Kathleen Pender
Thursday, February 2, 2012
The Obama administration on Wednesday detailed its new proposal to let some homeowners with mortgages not owned by Fannie Mae or Freddie Mac refinance into a new loan backed by the Federal Housing Administration, even if they are underwater and have low credit scores.
The proposal, if approved by Congress, would slap a government guarantee on a lot of risky mortgages that are not government-guaranteed today. The White House says it would impose a “small” fee on large financial institutions to cover the cost of the program, which it estimates at $5 billon to $10 billion.
The plan is designed to help underwater borrowers who are ineligible for the government’s Home Affordable Refinance Program. HARP was recently expanded to let homeowners whose loans were purchased by Fannie or Freddie before June 1, 2009, refinance into a new Fannie- or Freddie-backed loan no matter how far underwater they are, as long as they are current on their payments and have a source of income. That expansion was made without congressional approval.
Homeowners whose mortgages were not sold to Fannie or Freddie – because they were too large, too low-quality or for other reasons – don’t qualify for HARP.
That includes a lot of people in the Bay Area, where more than half of home-purchase loans made between 2004 and 2007 exceeded the Fannie/Freddie loan-size limits then in effect, according to DataQuick.
Under the new proposal, borrowers without Fannie/Freddie loans could refinance into an FHA-backed loan if:
— They have missed no mortgage payments in the last six months and no more than one in the past 12 months.
— They have a minimum FICO score of 580. Anything below 620 is generally considered subprime, although Fannie, Freddie and the FHA have guaranteed loans with FICO scores as low as 580.
— Their new loan does not exceed FHA limits, which range from $271,050 in low-cost areas to $729,750 in high-cost areas, which include most Bay Area counties.
— Their loan is for a single-family, owner-occupied home.
Borrowers would not have to get an appraisal or document their income to get the new loan. The lender making the new loan would only have to verify that the homeowner has a job. These are the same underwriting requirements under HARP.
There are no debt-to-income limits, so a borrower with a home-equity loan or line of credit could participate as long as the holder of the second mortgage agreed to resubordinate, or put it behind the new FHA loan.
The administration says it will “work with Congress to establish risk-mitigation measures” on deeply underwater loans. For example, it might require the holder of the existing mortgage to reduce principal to 140 percent of the home’s value before it could be refinanced into an FHA-backed loan.
The administration said it would put these new loans into a separate pool so it does not impact the FHA’s existing mortgage insurance fund, which is already under stress due to high loan defaults.
Separately, the administration says it will ask Congress to make it easier for all homeowners with Fannie- and Freddie-backed loans to refinance by eliminating the need for appraisals and reducing fees.
It also wants Fannie, Freddie or FHA to absorb all closing costs when borrowers who refinance into a lower-rate loan use the savings to accelerate principal reduction rather than reduce their monthly payment. This benefit would be open to everyone who refinances into a Fannie, Freddie or FHA loan, no matter who owns their existing loan.
Keith Gumbinger, a vice president HSH Associates, calls the proposal a “politically savvy stroke – virtually free, hassle-free refinancing for everybody, paid for by someone else.”
Given the gridlock in Congress and concerns about the FHA’s finances, it’s far from certain whether Congress will approve this proposal or anything like it.
Gumbinger says a lot of questions remain, such as what the mortgage insurance premium would be on the new FHA loans. If a plan is approved, it “probably can’t be implemented in the market very quickly,” he adds.
He also wonders why the administration wants to make it so much cheaper and easier to refinance an underwater loan than to get a mortgage to buy a home. “Isn’t it equally or perhaps even more important to help people buy homes and absorb all the inventory driving price down?” he asks.
The Consumer Federation of America applauded the proposal. “Homeowners who have been making their mortgage payments but saw the value of their homes slide because of house price deflation for which they are not responsible should be able to lower their payments,” said Barry Zigas, CFA’s director of housing policy. “Today’s proposal offers a sensible and modest federal helping hand that is long overdue.”
But Christopher Thornberg, founding partner of Beacon Economics, asks “whether this is a good idea for the households in question. If you have a middle-class family that doesn’t have a lot of assets outside their home, and they are $100,000 underwater, keeping those people in that home is not good social policy.”
If you walk away from a home, “you take a hit to your credit score but you get to start fresh. Many people who are deeply underwater should do just this,” Thornberg says.
IRS refund delay
Some people who filed their 2011 tax returns electronically will get their federal tax refunds about a week later than they were originally told because of an Internal Revenue Service computer-system upgrade.
The IRS said the delay “relates to fine-tuning IRS systems to adjust for new safeguards put in place this tax season to provide stronger protection against refund fraud.”
The delay will affect people who e-filed a return between Jan. 17 and 25 and chose direct deposit for their refund.
“Taxpayers who file on or after Jan. 26 should not experience a delay,” says IRS spokesman Jesse Weller.
Taxpayers can track their refund using the IRS’ “Where’s My Refund” tool at sfg.ly/z86yPH.
One preparer says her clients who filed Jan. 17, the first day the IRS accepted e-filed returns, were originally told to expect a refund Jan. 25. But one client says that date was later changed to Feb. 1 and then Feb. 8.
Julie Miller, a spokeswoman for TurboTax, says most people who filed Jan. 17 got their refunds Jan. 31 or Feb. 1, about a week later than normal.
The IRS says most people should receive direct-deposit refunds 10 to 21 days after e-filing. It apologized for the delay.
Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at kpender@sfchronicle.com. Tweeting @kathpender.
This article appeared on page D – 1 of the San Francisco Chronicle
View original article at http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/02/01/BU971N140U.DTL