“Obama to Bypass Congress on Mortgages” … But “New Obama Foreclosure Plan Helps Banks At Taxpayers’ Expense”

Washington's Blog

October 25, 2011

CBS News notes that Obama is bypassing Congress to enact mortgage reform:

President Obama is going to begin a series of executive branch actions that will not require action from Congress – or the assent of Republicans.

With recovery in the housing market tied to economic recovery, Mr. Obama will today announce what senior officials are calling a “major overhaul” of the government’s underused refinance program for federally guaranteed mortgages, in order to aid homeowners having difficult refinancing their housing loan.

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Late Monday morning, the Federal Housing Finance Agency released details of new changes to its Home Affordable Refinance, known as HARP.

It may sound at first blush like Obama is bypassing the obstructionist Congress to issue executive orders to help homeowners.

But as Huffington Post notes, in a story entitled “New Obama Foreclosure Plan Helps Banks At Taxpayers’ Expense “:

A key new condition in the plan would shift the financial liability for refinanced loans from Wall Street banks to the American taxpayer.

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The newly expanded program would expunge legal liabilities associated with mortgages refinanced through the program for the original lenders of the mortgages. Each time a bank sent a loan to Fannie and Freddie, it certified that the loan met Fannie and Freddie’s safe lending criteria. But many loans sent to the mortgage giants did not, in fact, meet those criteria. Currently, when borrowers default on those ineligible loans, the mortgage giants can “put back” the resulting losses onto the banks that pushed the loans.

Under the modified plan, “put back” liability at banks will be erased for any underwater mortgage that is refinanced through HARP, eliminating Fannie and Freddie’s ability to sack lenders with losses in the event that the mortgage does not pan out.

If borrowers go through HARP, but decide after several months that the modest monthly savings do not outweigh owing tens of thousands of dollars more than their home is worth, taxpayer-owned Fannie and Freddie will have to take the full loss. Even if the original loan was sent to Fannie and Freddie with false or fraudulent guarantees from the bank — promises that may directly be tied to the borrower’s current financial problems — banks will be immune from liability. Fannie and Freddie plan to charge banks “a modest fee” to extinguish this liability, but the administration has yet to determine what that fee will be.

“In most cases people would probably be better off walking,” said economist Dean Baker, co-director of the Center for Economic Policy and Research.

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