Earlier this week, President Obama announced a plan to help homeowners refinance their mortgages.
The White House says it will help millions of people hold onto their homes through a government-backed modification program. But critics are skeptical the plan will be a success, in part because of the dependence on the good will of banks to voluntarily join up.
Raphael Bostic, the assistant secretary for Policy Development and Research at the Department of Housing and Urban Development, is the architect of this new plan. He told weekends on All Things Considered host Guy Raz that the plan is aimed at homeowners who owe more than their homes are worth but have been unable to refinance and take advantage of historically low mortgage rates.
"What this program does is it really changes the criteria for deciding whether you're eligible for a mortgage," Bostic says.
Instead of looking at homeowners' negative equity or how "underwater" they are, Bostic says, lenders will instead look at the homeowners' past performance in paying their mortgage consistently. He says if the homeowner has done that, the homeowner can qualify to refinance at the current 4 to 4.5 percent rates instead of the 6 or 7 percent many are paying.
"[The money saved] should then go back into people's pocketbooks and really help them stabilize their financial situation," he says.
The program also streamlines the process and reduces closing costs, Bostic says, which are often seen as another barrier to refinancing.
Even though the program applies only to homeowners with loans backed by Fannie Mae and Freddie Mac, Bostic says the administration expects that as many as 4 million mortgages will be eligible for the refinancing. Current estimates, however, put the number of homeowners "underwater" in their mortgages at 11 million.
Refinancing is voluntary for lenders. But banks are realizing that by not engaging in refinancing, they are exposing themselves to much deeper costs associated with foreclosure, Bostic says. And, he says, those potential losses have banks concerned.
Bostic says he doesn't think there are any single solutions that would be a "silver bullet" and completely heal the housing market.
"We collectively underestimated how complex the mortgage market is and how many different approaches you'd need to put in place in order to find that kind of relief," he says.
President BARACK OBAMA: Probably the single greatest cause of the financial crisis and this brutal recession has been the housing bubble that burst four years ago.
GUY RAZ, host: That's President Obama in a speech earlier this week, announcing a plan to help homeowners refinance their mortgages. At least 11 million homeowners in this country are underwater. They owe more on their houses than they're worth. The White House says it will help millions of people hold on to their homes through a government-backed modification program. But critics are skeptical the plan will be a success, in part because the White House is depending on the goodwill of banks to voluntarily join up.
Raphael Bostic is the architect of this new plan. He is the assistant secretary for Policy Development and Research at the Department of Housing and Urban Development. And when I spoke to him on Friday, he explained who this plan helps and who will be left out.
RAPHAEL BOSTIC: We have thousands of homeowners in the current environment where they just can't change their mortgage. And so, they're stuck in mortgages at 6 percent or 7 percent and haven't been able to take advantage of the historically low mortgage rates.
So, what this program does is it really changes the criteria for deciding whether you're eligible for a mortgage. And it says, we're not going to look at the amount to which you're underwater or you have negative equity, but rather we're going to look at what your performance has been. Have you paid your mortgage consistently? And if you can do that, we're going to let you just do a pretty straight, simple refinance to get from your 6 or 7 percent into a mortgage that's closer to the four and the four and a half.
And what that should do is it should reduce payments fairly significantly for those families by, you know, in many instances, it'll be 200, 300, $400 a month, which should then go back into people's pocketbooks and really help them stabilize their financial situation.
RAZ: We've had a lot of interest from our listeners. We put out a call on Facebook about this. A lot of people aren't sure whether they qualify. Do you have to have a loan serviced by a specific provider? Does it have to be a loan that originated with Fannie or Freddie to qualify?
BOSTIC: So, for this program, it needs to be a loan that is insured by Fannie or Freddie. So, it does have to be that. You know, for most people, for many people, Fannie and Freddie are the ultimate insurers of the loan. So, it's our expectation that a lot of folks who are looking for assistance will be able to qualify. And, you know, nationwide, it's our best guess that there are about four million mortgages that would qualify for this program. That's not to say that there would be four million refinances, because people have to decide what is best for them and what they can afford.
There's one other thing I did want to say on this, which is another aspect of the program, which people should keep in mind. What we have learned through the last couple of months and years is that one barrier to refinance has been closing costs: the cost associated with title, insurance and appraisals and the like. And through this program, we've actually reduced the cost of those things and tried to streamline the process. So, the program actually deals with two important barriers: the amount of negative equity and also this amount of money you need at closing.
RAZ: As you know, refinancing is purely voluntary for banks that are not Fannie or Freddie. Why doesn't or can't the administration apply pressure to those banks to refinance more homes, particularly those banks that, you know, received taxpayer-subsidized bailouts?
BOSTIC: I think that the real reality here is that what banks have started to realize is that by not engaging in refinancing, they're exposing themselves to much deeper cost associated with foreclosure. What we know and what experience tells us and what bankers have told us is as soon as the property goes into foreclosure, regardless of what the market value has been, there's an extra 15 percent hit to the value of that property. And what that means is that you have a bunch of homes out there that are on the verge of incurring or creating significant losses on the part of the banks. And frankly, I think they're concerned.
The other piece here, though, is that, you know, we're talking, for this program, about people who are already - who are paying their mortgage. They are current on their mortgage. And so, this takes a bunch of properties that would otherwise, you know, frankly be at risk of foreclosure and really take them off the table because we're reducing the burden and providing a deep incentive for people to stay in their house.
RAZ: Raphael, as you know, this is still a crisis in this country.
BOSTIC: It still is, yes.
RAZ: Is this plan - are you confident that it is going to resolve that crisis?
BOSTIC: By itself, I would say no. Look, we have a deep problem in this housing market. We have a bunch of people who are at risk of foreclosure. We have a bunch of foreclosures that are already out there, and we have a bunch of people who are really worried about their ability to maintain a mortgage because we have employment challenges.
And so, we need solutions and programs that deal with all of those. And so, it really gets back to this question of are there silver bullets and are there single hits that you can do to completely heal the market. And I don't think there are, and I think that we collectively underestimated how complex the mortgage market is and how many different approaches you'd need to put in place in order to find that kind of relief.
RAZ: That's Raphael Bostic, assistant secretary for Policy Development and Research at the Department of Housing and Urban Development. Raphael, thank you so much.
BOSTIC: It's been really good to talk with you. Thank you. Transcript provided by NPR, Copyright NPR.