Obama's refinance plan faces partisan paralysis

Source: MarketWatch

WASHINGTON (MarketWatch) — President Barack Obama’s State of the Union proposal to have Congress approve a sweeping mortgage-refinancing program funded by a bank tax has little or no chance of passage, analysts said.

Specifically, Obama said he’s sending to Congress a plan that would give homeowners a chance to save roughly $3,000 a year on their mortgage by refinancing to historically low rates. The plan would be paid for by a fee on the largest financial institutions, he added.

The plan is expected to be an expansion of an existing White House program that seeks to help underwater borrowers, who have no equity in their homes, to refinance at lower interest rates. However, that program, which already has been expanded, helps underwater borrowers refinance as long as their mortgage is backed by Fannie Mae and Freddie Mac, the government-controlled housing giants.

Analysts speculate that the program Obama is considering would also include millions of underwater borrowers who have mortgages that are not owned by Fannie or Freddie — an effort that would require congressional approval.

To reach this conclusion they point to a Jan. 4 white paper by Federal Reserve Chairman Ben Bernanke, who suggested that regulators could expand the program — known as the Home Affordable Refinance Program — to loans that are not owned by Fannie or Freddie. Read about the HARP program expansion

Bernanke said that perhaps 1 million to 2.5 million borrowers would be eligible to refinance through HARP, except that their mortgages aren’t backed by Fannie and Freddie. Read more about Bernanke's white paper

Yet analysts argue that obtaining congressional approval would be difficult at best. They also point out that the bank tax Obama seeks to pay for the refinancing program would also need statutory approval by Congress.

“Given the inability of Congress to agree on most big issues in the past couple of years, we believe the decision to refer a bill to Congress greatly reduces the chance of a mass refinancing program happening,” Barclays Capital analyst Ajay Rajadhyaksha wrote in a report.

Jaret Seiberg, analyst at Guggenheim Securities LLC in Washington, said he believes it has a one in three chance of being approved, as Republicans weigh whether they worry more about giving Obama a win or experience backlash from troubled homeowners or housing-lobby groups.

He added that Guggenheim believes it would be “almost impossible to enact the bank tax into law” with Republican opposition, but that Congress could find other mechanisms to fund the program that did not require their approval.

Paul Dales, senior U.S. economist at Capital Economics, agrees that it will be a “tough sell” to Republicans, who he said already think the government is too involved in housing.

The bank tax Obama said would pay for the costs of the program was a problem, according to Brian Gardner of Keefe, Bruyette & Woods. “We view the bank tax as a poison pill,” he said.

Mortgage fraud the big banks
Obama also announced that he is setting up a unit in the Justice Department to “expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis.” It is unclear how this division, which is expected to be led by New York Attorney General Eric Schneiderman, will impact efforts by states to reach a settlement with five big banks over questionable foreclosure practices. Read more about state, Feds discussing bank-settlement goals.

Guggenheim’s Seiberg said the financial-crimes task force could derail the settlement talks. He noted that as part of an expected settlement, big banks are likely to receive relief from state claims on loans and that relief is worth less if federal prosecutors bring similar claims.

However, Geoff Greenwood, spokesman for Iowa Attorney General Tom Miller, said he did not believe the task force will impact settlement negotiations at all.

Miller is helping to lead the talks between state attorneys general and federal prosecutors and the five big banks: Bank of America Corp. /quotes/zigman/190927/quotes/nls/bac BAC +0.14% , J.P. Morgan Chase & Co. /quotes/zigman/272085/quotes/nls/jpm JPM +0.08% , Citigroup Inc. /quotes/zigman/5065548/quotes/nls/c C +0.13% , Wells Fargo & Co. /quotes/zigman/239557/quotes/nls/wfc WFC -0.10% and Ally Financial Inc. (formerly GMAC).

He said that while states would release servicing and origination claims against the five big banks, it would not grant criminal immunity to bank executives. Greenwood added that banks involved would not be released from any fraud related to securitizations and that the settlement does not involve other companies that originated fraudulent loans.

“So there are many other pieces of the puzzle, and this announcement will enable states and our federal partners to continue to work together to address those other pieces,” Greenwood commented.

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