|| Print ||
|Thursday, August 16, 2012|
BY LINDA BAKER
When I was on the road with Jeff Merkley this past April, Oregon's junior senator took an off-the-record break to work on a housing assistance plan, the details of which he was not ready to reveal. Four months later, that plan, a mass refinancing program for underwater homeowners, is getting a lot of attention. In a New York Times op-ed published last week, noted economist Joseph Stiglitz described it as the “one housing solution left.” U.S. Treasury secretary Tim Geithner has also expressed interest in working
In Oregon, an estimated 21.7 percent of Portland area homes and 20.8 percent of Oregon homes are burdened by underwater mortgages or negative equity. Merkley’s plan, Rebuilding American Homeownership, would allow underwater owners who are current on their payments to refinance at lower rates and either lower their monthly payments or pay off their loan more quickly. The vehicle for this would be a government-financed trust that would buy the mortages of homeowners who had refinanced at about 2 percentage points more than the rates at which the government borrows. The interest differential would cover the cost of administering the trust as well as any defaults.
To hear a plain-speaking Merkley explain more about how the program would work, watch this YouTube video about the mythical Miller family. Conducting my own due diligence, I asked representatives from the banking and real estate sectors, as well as a local economist, to identify the unique features of RAH, and weigh in on its pros and cons. Still working their way through the details of the proposal, they raised questions about the costs that might accrue to banks, the uncertain and variable behavior of underwater homeowners and the political and economic viability of another government-backed housing program.
Despite the questions and unknowns, there was little disagreement about the potential benefits of lowering the cost of mortgages for underwater homeowners — a group yet to be targeted by housing assistance programs — and the potential of RAH to ward off a second foreclosure crisis, thus stabilizing both the housing market and the economy.
Linda Navarro, president, Oregon Bankers Association
“There are obvious benefits to refinancing if it's going to help families lower the cost of their mortgage and help families stay in their home. There is also some benefit to reducing the risk of default.” But Navarro said a number of factors could impact RAH participation by banks: namely that “participating comes with a financial cost.” For example, the bank would have to write down the mortgage in cases where the borrower has a high loan to value ratio before the trust would purchase the loan. Banks would also have to pay a “risk transfer fee” as part of the sale. Then there’s the fact that banks would lose the original, high interest mortgage.
“In addition to losing that mortgage, there's a fee to give up that mortage,” Navarro said. And whether those fees would be offst by the benefits of getting risky loans off the books and refinancing a large number of loans is unclear. Plus, said Navarro, not all underwater homeowners are going to default. "Every customer is different."
“There are assumptions here we haven’t vetted with our members,” Navarro said. "Senator Merkley has been very communicative and has put something unique on the table. For that I very much respect what he’s done. But the devil is in the details.”
Shaun Jillions, vice president of public policy, Oregon Association of Realtors
"Where RAH is very different from other programs is this is for people current on their mortgage, who have good credit and are doing everything right," Jillions said. "The only reason they can’t refinance is because they’re underwater."
The OAR would be open to siting an RAH pilot project in Oregon, said Jillions. He also approved of "refinements" Merkely had made to RAH, such as adding a 15-year refinancing option, which allows homeowners to pay down their loan more quickly.
Despite the benefits, Jillions said "a little too much is made of" the underwater homeowner phenomenon. Housing prices go up and down, he said. "People forget that homeownership is a long-term investment. The idea that everyone is underwater is going to lose their house ... that’s not the case"
On the other hand, acknowedged Jillions, being underwater is "a bigger issue in these terrible economic times. With the high unemployment in the state, above the national average, negative equity has a bigger impact on people."
Tom Potiowksy, director, Northwest Economic Research Center, Portland State University
Says Potiowsky: The question RAH answers is "how do you lift the reluctance by the banking system to finance homeowners who don't have equity? Basically one way is having the government buy the mortgage."
The RAH is similar to a Depression-era program, the Home Owner's Loan Corporation, which brought more than 1 million Americans out of foreclosure, Potiowsky said.
When homeowners can't refinance at lower mortgage rates, their ability to buy other goods and services is less, Potiowsky said. "It restricts spending and slows things down a bit." Underwater homes are also a risk because homeowners don't have equity to draw on when times get tough.
One concern about RAH revolves around financial solvency, Potiowsky said. "You want a system that at least has at least better chance of not putting the taxpayer on the line." The two percent difference in interest rates is intended to mitigate that risk, but that difference also depends on the govenrment being able to borrow money at record low Treasury rates.
One of the questions is to what extent is the trust is "truly backed" by federal government, Potiowsky said. "To the extent that the trust is constructed as semi private entitity it may not have that nice ability to borrow at such low rates."
Those are the accounting details. Here is the bigger picture. The government backed "very nice loans to car manufacturers, financial houses, AIG" — institutions deemed "too big to fail," Potiowsky said.
Today, one might ask whether the 142,000 Oregonians and 13.5 million Americans who are underwater are also too big to fail.
Linda Baker is the managing editor of Oregon Business.
Correction: This story was corrected on Aug. 17, 2012, to change the characterization of U.S. Treasury secretary Tim Geithner's support of Merkley's housing program. Geithner's office says the secretary has not pledged to work with Merkley to establish pilot programs for the program in several states, but has expressed interest in working with him.
|OHSU researchers work on AIDS vaccine|
|Lean in? Not Sabrina Parsons.|
|Oregon agriculture - not just a commodity|
|The cable guy|
|Outside the box|
|WalMart pays legal fees for bribery probe|
|Google ramps up plan to make robots|
|Sales on Cyber Monday reach new heights|
|CNN plans major changes|
|One million new visits to Obamacare website Monday|
|Shanghai teens top international education rankings|
|Los Angeles could ban feeding homeless people|
Produced by the Oregon Business marketing department
When the Portland-based manufacturing company Glass Alchemy, Ltd. was first nominated for an Oregon State University Austin Family Business Excellence in Family Business award in 2004, husband-and-wife team Henry Grimmett and Susan Webb-Grimmett, were honored and optimistic about their chances of winning.
Some employers have embraced the use of employment arbitration agreements as a way to manage and mitigate the rising costs, risks and liabilities associated with employment-related claims. Historically, employment arbitration agreements require employees to present employment-related claims, such as employment discrimination, wrongful discharge, harassment, or claims for wages or compensation to an arbitrator, in lieu of proceeding to court.
Produced by the Oregon Business marketing department
Boly:Welch was founded in 1986 based on a close connection between Diane Boly and Pat Welch. The two had worked together at another recruitment firm and shared certain core values: passion for their work, a sense of humor, a commitment to their community and a desire to create a healthy, nurturing work environment.
Dunn Carney will host its annual Ag Summit on Jan. 10, 2014 at the Holiday Inn in Wilsonville, OR. We are very pleased to welcome Dr. Sherri Noxel, Director of the Austin Family Business Program at Oregon State University College of Business as our Keynote speaker.
The Naa Amerley Palm Education ("NAPE") Foundation recently awarded two more Lane Powell/Lee Nusich Scholarships to deserving students attending institutions of higher learning in Ghana. Including the most recent recipients, a total of 48 scholarships have been awarded to Ghanaian university students since the scholarship foundation started in January 2009.
Unitus Community Credit Union, a Portland-based credit union with more than 80,000 members, has announced the addition of Brian Alfano as Vice President of Member Services. Alfano will provide strategic leadership over Unitus’ member experience to ensure consistency across delivery channels, including branch operations, member support, and products and services.