President Obama's home refinancing plan seeks to let a million or more American homeowners save money on their mortgages, even if those loans are underwater. But the plan announced Monday is not a new idea: A pair of economists at Columbia University — Chris Mayer and Glenn Hubbard — have been proposing a similar measure for years.
The plan addresses an issue that's been frustrating many homeowners: They see other people refinancing at today's super-cheap interest rates — down around 4 percent for a 30-year fixed-rate loan — but they can't qualify for those rates because their house price has fallen.
Under Obama's plan, homeowners with loans backed by Fannie Mae and Freddie Mac that meet other qualifications could be eligible to refinance their mortgages even if their home is worth less than they owe.
With the president himself announcing the plan it certainly sounds like the day has come when Mayer and Hubbard's proposal is becoming a reality, but they hope the scope is broad enough to affect a large amount of homeowners.
Mayer hopes the administration, Fannie Mae and Freddie Mac, and the banks will swing for the fences. An existing government refinancing program has reached fewer than one million people and the Federal Housing Finance Agency estimates this new effort might reach double that, perhaps two million people. But Mayer said that many times more Americans really should qualify.
"You could easily see 15 to 20 million mortgages refinanced under this program if this were really aggressively pushed by the lending community," he said.
The final details of the plan, however, won't be announced until mid-November.
"This has finally spurred some real action, I hope. But the devil is in the details," Mayer said. "There's going to be a lot in the next three weeks that has to happen for this program to go right. It could easily go right but it could easily go off the tracks, too, if we don't get the details correct."
Will Lenders Be On Board?
But getting the details correct is a big "if". The central question is whether this program can be done in a way that makes big mortgage lenders want to actually do these refinancings. Without that, this effort will be pretty insignificant.
Critics of the plan say it might not cost taxpayers money but, they say, it would cost investors money. Some of those include bond funds, pension funds, banks and various investors around the world. Some who own mortgages with interest rates of 7 percent would make less money if those homeowners refinanced into 4 percent loans.
But if the plan does end up working on a large scale, the administration says home-owners on average could save $2,500 a year. Mayer said that means about $50 billion a year nationwide.
"Those kinds of numbers ... [are] like a permanent tax cut for a lot of middle class households," he said.
The biggest requirement for Obama's proposal is that the loan was backed by Fannie Mae and Freddie Mac, the giant government-sponsored mortgage firms. It also requires that the loan was made prior to June 2009, and that the homeowner has kept up the mortgage payments. Tens of millions of Americans fall into that category.
Saving Money On Mortgages
If they could refinance, many people could save a lot of money. And when he spoke to homeowners in Las Vegas on Monday, the president said he wants to let more Americans put that extra money in their pockets.
"So let me just give you an example," Obama said. "If you've got a $250,000 mortgage at 6 percent interest rates but the value of your home has fallen below $200,000, right now you can't refinance; you're ineligible. But that's going to change: If you meet certain requirements you will have the chance to refinance at lower rates."
The president said the plan is something he can do right now, as part of a series of steps to boost the economy that he can order without congressional approval.
While the Obama administration has thrown its weight behind this plan, at least some Republicans support it too. Mayer's fellow economist at Columbia, Glen Hubbard, was an adviser in the George W. Bush White House and Hubbard now heads up GOP presidential candidate Mitt Romney's economic team.
"It looks like a good plan; I'm glad they're doing it," Hubbard said.
But Hubbard also has all the same devil-is-in the details qualifiers about whether it will actually work on a large scale.