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
with Merkley on the program.
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.