Marc Guzman's West County Blog

Last month, President Obama announced at the State of the Union Address of a new refinance program he was working on that would extend HARP rules past Fannie Mae and Freddie Mac.  The new program would be extended to include the largest financial institutions.  This new program would allow homeowners underwater on their homes to refinance their mortgages to current interest rates, potentially savings homeowners thousands of dollars per year. 

One of the biggest problems that President Obama will encounter trying to pass this new refinance program is how to encourage the biggest financial institutions to refinance many of these loans.  The loans applying for this refinance would be current on payments and cause no issues for the banks.  So why would the banks encourage refinances and lose profit on mortgages not in default? 

Enter the Federal Housing Administration (FHA).  It is believed that if President Obama can find a way to encourage refinances, it will be through the Federal Housing Administration by providing a guarantee and a way to ‘streamline’ refinances.  It is estimated that at least 1 Million homeowners would be able to take advantage of this and refinance through FHA.  But the big question in the industry is:  Will it happen?

Every time FHA guarantees a new mortgage, it is required to keep a percentage of that loan as reserves.  The current reserve requirement is 2%.  The problem is that FHA is operating at less than 0.25% in reserves.  So for example if home values decrease further by 10% this year, FHA is in danger of possibly needing a bailout by the government.  Another problem is that in 2011, FHA guaranteed 90% of all loans originated.  They were mainly refinances but 90% is still a huge market share.  FHA knows at their current reserves and operating level, they are in a very dangerous position.

So the Federal Housing Administration has been planning since last year on making dramatic changes.  Their goal is to reduce their market share to about 50% of current levels and with refinances making up a majority of the mortgages they guarantee, this is not good news for the Obama Administration.  FHA is set to increase premiums in the following months with further increases next year; this will decrease the number of people who qualify.

So will the new refinance program actually happen?  It doesn’t look promising right now.  But let me know your thoughts.

by
Marc Guzman