Johnny James and his wife, Yolanda Hatcher, have had more trouble than expected… (Arkasha Stevenson, Los…)
A newly streamlined government plan to reward homeowners who diligently pay their underwater mortgages is proving a bonanza for banks, which by one estimate may pocket $12 billion in extra revenue by refinancing loans.
The revisions to the Obama administration's 3-year-old Home Affordable Refinance Program have yielded mixed results for homeowners, analysts and mortgage professionals say.
Some responsible homeowners are indeed getting lower-interest loans despite owing far more than their homes are worth. But others have loans that don't qualify, or must jump through hoops the plan was supposed to eliminate, such as on-site appraisals and extensive paperwork.
What's more, critics say, homeowners who get new loans are being stuck with higher rates than necessary, often half a percentage point or more. That's because banks are refinancing only their own borrowers, instead of competing against one another, which would drive rates down.
"The banks should charge lower than the market interest rate because the new version of the program means less work and less risk for them. Instead, they are charging more," said Amherst Securities analyst Laurie Goodman, who titled a recent report on the program "And the Winner Is ... the Largest Banks."
The program is a key part of President Obama's efforts to bolster the ravaged housing market. Administration officials including Housing and Urban Development Secretary Shaun Donovan are pressuring Congress to pass a law enabling the program to be used to help more homeowners.
"There's a real urgency here because interest rates today are at the lowest level they have ever been," Donovan testified Tuesday before the Senate Banking Committee. "But as the economy continues to improve, the expectations are this window of record low interest rates may not last for a long time."
In response, Sens. Robert Menendez (D-N.J.) and Barbara Boxer (D-Calif.) said Tuesday that they would introduce legislation this week to extend streamlined refinancing to all underwater Fannie and Freddie borrowers and eliminate appraisal and upfront fees for homeowners using the program to obtain new loans.
The Home Affordable Refinance Program is less controversial than relief plans for delinquent borrowers. Few have objected to its goal of helping homeowners who pay their loans on time but can't refinance at today's record low rates because their home values have plummeted.
To qualify, borrowers must owe more than 80% of the current home value. They can't have missed a payment for the last six months and are allowed to have been late by 30 days only once in the last year.
As this year began, nearly 1 million loans had been replaced using the program, but only 1 in 10 had balances higher than 105% of the home value. The changes, phased in during the first quarter, aim to encourage refinances no matter how far underwater the loan is.
The program is for loans owned or backed by Fannie Mae and Freddie Mac, the government-supported mortgage buyers that handle 60% of U.S. home loans. It works by having mortgage customer-service providers, which are mainly arms of banks, refinance borrowers into new loans that are sold to Fannie or Freddie.
Because Fannie and Freddie already are stuck with the losses if the existing loans go bad, the thinking goes, substituting lower-interest new mortgages actually reduces everyone's risk. The homeowners have hundreds of dollars more each month, which makes them less likely to default — a boon to their local housing markets and a lift for the economy when they spend their extra cash.
The problem, Goodman said, is that the streamlined program minimizes processing costs for the existing loan servicers but not for competitors, who must collect nearly as much information about borrowers as though they were writing new loans.
The program also exempts existing servicers from having to reimburse Fannie and Freddie for losses on certain flawed mortgages — a multibillion-dollar problem these last few years for the big banks — while requiring competitors to bear that same risk.
President Obama envisioned a different scenario when he announced the revised program last fall.
"These changes are going to encourage other lenders to compete for that business by offering better terms and rates," he said. "And eligible homeowners are going to be able to shop around for the best rates and the best terms."
That wasn't the experience of Johnny James, who bought a Gardena condominium with a 20% down payment during the housing bubble and now owes $414,000 on a home Fannie Mae says is worth $266,000.
James and his wife, Yolanda Hatcher, have full-time jobs with Los Angeles County and excellent credit ratings. Since they hadn't missed payments on their Fannie Mae loan, they thought they were good candidates for a lower-interest refi.