Last week President Obama expanded on his proposal for a government refinance program that he said would help millions of “responsible homeowners” and in turn the U.S. economy. The goal of the program is to lower monthly mortgage payments to as many borrowers as possible.

According to senior administration officials, the program would go through the Federal Housing Administration (FHA) and cost between five and 10 billion dollars. It would be funded by a tax on major lenders.

Cal Haupt, President and CEO of Southeast Mortgage of Georgia, Inc.

This plan is a bad idea. Increasing costs to major lenders will further limit product availability and potentially slow the housing recovery. The average cost of a loan to mortgage lenders has already increased a whopping $817 since 2009.

To be eligible for the program, borrowers would have to be current on their mortgages, not having missed a payment in at least six months. They need a credit score (FICO) above 580, must be employed, and must have a conforming loan (between $271,050 and $729,750 depending on their location). No appraisal would be necessary, according to officials.

There is a historical relationship between credit scores, loan to value, and repayment ability to default rates. The plan would probably shift the burden of default from one investor to the government for people with credit scores between 580 and 600.  Moving the score to 620 from 680 would be a great idea with little additional risk.

The FHA does not currently insure new loans when the borrower owes more than the home is worth. This program would cover the closing fee for borrowers and the additional risk to the FHA.

Some critics argue that the FHA, which now has a historically large share of the mortgage market, doesn’t need to take on more risk. But with the economy recovering, the risk to the FHA insurance fund is decreasing. In this improving economy, increasing FHA’s share of risk while housing values rise with employment neutralizes the inherent risk associated with any concentration in a constant environment. I would agree that increasing the guarantee would be risky if housing values were still falling in Georgia, but values of homes in most areas of Georgia are improving.

Although the estimates are that the plan would help 3.5 million borrowers and 11 million more expected to quality for the existing refinance program for those with Fannie Mae and Freddie Mac loans (HARP), the FHA would charge mortgage insurance premiums. If these are rolled into the loan, the borrower would be further under water and the premiums would offset any benefit.

The plan would also require lenders to write down the value of the loan if it exceeded 140 percent of the value of the home. Administration officials say the trade-off for lenders is they get rid of a risky loan.

Asking a bank or an investor to write down a performing loan due to a value at a point in time would create additional costs that the banks would pass on to consumers. Values are improving and at this point there is no need for a forced write-down and the resulting additional cost associated with it.  Be patient.  Property values will come back in line as they have done in every post-recessionary period prior.

If this plan had been implemented 18 months ago it may have helped our economic situation. However, the recovery is under way, it is of little value and could actually slow the progress the economy has already made. The housing market in Georgia is improving.  I would let the market naturally recover without this intervention.

– Cal Haupt