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Obama’s refinance dilemma

By Judy Martel · Bankrate.com
Monday, February 6, 2012
Posted: 4 pm ET

Is President Barack Obama's latest plan to allow millions more struggling homeowners to refinance their mortgages actually further stalling a housing market recovery? Critics of the proposal, announced last week, say the chief drawback is that it's setting up a delay in foreclosures, which, in turn, prevents home prices from hitting bottom.

Republicans, who believe government should stop intervening and let foreclosures work through the system to allow the housing market to finally recover, are questioning the viability of this latest effort. "One more time? One more time? How many times have we done this?" Republican House Speaker John Boehner said in the Wall Street Journal.

Obama countered by stating: "It is wrong for anybody to suggest that the only option for struggling, responsible homeowners is to sit and wait for the housing market to hit bottom."

Only four months ago, Obama announced the second version of the Home Affordable Refinance Program, allowing more people in underwater mortgages to refinance. That program is restricted to those who are current on their payments and whose mortgages are held by Fannie Mae and Freddie Mac. The newest proposal extends the benefit to homeowners with private mortgages, but requires Congressional approval because it comes with a cost.

One of the niggling questions concerning these government refinance programs is whether they are setting up a "moral hazard" by allowing a bailout for people who shouldn't have taken on debt in the first place or who want to walk away from their obligation. For this reason, the assistance programs are complicated to design.

Do you think additional government refinance programs will help or hurt the housing market recovery?

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13 Comments
Andy
February 08, 2012 at 4:57 pm

George,

I have been meaning to pull out my mortgage documents to see if I am at my cap minimum because I must be being that my Mortgage has been stuck at 6% for the past 3 years. I understand I'm a little better off, but it sucks that I have excellent credit and decent income BUT can't take advantage of the lower rates (or stop my rate from increasing when/if the market does begin to improve) simply becuase the bottom dropped out of the market. I feel like I've been living in fear of my interest rate increasing for 3 years. Should I have to pay an increased payment just because I can afford it according to the banks? I'm attempting to do the right thing and pay down student loan debt and what not, but if my payment increases, thats less I can put towards those. I would be content if my bank would just lock me in at the 6% that I'm currently at that way I can plan accordingly in the future but that is apparently too much to ask. So in turn, this Obama plan would be my only salvation, but I don't think it will ever pass.

George
February 08, 2012 at 2:46 pm

Andy, if you have a true ARM the adjustment is tied to a basis factor that compared to 2005 rates HAS TO BE lower now than then. When you add your adjustment factor your rate OUGHT to be lowered every 6 months. Now your cap on lowering may not allow for the full adjustment available but you are WAY better off than a lot of people. If on the other hand your rate automatically goes up every 6 months then that is not a true ARM and you got messed around at closing.

Michael
February 08, 2012 at 10:28 am

What about the assessed values of the properties, why is no-one held responsible for the prices that the homes were assessed at. Property was always an investment that you could not loose with, personally being a first home buyer I was scared into buying a home due to the fact they were going up so quickly and was sure I would not be able to afford a home in the future. The fair thing to do would be to refinance everyones mortgauge to the fair assessed value of today.

Mary
February 08, 2012 at 12:07 am

I wanted to point out that there are people like my family which relocated for work and had to rent out our home instead of selling it due to the housing crash. We are not upside down on our rental, but we are stuck with it. We are a single income family with three kids and are forced to pay the difference between rent and the mortgage because of our crazy high interest rate. A letter arrived today from our lender stating that we are eligible for a refinance program under HARP at no cost. If we do in fact qualify, this loan could put us into a position where we can save up for a replacement car or save up to take our kids to Disney Land. This refinance program helps families like our who are blessed with work, but blindsided by the stagnant market, begin to put money back into the economy.

Andy
February 07, 2012 at 3:19 pm

I admit, I took out a subprime, adjustable rate mortgage (not owned by Freddie or Fannie) back in 2005. However, I was confident that my income would significantly increase within the following 3-5 years and I would be able to refinance. As of today, I have never missed a payment and my income has more than doubled BUT, due to the the large number of foreclosures in my area, I am underwater on my mortgage that carries an interest rate that can adjust every 6 months. I cannot refinance due to being underwater and my bank will not modify my loan to a fixed rate because, according to them, I'm rich (sarcasm) and I pay my mortgage on time every month. What they don't care to know is that I have over $100k in student loan debt in order to get to where I am today. I'm not asking for a bailout, I'm simply asking for a rate reduction that is fixed to today's rates and not 2005's. I have historically voted republican, however, if Obama can get this to pass and I can refinance, he will have my vote because the republicans are out to help their own wallets and no one elses.

Randy
February 07, 2012 at 2:27 pm

There are more than two kind of people in this whole mortgage crisis. Most think we have a person who makes their payments and the ones who borrowed too much and dont. Truth is many borrowed far less than they could and after the economy took a dive lost their jobs and now are put in the same category as people who couldnt afford their mortgages in the first place. Should have let the banks all fail, let all the mortgages fail and hopefully when the dust settles we can all start over.

Patrick
February 07, 2012 at 10:27 am

I agree with Part of what Greg says. But not with the part about people who got behind bought more than they could afford got free money they would not have to pay back. They got a loan that a lender told them they could afford, when he knew they could not.

They borrowed to buy things for themselves and their children, so this is money the did not work for? What do you call credit is used for? Borrowing on future earnings. And who gives you the ability to buy on credit and and unabashedly preaches that you do so? The banks. They put all of us in this position. All of Us...

Ray
February 07, 2012 at 10:01 am

I agree with what Greg says.

In addition, when a homeowner refinances, there are positive side effects:
1. The homeowner is less likely to strategically default (since they put so much energy and money into refinancing).
2. A reduced payment means more cash to spend. This can have a stimulative effect on the economy (kind of like a tax break, but not just for the rich).

Greg McBride
February 07, 2012 at 8:15 am

I disagree with any characterization of refinancing for people that are current on their payments as a "bailout" or "moral hazard." There is a huge difference between someone that has faithfully made their payments on time every month despite negative equity and those that are in arrears. The bailout and moral hazard comes into play with the principal reduction aspect of mortgage modifications. Mortgage modifications are granted to borrowers that are behind on payments, and this amounts to nothing more than a handout to people that borrowed more than they could afford, took out all the equity at the top of the market to go buy toys, or paid peak prices. This is money they didn't have to work for, didn't have to pay taxes on, and now don't even need to pay back.

Rudy Montano
February 06, 2012 at 7:37 pm

I checked into refinancing and found that after the cost of refinancing I was going to pay .25% more that I am currentingly paying. So i would suggest that you check with your current mortgage company or broker to find out where you stand. Otherwise you may be taking on a gerater cost to yourself.