Why Obama’s refinance plan is still missing the point

Yesterday, President Obama announced that he used an executive order to revamp the rules for the Home Affordable Refinance Program. The hope is to make it easier for struggling homeowners to refinance their mortgage and take advantage of historic low interest rates.  The new rules include allowing homeowners who owe more than 125% of the value of their home to refinance their homes as long as they are current on their mortgage. The process is also supposed to be streamlined and eliminating some of the fees. White House officials estimate these new changes will help 1 million homeowners (14 million are underwater) get some relief.

Forgive me if I sound skeptical.  The last time the administration announced a refinance plan, they estimated 5 million people would be helped. So far, less than one million have been through the program. Once again there is a lack of standing up to the banks.  The only loans that qualify for the program are those held by Fannie and Freddie.  The reason why the initial version of this plan and other plans to confront the crisis have failed, is because they lack any real pressure on the banks.

I am sure a decent number of homeowners will get relief from this move, but the impact on the crisis will be minimal.  These loans are not the ones hurting the housing market, since they aren’t sitting empty or for sale.  These are homeowners who while underwater are still current on their mortgage and not in danger of facing foreclosure.  The administration has said this will be the first in a series of moves, but once again I will not be holding my breath.

Until the President and Congress are willing to stand up to the banks, hold banks accountable, and force them to  help fix the crisis, any program will have minimal impact.  We can’t continue to use a spray bottle on a wild fire when it comes to finding solutions.  Until someone is willing to stand up to the banks that is all we will be doing.


My Quick Take on the Jobs Speech

While under ordinary circumstances, this night would have been all about football these aren’t normal times.  The current crisis calls for action to create jobs and address the foreclosure crisis in order for us to move forward. People have been waiting for a comprehensive jobs plan to come out of D.C. and the speech was to deliver that plan.

President Obama was back to his old campaign form.  The speech felt like one of the moving speeches from the campaign, where you were captivated even if you didn’t agree. I think he played both sides well.  For his base, he focused on stimulus through tax breaks for the middle class, and job creation through rebuilding infrastructure.  He also played to republicans by mentioning the corporate tax rate, entitlement reform, and a mention about regulations.  He catered enough to both sides that I think there is real pressure to get something done. Even in a post speech interview Eric Cantor ( R-VA), couldn’t disagree much and admitted there was a lot to work with in the speech.

With all that being said, I think there were some specifics that could have used some more details.  He mentioned that everything would be paid for, but left us waiting for the specifics.  Yes, he mentioned cuts already made, and promised a detailed plan in the coming week, but some of those details would have been useful. When talking about eliminating loopholes to lower the corporate tax rate, while I know there are many options, but mentioning one or two of the possibilities would have been nice.

My biggest issue with the speech, was the plan for the foreclosure mess seemed like an afterthought.  He mentioned a refinance plan to capitalize on the low rates, but left it at that.  I have been critical of his foreclosure prevention plans in the past, and feel that more attention needs to paid to this issue.  I wanted to hear a strategy to address the refinance plan in the speech, but will have to wait for future speeches I guess.

Overall, I though the speech hit the right points, and had Obama in campaign mode, which really helped him shine.  Once the dust settles from this it will be important for us to hold congress accountable to get this done.

How would a larger down payment requirement impact you?

I have written several posts in the past about the proposed rules being debated.  These new rules could impose down payment requirement of up to 20%.  This is not to say that one could not get a mortgage through FHA for lower down payments or that banks wouldn’t make loans for lower down payments.  However, these new down payment thresholds would determine the pricing of the loan.  So in order to get the best rate you would be looking at a minimum of paying a 10% down payment.  How would this impact you and your ability to buy a home?  If you already own, how much longer would you of had to wait?  Would this make you move on from owning a home?  These are all questions that are being asked.  Please check out this video and then share how this could or would have impact you.

Visit http://cra-nc.org/your-stories and share.

Rent, Don’t Buy, the American Dream

This article was originally posted on www.policymic.com.

Raising the debt ceiling, enacting budget cuts, and closing loopholes all seem to be popular topics of the day. There is a lot riding on a deal, including an increase in interest rates; and everyone (including myself) who is looking to buy a home has an eye on that, since any change in rates can impact the amount of home loans one qualifies for, which in turn affects what home one can afford. But are we putting too much stock in home ownership as the key to wealth and achieving the American dream? If we broaden our definition of how to build wealth, it becomes apparent that this is a flawed approach, and that instead an increased focus on affordable rental housing can go a long way to increase access to wealth.

With Fannie Mae, Freddie Mac, FHA, and tax subsidies, our government has a huge presence in the housing market (Charles Wallace wrote a great piece breaking down the impacts of the credit and what it costs and who it benefits). The mortgage interest deduction is a tax break designed to give homeowners a break on their taxes and encourage renters to buy homes, and has a 2012 budget line of $100 billion. The fact is, we have the credit, but the housing market isn’t booming — in fact, the last housing boom had more to do about access to credit than it did tax breaks. This makes a case to eliminate the deduction. As Wallace puts it, “Canada and Britain don’t allow it as a tax deduction, and the real estate markets are booming in both countries.”

Even if we ignore the tax breaks subsidizing home ownership, the benefits still do not fully add up for everyone. For a low to middle income family, their home purchase represents a significant piece if not all of their asset wealth. The cost to buy a home for these families makes their home and its equity their largest source of wealth, leaving all their wealth tied into one asset without diversification. When that asset doesn’t perform like it should, their ability to build wealth is gone.

Affordable rental housing can be a solution to these wealth building issues. Without the burden of paying a property tax bills or being responsible for repairs, a renter has an opportunity to use the money they save in those areas to diversify their investments. Thus, because we focus so much on home ownership being the key to the dream and wealth, we are ignoring another housing crisis we have: The lack of affordable rental housing. This shortfall leads to higher rental costs, limiting a renter’s ability to build wealth.

As I have written, I still also believe in other solutions to the housing crisis. However, if we invested more into affordable rental housing and provide less investment in home ownership, we would see an increase in wealth diversification and an elimination of the pressure to purchase. With so much invested in home ownership, people are not shown alternatives to building wealth. The path to the American dream has been defined for them, and it is highly flawed.  If we broaden our housing investments and ways to define wealth building, I believe that we can reshape how people define accessing the American dream, and realize there are many alternatives to home ownership.


How the QRM will Change your Mortgage Loan

I have already done a series of blogs on my perspective of the QRM, but I wanted to share a post Adam Rust of BankTalk and CRA-NC did on the topic.  Below is a cross post of his blog.


This is a difficult time for American reporting. Most of America’s attention is shifting between the polar magnetism of Casey Anthony (see CNN’s “Essential guide to the Casey Anthony Trial“) and the debt ceiling crisis.

Left to progress under the radar is a substantial change in how Americans buy homes. You may have seen some reference to the qualified residential mortgage (“the QRM”) in the business section of your paper or perhaps from Bank Talk. The QRM is difficult to understand, in part because it is hard to explain what it means without going into a series of double negatives. But it goes something like this: banks will soon have to extract a down payment of at least twenty percent on any loan that they originate in order to avoid having to keep at least 5 percent of that loan on their books.

Banks don’t want to hold on to mortgage debt. The development of a secondary mortgage market solved that problem and it has changed the entire scope of how loans are now made. The QRM would change that in a sudden fashion. Normally, a bank sells a loan less than 90 days after closing. They are not interested in the interest – they write a loan in order to generate fees. Retaining five percent creates a liquidity strain, particularly for small banks.

The Senate Banking Committee held a hearing about the QRM earlier this month. This is an excerpt from one of the testifiers:

The respondent, Peter Skillern, is getting across a point that should be clear to everyone. Most Americans do not have twenty percent to put down on a home. If you live in any kind of big city, then the price of a new home is probably over $250,000. The average cost of a home across the United States fell from as high as $210,000 a few years ago to now a bit over $170,000. Even at the last price point, pulling out $34,000 plus closing costs is going to stretch a lot of people.

First-time homebuyers are a critical constituency, because they tend to be the ones that buy the houses that more well-off people are trying to sell. Think about it – it is hard to move up to a bigger home when you can’t sell your starter home.

Another Hurdle to Home Ownership

With all the talk about the QRM rule definition and the impact it will have on the housing market, another hurdle is flying under the radar.  Adam Rust from the Community Reinvestment Association of North Carolina (CRA-NC) has written a report about the other hurdle to home ownership, Loan Level Pricing Adjustments.

In short, these pricing adjustments are loan fees added to the cost of a loan that take into account the risk of the borrower.  This fee is designed to better assess the risk of a borrower and apply that cost to a loan.  The adjustment takes into consideration 5 key points: Credit Score, Property Type, Occupancy, Structure, and Equity.  Here is the breakdown of this adjustment as provided by Fannie Mae.

This adjustment does not take things like moving loans to FHA, the disparate impact on protected classes, and the use of private mortgage insurance into account.  Without taking these into account these adjustments can price out low wealth and minority communities from home ownership, and move more of the burden to FHA.  Just the QRM debate this also could have an impact on the rental market.

If you want to dig deeper into the topic I encourage you to read the report: The New Hurdle to Home Ownership


Additional issues with the possible QRM definition

If you are unsure of what the QRM is or what it would do, check out an article I wrote for policymic.com that discusses the issue.  I want to talk about another side of the debate that isn’t often discussed.

This debate has been solely focused on the restrictions is places on first time home buyers, and rightfully so. Redefining the face of home ownership isn’t a good thing and hurts the economy.  Let’s think for a second though about the families that already own a home.  Often times, when they are ready to move, they depend on first time home buyers to purchase their homes.  What happens to this segment of people when there are no buyers for their homes.  With the possible new rules that could change the down payment requirements, even current home owners will have difficulty with a down payment for their next purchase.  That is until they can sell their first home.  When they can’t sell their first home, it prevents them from moving on.  It is a rare instance, in the large scheme of things where a homeowner can afford a second mortgage, and have the large sum for an initial down payment on their next home.

My fear is that not only first time home buyers will be impacted by these changes.  Current homeowners will also face difficulty, and our current housing crisis isn’t solved.  What it would do is further slow down our market, which is already overburdened with housing stock.  Financial reform shouldn’t create more problems for the crisis it is trying to fix.

Just my thoughts.