Could Obama’s New Mortgage Plan Solve the Housing Crisis?
Could the changes to the Home Affordable Refinance Plan be the solution to the housing crisis--and economic recession--that we've been looking for?
By Jessica Fiur, News Editor
Washington, D.C.—On Monday, October 24, 2011, President Obama highlighted changes made by the Federal Housing Finance Agency that would allow homeowners to refinance their mortgages at much lower rates than they’re currently allowed, no matter how far their homes have declined in value. Could these changes to the Home Affordable Refinance Plan be the solution to the housing crisis—and economic recession—that we’ve been looking for?
According to David Abromowitz, senior fellow at the Center for American Progress, the new plan will definitely aid people who have been making their mortgage payments, but who owe more mortgage than their houses are worth. “Nobody wants to oversell what’s going to happen, given past predictions,” he tells MHN. “But most recent estimates think this might help another million homeowners over the next year or two.”
Others also predict this new mortgage plan will have a positive impact for homeowners.
“This is the government pushing the banks to start lending, to start refinancing, and allow people to be able to take advantage of the new interest rates,” Amir Korangy, publisher of the real estate publication The Real Deal, says. “In terms of changing all the guidelines so that all these people can be on the level again and be able to take advantage of the low interest rates that are being offered by the government right now, that’s going to help a tremendous amount.”
Not everyone is quite as optimistic that the mortgage plan will fix the housing crisis. In fact, some feel it can do more harm than good.
“Ultimately, what we’ve learned over the last couple of years is regardless of the regulation that’s put out to either force the banks to lend more or to loosen the regulatory measures, it hasn’t shown to have worked,” Edward Mermelstein, partner and co-founder, Rheem Bell & Mermelstein LLP, cautions. “Banks are making more money on holding [money] rather than letting it get out in terms of borrowing, whether it’s direct to the consumer or lending it out to small businesses through mortgages. When the banks have no incentives to make loans, that’s what winds up happening, and we’ve seen many of these measures over the last year and a half fail.”
“I just don’t see anything different with respect to what’s being proposed,” he adds.
Government interference in the housing crisis is always a touchy subject, and this new mortgage plan is no exception.
“Let the market correct itself,” Mermelstein says. “The less interference that’s provided, the quicker that’s going to happen.”
Korangy disagrees. “I hate it when I hear people say, ‘The only way this is going to work is if we actually let this thing run its course,’” he says. “I don’t think that’s the right attitude—it’s just bad for morale.”
If the mortgage plan does stimulate the housing market, there could be widespread benefits that reach beyond just those who receive additional assistance.
“The way I look at it is every foreclosure in my neighborhood impacts my house and all the houses around it,” Abromowitz says. “This is going to avoid tens of thousands, if not hundreds of thousands, of foreclosures. And this has a ripple effect on whole neighborhoods because prices are dropping because of foreclosures, so this will help directly the homeowners, and indirectly it’ll help the neighborhoods around them.”
Though this mortgage plan will generally affect single-family units, the multifamily industry, of course, is not immune to the ripple effect. In fact, multifamily stands to benefit.
“I think we’ve got a ways to go before the trend is back towards homeownership the way we saw it in the last decade,” Abromowitz says. “There are a lot of people who need to rebuild their credit before they become homeowners again, and a lot of people in their 20s don’t see their lifestyles as moving to a home as strictly as the baby boomer generation did.”
Mermelstein echoes this sentiment.
“I think apartment rentals will continue to dominate the housing market, and we’ve seen that being proven by all the investments being made by REITs and private investors where most of the money in the commercial market has gone into that sector,” he says.
Whether Obama’s plan helps with the mortgage crisis or not, not even the plan’s supporters believe this is a cure all, but rather a step in the right direction.
“There’s going to be some people who are going to suffer as a result of this,” Korangy admits. “That’s going to be the mortgage-backed security holders, who will probably take a significant hit as a result of this because of the much higher pre-payment, but there is going to be a definite uptick in terms of refinance activity.”
“I think that’s a great thing,” Korangy adds. “It’s a great thing for America.”