Instead of making an earnest effort to tackle the nation’s continuing jobs crisis, Congress has wasted most of September steering the federal government towards a near-shutdown over the question of whether hurricane disaster relief must be paid for with cuts to federal investments to promote clean energy.
This continued dithering seems to be leave little hope for speedy passage of even the broadly bipartisan elements of President Obama’s American Jobs Act. There is hope that at least once piece of the President’s proposal has a realistic chance of being adopted even in the face of continued inability of Congress to focus on Americans’ number one priority. That’s largely because the administration and the Federal Housing Finance Agency can act to refinance millions of home loans to historically low interest rates without Congressional approval.
The Congressional Budget office estimates that the program would benefit roughly 2.9 million homeowners, enabling them to save $7.4 billion in monthly interest payments in the first year alone. That’s billions of badly needed dollars that homeowners can then redirect to shore-up their finances and use to help our sluggish economy.
The CBO also estimates that over 110,000 borrowers would avoid loan default with new lower payments, thereby saving taxpayers backing these loans an estimated $3.9 billion in losses. Although private investors will cry foul that their high-interest loans are being paid off early, in fairness they should have considered that risk before buying too-good-to-be-true mortgage-backed securities.
Like so many other refinance and loan modification proposals, however, key measures need to be in place to ensure success.
We already know that some other federal homeowner programs have been a gross failure. The HAMP program (Home Affordable Modification Program) has failed largely because the program relies on the bank-owned mortgage servicers to administer the program. The mortgage servicers, however, actually have a financial incentive for homeowners to enter foreclosure rather than refinance.
With these perverse incentives in mind, it is imperative that the administration designs this new program to be streamlined and avoid servicer participation as much as possible. Homeowners should not need mountains of paperwork and closing fees in order to participate. Instead, the standard should be simple: if you are current on your loan, let us know what the payoff amount is, and bang – you just got refinanced into a much better loan.
Meanwhile, even if this program is a tremendous success, which it should be, we are still left with a housing crisis and millions of homeowners with underwater loans in default and struggling to avoid foreclosure. For these homeowners, we need to insist on refinance programs that include principal reduction charged to the wealthy parties that created this crisis in the first place.
It is long past time for the banks, complicit Wall Street manipulators and their rating agencies to pay, and pay dearly. The liabilities of these institutions for all their misdeeds are tremendous. We need state and federal regulators to ensure that the remedies to ongoing lawsuits and investigations include principal reduction to help struggling homeowners avoid foreclosure.
Unfortunately, the clock is running and action is desperately needed. Instead federal and state investigations of the mortgage crisis and robo-signing scandal have been dragging on for months. That’s perhaps the greatest strength of the Presidents refinancing proposal; it could be implemented quickly and — perhaps most importantly of all – without Congress’s participation.