It’s been quite a while since our country’s economic doldrums started, so it’s easy to forget that one of the big causes was the bubble in the housing market.
But economists haven’t forgotten.
In fact, all these years later, the housing market is still languishing and being a drag on the broader economy. It might even be preventing economic growth.
Many economists think the housing market needs a boost, and that a lift there could help the economy as a whole.
On Monday, President Obama was ready to do just that, with a mortgage refinancing plan that would help more than one million homeowners who owe more on their homes than what their homes are worth.
However, many analysts believe this plan will have a limited impact on the broader economy. So what is the new program exactly, and who will it impact?
If You Owed More on Your Home Than What It Was Worth
A home is usually the biggest purchase anyone will make in his or her life. Imagine you spent the time, energy and money to buy a home—and then found out shortly thereafter that you were paying many thousands more than it was worth.
That’s the situation that more than ten million Americans find themselves in today.
Refinancing: What It Is and How the Government May Help
Refinancing a mortgage means replacing your current loan with one with better terms. This can help homeowners lower their monthly payments, pay less interest or convert from a 30-year-loan to a 15-year-loan. If you’d like to learn more about the basics of refinancing, we’ve got you covered.
Especially with interest rates so low right now, refinancing a mortgage would allow homeowners to change the terms of their mortgages and take advantage of better rates. (Here’s how interest rates impact the economy.)
Back in 2009, the government created a program called the Home Affordable Refinance Program (HARP), that would allow such homeowners to refinance their loans, as long as their loans were backed by Fannie Mae or Freddie Mac and they hadn’t fallen behind on their payments.
But HARP had other rules that excluded many homeowners. For instance, refinancing was limited to people who owed between 80% and 125% of the value of their homes, but many owe much more than that. In Nevada, for example, half of all loans fall above that 125% threshold. In the end, few of these so-called “underwater” homeowners could take advantage of HARP, and only 894,000 did.
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President Obama’s New Plan
The revised HARP that President Obama announced on Monday would allow borrowers to refinance no matter how much their homes have fallen in value.
The eligibility rules have also been relaxed. Previously, refinancing required a lot of paperwork. Under this new system, the lender will just have to make sure that borrowers made their last six payments, that they haven’t missed more than one payment in the last year and that they have a job or other regular income. That’s it.
For more information on the rules, check out this Wall Street Journal FAQ.
We also put together a summary to help you learn if you qualify under these new rules, and how to actually go about refinancing, here.
The Impact on Homeowners and the Economy
Homeowners: This could mean a few hundred extra dollars a month for underwater homeowners, which they could spend instead on their children, a vacation or other debts.
The Economy: The administration projects that the revised program will free up about $2.5 billion in consumer spending … but analysts expect the stimulus to be smaller than that, because households won’t spend all the extra money they save.
And the Critics Have Their Say
When he unveiled the program in Las Vegas on Monday, President Obama acknowledged his plan was not sweeping enough to solve the problems in the housing market. Still, he said, “that is no excuse for inaction.”
Many economists believe that what would spur a real recovery in the housing market is lowering the total amounts people owe on their underwater loans, rather than just refinancing. That would reduce the number of defaults and foreclosures, which in turn would stop home values from declining, which in turn would increase the amount governments can raise in property taxes.
So, this program is likely to give a leg up to about a million or so homeowners across the country and stimulate a bit of spending—both of which are good things.
But solve our problems housing- and economy-wise? We’ll wait for another program to do that.
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