Last week, President Obama convened the annual State of the Union address from Capitol Hill in front of both houses of Congress and the American people. In his one hour, 9-minute and 43-second speech, he outlined his plans for 2012 and beyond. Speech analysts mentioned that the word “jobs” was stated more than any other in his oration (over 100 times). There were the subtle jabs at Republicans, references to more taxes for the rich, and help for the poor. In my opinion, he discussed the usual stuff, until he started to talk about real estate.
Attorney General Eric Holder must have been blinking his eyelids at 100 blinks per minute as the President outlined how he’s being charged with the creation of a new task force to be called the Office of Mortgage Origination and Securitization Abuses (OMOSA). Its intent is to provide “robust and comprehensive investigation into the global financial meltdown to ensure nothing like it ever happens again.” This new office is supposed to provide compensation to victims, provide relief for homeowners, and make institutions pay for their sins and transgressions of consumer abuse. This new task force appears to be a full court press of legal muscle. The Attorney General (AG) of New York will be chairing the office. Others notable officers of the law involved in this new office include two assistant AGs from the Dept. of Justice, including the head of its Criminal Division; the SEC’s enforcement chief; and the US Attorney for the State of Colorado.
Indeed, this is a power packed team. Their titles seem ominous and intimidating, but given their primary and existing responsibilities, will they be able to provide any teeth to enforce the letter of the law and bring mortgage criminals to justice, or will this be an bureaucratic effort in futility with an office full of headstrong individuals whose egos could potentially get in the way of one another’s advancement? Additionally, will their “day jobs” prove to be more demanding on their time than service to the American people? I can envision this office spending over $1.5 million per year in salaries and benefits before the first criminal is brought to justice. Moreover, the biggest challenge will be that many of the institutions that this office seeks to “hold accountable” haven’t broken any laws on the books. The President has already admitted this very factoid on national television. Therefore, the office should step up to the plate and work diligently as a team designed to bring criminals to justice like never before. So, the jury is out on this one (pun intended).
Now, the proposal that really got my attention was President Obama’s desire to create the “mother of all refis,” as I would call it. Currently, through the Home Affordable Refinance Program (HARP), Fannie Mae and Freddie Mac borrowers who originated their loan before June 1, 2009 and are only 5% (or less) underwater on their primary mortgage loan can refinance and take advantage of the historically low rates that are offered in the marketplace. Clearly, it has been great for those who meet the minimum criteria, but a bane for those who don’t have a pre-June 2009 Fannie/Freddie loan. For these individuals, HARP cannot help to reduce their mortgage payments. Accordingly, a broad swath of American homeowners haven’t had any relief outside of a five-year loan mod obtained only after voluntarily becoming delinquent on their mortgage. Based on what the President outlined, this is about to change. There are scant details about this program at the moment, but the President said that his initiative will “cut red tape” and could “save homeowners about $3,000 a year” on their housing payments. The program will apply to all borrowers whether or not their current mortgages are owned by a government sponsored entity (GSE) like Fannie Mae or Freddie Mac or not.
This truly is the program that I have been waiting to hear about. There are a ton of homeowners who make all of their payments on-time and deserve some relief. They have waited on the sidelines fuming about their lack of options. Now, it sounds like they will have one–supposedly. HARP 2.0 is supposed to be a super-charged version of the original HARP by eliminating loan-to-value provisions, but assembling the mechanics together to make the plan work has been a challenge and to date, no lender has offered this program. The logistics of the HARP program are challenging, and these are loans owned by GSEs. The President’s proposal calls for mortgage backed securities (MBS) trustees, hedge funds, life insurance companies, and private individuals to modify their current terms and interest rates, when prior to last Tuesday night, they didn’t have to do so. If someone is not aware of it, MBS documents are like multiple dissertations– the owners of the securities are far ranging and could be anyone or any institution around the globe. Accordingly, making any change requires the buy-in from the majority if not all of the securities’ holders. This will be a tough sell. It’s necessary, but it won’t come easy. The borrowing public wants the product, but can the President provide the product and at what cost? Will this be the program of the decade or a line in a hot speech to get the people’s ears to burn? Additional information that I have received suggest that new borrowers will have to accept mortgage insurance. For a borrower, with equity, this is a non-starter; particularly if the mortgage insurance premium negates any potential savings.
Undoubtedly, the each State of the Union address provides ample opportunity to hear the plans of our leader coming straight from his mouth. Will there be meat in the message or fodder for the masses? The state of the real estate industry is that it’s alive, but on life support. There appears to be help on the way, or is it just a lot of big plans that will turn out to be expensive bureaucracy? A new office has been created with a lot of firepower, but will be see if this turns into deposits into the US Treasury to reimburse the American people or will we see an office that is overrun with egos and individual agendas. A proposal has been floated to refinance the masses, but will it turn into a bonafide, executable plan? The state of the industry is tepid at best, but if President’s Obama’s proposals bear fruit, the American people will reap a great harvest.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at email@example.com.