On Tuesday, the Obama Administration launched a new "short refinance" program, one of many expected policies to help homeowners in the red. This particular program aims to rescue home owners who are current on their mortgage payments but remain at risk for default due to no equity in their homes. The program allows banks and other creditors to write down mortgages to less than the value of the property. The reduced loan is then handed off to the government where consumers are refinanced into loans backed by the Federal Housing Administration.
This program is the result of failed government programs and underwater homeowners. Obama's Home Affordable Modification Program fell short of helping its originally projected three million homeowners, only managing to make permanent modifications to one-third of applicants. The bigger issue that the program attempts to address are vulnerable homeowners who could potentially default if their personal finances or home prices depress. CoreLogic Inc. estimates that 23% or households with a mortgage were underwater as of June 30th.
I agree that it is important to help typical Americans who are bogged down in mortgages that threaten their personal finances. I also agree with the notion that the government should be doing all it can to promote consumer spending and increase household liquidity. But it will be interesting to see how families afford the loans backed by the Federal Housing Administration. Will these loans be more manageable? And if so, how? The article is unclear. Only time will tell if this program really lightens the load on homeowners and allows for increased consumer spending down the road.
It is clear that this new program is designed to benefit American homeowners, but what will be the effect on banks? Are the banks still the creditors on these loans, or is the government going to be the primary lender? Consumer banks are supposed to be the main lenders to consumers. If the government is backing these loans, does this move threaten the role of consumer banks as consumer lenders?
ReplyDeleteI think this action would have to threaten the role of consumer banks on way or the other. This is because it will either discourage people with a mortgage to pay it back through their own means or prevent banks from failing although they should fail. Of course, more information would be needed to make a more accurate critique.
ReplyDeleteThe loans issued by the FHA are more manageable because the values of the homes are at a low, which means that the mortgage amount themselves are low. The main problem with the mortgages was that the amounts of the loan was higher than the value of their homes because the mortgage was taken out when the home were worth a lot more and since then, the housing bubble significantly devalued the price of the homes. Now, even if they sell the house, they can't pay back the loan.
ReplyDeleteI think that Justin raises some interesting questions as to the impact on the consumer banks. Oddly enough some of this didn't dawn on my while writing the post. There are a lot of gray spots within this policy that the article doesn't clarify (not that it needs to - i just don't have the background knowledge.) I'm not sure if this is something that the banks are supporting. Do the banks lose any money? The mortgage difference cannot just disappear into thin air. Is the government going to be footing the bill? It will definitely be something to follow/read into.
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