Clearer Mortgage Rules, No-Fee Refinances Key To President’s Plan For Middle-Class Housing Market

On Tuesday, President Obama will visit Arizona, one of the states that took the biggest butt-whooping from the housing boot, and one of five states (along with Nevada, Florida, Michigan, and Georgia) that still account for a full 1/3 of the negative equity in the U.S. In a speech in Phoenix, the President will outline what his administration believes are steps that will help give more middle-class Americans a chance at securing a foothold in the housing market.

Speaking to Consumerist, senior administration officials say that even though home prices are generally on the rise (which some experts attribute, at least partly, to overly speculative institutional investors; we’ll get to that in a bit), not every American who is financially qualified to buy a home is able to get a mortgage or find affordable rental properties. Additionally, there are currently impediments that make it difficult for existing homeowners to refinance to take advantage of a lower interest rate.

QUALIFIED BUT NOT QUALIFIED
“There are still millions of families with strong enough credit profiles to qualify for a mortgage but who are nonetheless being denied loans,” says one administration official, citing Federal Reserve statistics that, from 2007 to 2012, mortgage lending to borrowers with credit scores above 780 fell by a one-third.

“We have to makes sure that responsible families who can afford a mortgage can get one,” explains the official.

The White House believes that many of these borrowers are victims of lenders who aren’t certain about new underwriting concerns and rules — especially those governing temporary unemployment and other brief financial hardships — and therefore hedge on the side of extreme caution, saying “no” to borrowers who are not actually a risk.

As such, the President is calling on financial regulators to implement mortgage-related rules in a clear way that makes everything straightforward for lenders and borrowers. He also seeks to establish more certain rules for those situations in which government will rescind its guarantees on mortgages. The idea being that if a lender is clear on exactly what would and would not cause the feds to not back a mortgage, the lender will then be freer to evaluate the borrower’s qualifications.

“It’s critical that we give clear rules of the road going forward,” says one official.

Through an initiative called “Back to Work,” the Federal Housing Authority is working on additional lending flexibilities intended to help applicants who may trouble qualifying because of a lapse in employment. The goal, explain the officials, is to make sure that a creditworthy consumer with a solid recent payment history won’t necessarily be blocked from receiving an FHA loan because of temporary unemployment in his or her recent past.

RETHINKING REFINANCING
Getting consumers into their first homes is incredibly important, but what about all those homeowners who are currently paying upwards of 6-8% interest on their mortgages but who don’t qualify for federal loan modification programs?

For some of these people, the idea of refinancing into a lower-rate mortgage is incredibly attractive, but the costs and roadblocks to doing so can sometimes make it difficult or impossible.

Furthermore, it’s inevitable that the current historically low interest rates will creep upward, and with each fraction of a percent, homeowners are losing out on an opportunity to save.

“The window is closing to be able to help millions of families,” explains one administration official.

Thus, the President believes that streamlining the refi process is a top priority for his administration. For mortgages backed by the government, regulators can use their leverage to urge lenders to make refinancing as painless as possible.

The administration also wants Freddie Mac and Fannie Mae to create programs that would expand the refinance eligibility pool of homeowners with mortgages backed by either of those bailed-out companies.

In terms of making refis more affordable, the President proposes getting rid of closing costs for those borrowers who refinance into shorter term loans, which also often have lower interest rates. That combination of no closing costs and lower monthly payments means homeowners should be able to earn equity on their homes at a faster clip.

BEING BULLIED OUT OF THE MARKET
We’ve read about — and heard stories from readers about — first-time homebuyers in hard-hit areas like Florida and Arizona that they are having trouble competing with institutional investors who are snapping up depressed homes. These bank-backed buyers often pay cash or can get their financing a lot faster than a first-time borrower only able to put 5% down.

In addition to pushing first-timers out of the market, some real-estate watchers have voiced concern that all this speculative buying is falsely inflating home prices in some areas and may lead to another — albeit smaller — burst bubble if/when these investors fail to start seeing profits.

The administration officials we spoke to downplayed the impact of these institutional buyers, claiming they only represent about 18% of the market and that this number is dropping, while first-time buyers make up around 30%. Of course, that number appears to be dropping to, but the officials we spoke to did not address that.

The officials admitted that while “it’s not the issue it once was,” the administration can still do more to help first-time homebuyers compete, such as helping to expedite the loan process so that borrowers can get a loan in a reasonable time period and be able to compete.

Additionally, the administration says it is working with states (through their Hardest Hit Funds programs) and local community groups (through the Distressed Asset Stabilization Program) to help insure that foreclosed-upon, abandoned, and distressed properties are being rebuilt and refurbished with the goal of getting them into the hands of actual homeowners, and not real-estate speculators.