you think of this as savings or reduced costs, it’s a significant amount of cash that can be redirected from banks to families.
To the frustration of many advocates and policymakers, mortgage modifications and refinancing through current programs has been slow. It would have been nice if the financial institutions stabilized and saved through the timing infusion of public cash moved with a greater sense of urgency in helping families remain in the homes and stay current with their mortgages. To date, only 1.5 million families have participated in the Treasury-run HARP Program, even though 4 families qualify. The proposal supported by the President and in legislative form would expand eligibility to 12 million families.
It is worth recalling that many people ended up underwater through no fault of their own, Poor oversight of the market allowed many to bet trapped by inappropriate products. Others just happened to live in neighborhoods and regions that were hit hard.
Regardless, refinancing is a sensible solution. It keeps responsible owns in their homes, just with better terms.
It’s a completely separate issue as to what we do with Fannie Mae and Freddie Mac, the former publicly-traded companies now under government supervision. It is time to tackle the question of what a reformed housing finance system looks like.
New safeguards are certainly necessary to make sure we don’t re-create the types of liabilities that brought down the previous system and left us all on the hook, but it is equally important that we maintain opportunities for aspiring families to become responsible owners. While it’s true that homeownership is not for everyone, it is also true that when done right, it can be sustainable, even for lower-income and minority families. These are the families that can greatly benefit from the residential stability, access to neighborhood amenities, and the potential to build wealth over time that can accompany homeownership. But expanding these opportunities and fixing the housing finance system will require a renewed engagement of the public sector and more effective oversight of the market. A vote on that is a bit farther off but it's time for Congress to get to work on that issue as well. After they pass the no-brainer refinancing law.
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