The White House said changes to the two-year-old Home Affordable Refinance Program will help homeowners with little or no equity in their houses refinance by cutting the cost of doing so and removing caps to give deeply underwater borrowers access to the program. The new rules apply to homeowners with federally guaranteed mortgages who are current on their payments.

Obama will discuss the initiative during a meeting with homeowners Monday in Las Vegas, a city hard hit by foreclosures and sagging home prices. One in every 118 homes in the state of Nevada received a foreclosure filing in September, according to the foreclosure listing firm RealtyTrac.

With the president’s jobs bill struggling in Congress, the White House is refocusing its efforts on steps Obama can take to address the nation’s economic woes without getting lawmakers’ approval. In addition to the refinancing program, the White House said Obama will also announce executive action later this week to help students better manage their student loan payments.

The new push comes with a fresh catchphrase as the White House tries to push Republicans into action: “We can’t wait.” It’s Obama’s latest in a string of slogans aimed at blaming GOP lawmakers for lack of action on the economy.

President Obama waves as he boards Air Force One at Andrews Air Force Base, Md., on Oct. 24, 2011. (Associated Press)

White House communications director Dan Pfeiffer said that while executive actions are no substitute for Congress passing elements of the jobs bill, the economy requires action now.

“When Congress won’t act, this president will,” he said.

GOP leaders counter that the sluggish economy and stubbornly high unemployment rate are the result of Obama administration policies that have failed, including the 2009 stimulus package and financial regulation bill.

“They got everything they wanted from Congress the first two years. Their policies are in place. And they are demonstrably not working,” Senate Minority Leader Mitch McConnell, R-Ky., said Sunday.

Last month, Obama announced a $447 billion jobs plan, filled with tax increases on the wealthy and new spending on education, infrastructure and aid to state and local governments. Efforts to pass the full measure were blocked by Senate Republicans, who see the president’s proposal as a second stimulus.

That’s left Obama and his Democratic allies pushing lawmakers to pass the bill in individual pieces, though the fate of most of the measures remains unclear.

White House economic adviser Gene Sperling said the president considered including an expansion of mortgage refinancing in his jobs bill, but felt the changes could be implemented more quickly through executive action.

The changes to the so-called HARP program will be implemented by the independent Federal Housing Finance Agency. At its core, the initiative will relax eligibility standards, allowing those who are 25 percent of more underwater on their mortgages to take advantage of loans with lower interest rates.

The administration is also extending the program through the end of 2013. The program was originally slated to end in June 2012.

The federal refinancing program only covers mortgages created before June 2009 and owned or backed by government-controlled mortgage buyers Fannie Mae and Freddie Mac. Borrowers also must be current on their payments.

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In a recently published study by the Federal Reserve they confirm what millions of American homeowners know first hand and what most professionals in the housing finance industry have known for over a year: namely, that millions of American homes are unable to be refinanced – despite historically low interest rates – due largely to the fact that many of these homes are either underwater (meaning the current loans balance exceeds the current property value) or the home’s owners fail to qualify for refinance loans due to tighter credit standards. The Fed’s study would suggest that at least two million American homes are eligible for refinance but for these conditions.

Despite this reality, Washington seems unable to come up with a solution. Prior efforts such as HARP (Home Affordable Refinance Program), though well intentioned, quite frankly have failed. The failure is due in no small part to the fact that the eligibility criteria designed by regulators have been too narrowly defined to accommodate a housing market where values continue to decline and an economy that remains weak at best.

And though efforts are currently underway to design and implement a new refinance program, it is likely that this effort to will fail. Why? Because Washington wants to put strict conditions on who will qualify for a refinance loan for fear of being accused of encouraging “moral hazard” where certain unworthy home owners benefit from the redesigned refinance program. The details of the “new” refinance program have not yet been published and no deadlines have yet been set for its implementation. As a result, millions of American home owners – most of whom are current on their mortgages, by the way – continue to twist in the wind as interest rates hit new lows nearly every day.

By contrast, I believe it is possible to implement a meaningful refinance program by year-end that is simple to implement, rewards every American that remains current on their mortgage, poses very little risk to encouraging moral hazard, and, most importantly, will inject billions of dollars of free cash flow into our struggling economy.

Here’s how it would work:

• Mortgage borrowers current on their mortgage for the past 12 months and whose new payment would be at least $50 dollars per month less than their current payment qualify. Period!
• To be clear, this would apply to borrowers who are owner occupants and investors alike. Moreover, the program would apply to borrowers’ with first and second mortgages as well. If the new payment is less than the combined old payments, they get rolled up and refinanced into a new loan under this program. It’s that simple.

Detractors will surely say “… Oh my God, it can’t be that simple, what about loan-to-value ratios, what about credit scores, what about current employment and income, what about investors who lied on their prior loan applications, what about…, what about …” To those detractors I say, who cares? If the goal is to enable American homeowners to take advantage of current interest rates, reduce their current payments and therefore free up cash for use in other parts of the American economy, then why not let them refinance.

For God’s sake, let’s be honest, if someone is managing to make their mortgage payment today at a higher rate – regardless of loan to value, regardless of whether they are employed or have a nickel of savings – then the odds are pretty darn high that they will continue to make their payment if the payment drops.

Of course, nothing is ever this simple, and lenders in today’s business environment – where their business decisions are being scrutinized at every turn – likely would be very reluctant to originate loans under this limited guideline for fear that in the future some regulator or politician would challenge their lending decision as somehow imprudent. They also would likely reasonably fear holding these loans on their balance sheets given the implications of such loans to their future financial condition and regulatory capital requirements, among other things.

Undoubtedly, operational bottlenecks from overtaxed servicing and origination platforms will be an issue for the implementation of any sort of plan. However, innovative private sector service providers and solutions exist today to help unburden those organizations and streamline this proposed refinance process. In fact, under one such solution, the process could be as simple as to only require that borrowers execute a new note or a rider to their existing note.

Even under the most streamlined scenario, however, to make this work – and it can work, the following also would be required:

• This limited guideline would need to be memorialized into a new loan program and published by FHA or Fannie and Freddie (or both);
• The program should be available only for a limited period – say for the next twelve (12) months – in recognition of the fact that lenders are already backlogged with refinance requests;
• The guideline would need to make clear that the lenders’ only repurchase – or rep and warrant obligation to FHA, Fannie or Freddie – would involve the determination of whether the borrower had been current the past 12 months and whether the new loan payment was lower than the old loan(s). Likewise, large lenders could not impose more onerous rep and warrant standards on smaller lenders originating these loans and from whom they might buy these refinance loans.
• Regulators would need to affirm that lenders’ capital or reserve requirements would not need to be increased in any way to account for the unique underwriting characteristics of the loans originated under this program.
• A new liquidity mechanism would need to be developed so these loans could be sold by the lenders originating them. For this, we believe that Ginnie Mae should create a new Ginnie III security designed specifically for these loans. By doing this, the securities would enjoy the full faith and credit of the US Government and would be readily purchased by investors, including foreign ones.

The benefits of such a program if successfully implemented could be significant both to the housing industry and the American economy.

First, for homeowners whose monthly payments would be reduced, that lower payment would function like an immediate tax cut – Americans’ spending power would improve immediately – but with no negative implications to the federal budget.

Second, investors (bondholders), who have interests in the loans being paid off by these refinance loans, would be satisfied at par (or 100%) – though perhaps earlier than they might have otherwise. However, that is a far better outcome than a situation involving government-sanctioned principal reductions – which in my opinion is nothing less than a government-sanctioned abrogation of contract – and the greatest example of moral hazard – and to be avoided at all costs.

And on that point, let me say, that there should be no government-sanctioned principal reductions under any circumstances. That should be avoided under all circumstances – even where a default and foreclosure would result.

Third, the cost to the government would be virtually zero. Costs would be conditional and would be recognized by the government if and only if borrowers whose loans were refinanced under the program defaulted. To be clear, that is a risk the government already has through its support of Fannie, Freddie, FHA and Ginnie Mae. Surely, it makes sense to reduce that risk by lowering millions of borrowers’ mortgage costs thereby reducing their likelihood of default.

Fourth, and most importantly, but perhaps most intangible, this program would revitalize consumer confidence at a time when it most needs encouragement. It would reward those homeowners who, despite all of their challenges and difficulties, have found a way to keep making their mortgage payments. If these aren’t the people we should be helping, I don’t know who is.

By: Brian O’Reilly

Brian O’Reilly raised some very intriguing propositions on dealing with the ever growing issue of borrower income/wealth trapped in deflated, under-water home values. While these ideas address each constituency impacted—borrower, lender, investor, taxpayer—there is still no evidence that the Administration, Congress or the regulators have any plans to address the current crisis.

Much has been made about the impact any mass refinance program could have on servicers and lenders, who would be deluged with new applications that they are not staffed to handle and, in this unprecedented low rate environment, not likely to prioritize. Let’s be honest—it’s much easier, and more profitable, to handle a “traditional” refinance than a refinance under the current HARP program. Also investors in MBS, who will experience prepayments at speeds they did not count on, may be wary of future investment in MBS if these programs can be changed on a dime. OK, say all of this is true. There is still a huge clog in the mortgage finance system and the tub is about to overflow. What about slicing off a segment of the most at-risk and underserved borrowers and launching a targeted campaign to offer these borrowers an option to take advantage of these low interest rates ? If it works, and in my opinion it will, it can be expanded to other borrowers as warranted, and could jump start the climb out of the economic morass where we now find ourselves.

As referenced in Brian’s posting, there are creative, viable private market solutions currently available that could be applied to a specific segment of the housing market that owes more than their home is worth but has been living up to their monthly obligations despite the hardship, and sometimes logic, of doing so. For example, borrowers who find themselves at 105%-125% LTV that are able are continuing to make payments, but no doubt are becoming more discouraged monthly by the fact that they are now, in effect, renters, but cannot “renegotiate” their “rent” and cannot walk away without devastating effects to their credit, not to mention their conscience. So here’s a new and improved plan :

1. Identify these borrowers in GSE/Ginnie Mae MBS and verify they have been making timely payments
2. Offer these borrowers an opportunity to reset their interest rate to a market rate plus some premium ( say .50%) by simply logging into a secure web based system and choosing rate reset option
3. Subsidize reduced payments (average of $250 per month) for a period of time, say 2-5 years, depending on the vintage of the origination.

Technology exists TODAY that can accomplish this in very short order. Yes, there is a cost to any subsidy, but it’s a small investment compared with the huge write-

downs that could occur with any sort of principal reduction or true modification / refinance alternative.

Of course we can continue to do nothing, and run the (likely) risk that these borrowers will lose hope and decide to default, tying up the immediate “economic stimulus” of cash flow a rate reduction would give these borrowers to spend or put toward righting their equity ship.

With some political and regulatory will, this sort of initiative can and should happen. There is little ability, or incentive, for the GSEs to implement any strategic plan without the endorsement and direction of the regulator—FHFA. The newly formed CFPB should opine as well, as this is of clear benefit to consumers. Who else needs to chime in??