Refinancing underwater home loans to get easier, maybe.

Breaking news from the L.A. Times! Refinancing Fannie Mae and Freddie Mac home loans that are underwater should be easier now, thanks to the Obama administration.  The title above should link; if not, here's the article.  However, don't get too excited yet.  Here's a quote:

"Even with the new rules, only borrowers with mortgages taken on by Fannie and Freddie on or before May 31, 2009, can qualify. Their loan amounts must top 80% of the current market value of their homes. And they must be current on their payments, with no late payment in the last six months and no more than one late payment in the last 12 months."

So, as usual, the devil is in the details and the proof is in the pudding and all that. 

Here's another article from today's L.A. Times regarding the administration's efforts to help people refinance their loans.  It details other, non-Freddie/Fannie efforts.  The article is skeptical in tone and so am I.

I think writing down interest is a great idea; I think writing down principal will never happen.

Refinancing a bubble?

The following editorial appeared on the opinion page of today's L.A. Times.  I think it's worth printing in its entirety, and my take is at the bottom:

Rock-bottom mortgage interest rates offer borrowers the opportunity to free up a significant amount of cash by refinancing their loans and lowering their monthly payments. Unfortunately, that option isn't available to millions of borrowers because plummeting property values have left them owing more than their homes are worth, rendering them ineligible for a better loan. Others are trapped by poor credit ratings or restrictions imposed by their second mortgages. The Obama administration, which has tried without much success to help some of these borrowers refinance, is looking for ways to enable more of them to do so. There are trade-offs, but it's an effort worth making.

At issue are several trillion dollars' worth of mortgages backed by Fannie Mae and Freddie Mac that charge interest well above today's prevailing rate. Enabling these borrowers to refinance could save them hundreds of dollars a month. It also would help more of them avoid foreclosure, reducing the amount Fannie and Freddie lose to defaults. That's good for the taxpayers, who are covering the companies' losses. Cutting the borrowers' payments, however, would necessarily trim the revenue collected by Fannie, Freddie and the investors who purchased securities based on those mortgages — potentially by billions of dollars.

Advocates say that the public would come out ahead because the reduced payments would be more than offset by the reduction in defaults and the benefit to the economy. The Congressional Budget Office agreed in a recent report based on one possible implementation of a refinancing plan. Even so, it's not a slam dunk. Some barriers to refinancing, such as those posed by second mortgages, are stubbornly hard to overcome; that's one reason the existing refinancing program for "underwater" borrowers has helped only a fraction of the number anticipated. Nor would the program do much for those most at risk of foreclosure, given that borrowers who have fallen behind on their payments aren't likely to be eligible.

Nevertheless, the government should try to enable more people whose property values have plummeted to refinance. These borrowers are caught in a trap not of their own making; if not for that trap, Fannie, Freddie and investors would have seen their revenues cut long ago. Lowering more borrowers' monthly payments won't cure all of the housing market's many ills, but it will brighten those households' financial outlooks. That will boost consumer spending and avert some foreclosures, helping the communities hit hardest by the housing slump. 

I agree that underwater homeowners should be allowed to refinance.  The alternatives -- either short sales or foreclosures -- only drag down property values for all the other non-underwater neighbors.  Plus, the end result is the same -- no, the investors won't see the profits they were promised, but they wouldn't either if these homes are short saled or foreclosed.

Fannie Mae and Freddie Mac: hasta la vista, baby!

Fannie Mae and Freddie Mac have provided mortgage "liquidity" for the past few decades. While they are not government programs, they are government-sponsoredprograms, and had to be bailed out by the tax payers when the housing crunch hit.

Now, there are plans to eliminate or reduce Fannie and Freddie over the next few years. There are also plans for the government to get out of the mortgage-guarantee biz entirely, except in times of a financial crisis. (Which I don't get; how would that be different than what we have now? But I'm not an economist.) See G. Morgenson's NY Times article here; Calculatedrisk.blogspot.com also has a good analysis.

Here's my take on how this will affect housing markets (hint: not good). Disclaimer: I'm not an economist, and could likely be very wrong. But every analysis I've read says that it will be harder to buy a home. So here goes with my personal analysis:
Winners/losers:
1. Taxpayers/taxpayers. Taxpayers may no longer be on the hook for bailing out Fannie and Freddie. But many taxpayers will no longer be able to buy a home and hence take advantage of the mortgage interest deduction.
2. Banks/banks. This will definitely put more power over the housing market into the hands of the banks. Banks will have to deal with less government interference. And they still may have a back-stop during financial crises. However, fewer people will be able to afford homes and after all, the banks don't make money unless buyers borrow money.
3. Landlords and landlords Less home sales mean more home renters, which is good for landlords. However, it will be harder to sell rental properties.
Now, for the losers/losers:
4. Home buyers, home sellers and Realtors: If you're a home buyer, you'll need a bigger down payment. If you're a home seller, fewer able buyers may translate to lower prices. And if you're a Realtor (hey, I can add some self-interest here) you'll be looking at less transactions all the way around.
If you think I'm wrong (and I hope I am), I'd love to know your opinion and your reasons.