Housing Industry Reacts to State of the Union

Housing featured prominently in President Obama's State of the Union speech on Tuesday night.  The President made two specific proposals, one to deal with the ghosts of housing past, the other to provide expanded credit to homeowners.

In contrast to the settlement with banks that Obama was widely rumored to announce at the State of the Union, he instead directed Attorney General Eric Holder to create a new office on Mortgage Origination and Securitization Abuses.  The President said, "The American people deserve a robust and comprehensive investigation into the global financial meltdown to ensure nothing like it ever happens again."

According to the Huffington Post, the new office will take a three-pronged approach to the issue, holding financial institutions accountable for abuses, compensating victims, and providing relief for homeowners, and will operate as part of the existing Financial Fraud Enforcement Task Force.  On Wednesday several news outlets were reporting that the unit will be chaired by State Attorney General Eric Schneiderman, who has been regarded as among the toughest of state law enforcement officers with Lanny Breuer, an assistant attorney general in the Criminal Division of the Department of Justice (DOJ) as co-chair.  Others reported to be in the group are Robert Khuzami, director of enforcement at the Securities and Exchange Commission, U.S. Attorney for Colorado John Walsh and Tony West, assistant AG, DOJ. 

The President's second and more broad-reaching proposal was for a massive refinancing of mortgage loans that would reach beyond the current government initiates such as the Home Affordable Refinance Program (HARP).  While few details are available, the President said that his proposed initiative would cut red tape and could save homeowners about $3,000 a year on their mortgage payments because of the current historically low rates.  Unlike HARP, the program would apply to all borrowers whether or not their current mortgages are government-backed and would be paid for by a small fee on the largest financial institutions. Obama did not mention principal reduction in his proposal.

Bloomberg is reporting that the program is Obama's response to a call by Fed Chairman Ben Bernanke in a paper sent to Congress earlier this month for the administration to offer more aid for housing.   While largely dealing with the need to convert excess housing inventory to rental property, the paper also touched on the benefits of easing refinancing beyond the HARP program.

Bloomberg also outlined some of the tradeoffs of a super-refinancing program saying it may damage investors in government-backed securities by more quickly paying off those with high coupons and limited default risk while aiding holders of other home-loan securities and banks.  Word that such a proposal might be forthcoming in the President's speech, Bloomberg said, "Roiled the market for Fannie Mae and Freddie Mac securities according to a note to clients by Bank of America Corp."

The Associated Press quoted Stan Humphries, chief economist at Zillow as saying the refinancing could allow 10 million more homeowners to refinance and, by preventing foreclosures and freeing up money for Americans to spend, could give the economy a $40 to $75 billion jolt.  The Federal Reserve, the AP said, was more cautious, estimating that 2.5 million additional homeowners might be able to refinance.

The refinancing initiative would require approval by Congress, however the day after the speech the focus was on other issues such as tax reform and we could not find any reaction from members of Congress specific to the refinancing issue.  Even the Mortgage Bankers Association (MBA) issued a statement from its president David H. Stevens which did not mention the refinancing program, obliquely addressing instead the creation of the mortgage fraud office.    

"Like the President, we believe it is time to move forward with rebuilding this nation's housing market and that lenders and borrowers alike contributed to the housing crisis we are currently in.  Let there also be no mistake, those who committed illegal acts ought to face the consequences, if they haven't already."

Stevens then called for a clear national housing policy "that establishes certainty for lenders and borrowers alike."  This, according to MBA, requires finalizing the Risk Retention/Qualified Residential Mortgage (QRM) rule "in a way that ensures access to credit for all qualified borrowers," establishing working national servicing standards, developing a legal safe-harbor for Dodd-Frank QRM/Ability to Repay requirements, and "Move(ing) quickly to determine the proper role of the federal government in the mortgage market in order to ensure sufficient mortgage liquidity through all markets, good and bad.

Creation of the fraud office generated substantial comment, much of which was unfavorable.  A lot of the criticism focused on the lack of prosecutions that have emerged from the existing fraud task force and there was a strong suspicion voiced by the liberal blogosphere that the new office was merely a cover for pushing the DOJ/50-state attorneys general settlement with major banks.  However, one analysis, written by Shahien Nasiripour in U.S. Politics and Policies pointed out the wider powers of enforcement available to attorneys general in some states such as New York's Martin Act and how the states and federal government might use the new office to pool their powers and responsibilities to the benefit of each.  

The new office will not lure California Attorney General Kamala Harris back into the fold.  Harris and Schneiderman both withdrew from the national foreclosure settlement last year, feeling that it did not represent the interest of their respective states.  Despite the appointment of Schneiderman to head the new office, Harris announced on Wednesday that she would not be rejoining her fellow AGs in their negotiations saying that the latest settlement proposal was inadequate for California.  A spokesman for her office said, "Our state has been clear about what any multistate settlement must contain: transparency, relief going to the most distressed homeowners, and meaningful enforcement that ensures accountability. At this point, this deal does not suffice for California."

Here's the video of the speech beginning at the point discussing housing related issues: