I watched President Obama’s State of the Union address expecting a bombshell related to mortgages and helping underwater homeowners refinance their loans. While I think our President is a gifted orator, his speech last night certainly lacked in substance. When it came to housing and mortgage reform, the President was vague and provided none of the details that I know many Americans were looking for.

As I mentioned in my previous post, there is a proposed settlement with the “Big Five” banks that would allow homeowners to refinance their loans down to 5.25%. A component of the settlement also includes some type of principle write-down for those homeowners who are underwater on their loan, or owe more than the value of their home. The White House was reportedly pitching the details of the settlement to Democrats and Republicans over the last couple of days. I can only think there was some type of snag that stopped the President from giving the details to us in his speech. There are lots of open questions related to housing, and I think they deserve examination.

What are the details of the proposed settlement? Outside of the sketchy pieces that have been leaked to the media, we really don’t know yet. What we do know is that the banks are settling with the Federal Government to avoid prosecution on their foreclosure practices through the last couple of years. As part of that, they are proposing to allow homeowners to refinance down to 5.25%, pay a portion of their closing costs, and possibly write-down the principle of the loan. We do not know who would qualify, what type of loans would be eligible, and what the catch on the back end would be. Are you going to be required to provide the bank with some of the gains when you sell you home or refinance in the future? I doubt it, but with the banks you can never be sure.

Haven’t I heard this song before? Yep. In 2010 the Administration introduced a program that would allow homeowners underwater on their loans to refinance through FHA loans, but less than 1,000 loans have been refinanced using this program because of the difficulty in qualifying and the costs associated with closing. Is this different than the HARP program? Right now we just don’t know the details or what type of loan would qualify.

Is this going to be automatic? Will everyone qualify? My answer is I doubt it. From everything I have read, you will still have to qualify for the loan, including your credit and DTI or debt to income ratio. That means I would seriously start working on my credit score and paying down any revolving debt that you have. There are always fees you have to pay with a mortgage regardless if your loan is approved or rejected, like the appraisal. You know that mortgage loan officers will be swamped once the details are announced, so don’t get caught being a borrower who has a tough file. Clean up your credit and get your debt paid down now.

What should my strategy be? Right now rates on a 30 year fixed-rate mortgage are hovering right around 4.0%, so the 5.25% being floated is not necessarily that attractive if you are not underwater on your loan right now. Let’s assume you owe $200,000 on your home and you have a 30 year fixed-rate loan. If your rate is 4.0%, then your principle and interest payment will be $954.83; if your rate is 5.25% then your principle and interest payment raises to $1,104.41, a difference of almost $150.00 per month. If you are not underwater on your loan, then it would make no sense to participate in this program. If you owe more than your home is worth, then you have to weigh the monthly payments against the amount your principle will be reduced.

What will this do to the housing market? I have read opinions on both sides of this question. Some economists think it will hurt home values because so many people will refinance and lower their principle. While in my state data related to refinancing is not used in comps related to appraisals, I gotta think that appraisers will receive directive from mortgage companies to carefully evaluate the comps they use. Regardless, I do think that if the program is structured correctly that loan officers, underwriters, appraisers, title companies, and everyone else in the industry will be super swamped, meaning it will take a while to get loans closed. Right now you can expect a turn-around of about 30 days between when you submit a complete loan file and when your loan can close. That timeline will be extended. A lot.

What about Fannie Mae and Freddie Mac. In my opinion these were the elephants in the room during the President’s State of the Union address. Both agencies are in real trouble right now and there is little likelihood that their situations will improve. I am not going to debate the benefits and disadvantages of having the Federal Government involved in the housing market, but I think everyone can agree that both agencies need to be fixed. Remember Fannie Mae and Freddie Mac backed all the crazy loans that Countrywide and other companies have been vilified for underwriting. You better believe that Fannie and Freddie both knew what was going on.

Where is my real mortgage and housing reform? If he had something in mind, Obama definitely kept this ace up his sleeve during what seemed to many to be an stump speech and announcement for his candidacy for the Presidency of the U.S. His vague promise of legislation to allow every responsible homeowner to refinance at today’s low mortgage rates was empty into today’s environment in D.C. I think that the proposal that stems from this settlement will be like those fireworks that have a huge BOOM! and very little light. There will be very few people who are eligible to refinance under the program and in the end, it will benefit very few people. Fannie and Freddie will still be limping along after the election this fall and reforming those two GSA’s will be the responsibility of the next administration. In the end, there will be lots of noise and very little action.

The Bottom Line: If you are underwater on your loan, keep an eye on this blog and the news I will bring you related to the settlement and resulting program. If you owe less than your home is worth and have a rate at or higher than 5.0%, consider refinancing your loan now because of the backlog that may result from a successful program. If you are looking to buy a home, get into the market now because your loan will take forever to process once this program is announced.

What did you think about the State of the Union Address? Do you think anything related to housing and mortgages will change?

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