In Obama's Refinancing Plan, Homeowners to Pay a Premium

When President Obama announced his sweeping plan to help more homeowners refinance their mortgages at lower interest rates, he left out one important detail -- a fee Uncle Sam would charge them for the government's support.

The president proposed lowering monthly payments for possibly millions of homeowners by refinancing their loans through the Federal Housing Administration. The agency provides insurance against default for banks that make riskier loans mainly to borrowers who make small down payments.

The insurance allows homebuyers to borrow at lower interest rates, but the FHA tacks a 1.15% charge on top of the interest rate of most new mortgages it guarantees -- for the life of the loan. While the administration has yet to decide how to structure surcharges in its refi program, such fees would reduce savings for borrowers and make the program less attractive to some.  

"At the heart of it is -- where will the FHA price the premiums?" said Brian Montgomery, a former FHA commissioner under President George W. Bush now with the Collingwood Group in Washington. "It is an insurance program, after all."

A senior administration official involved in crafting the proposal said, "There is going to be a premium -- that's the way it's going to cover its cost." But he said the White House will set the levels with Congress as it works with lawmakers on the plan. “We’re going to avoid getting into that numerical game” until then, the official said.

The president introduced the FHA refi proposal in his State of the Union address two weeks ago, along with other measures to support the housing market. Some of them, including changes at the FHA, would require approval from Congress. The administration's background documents did not mention a premium payment in the FHA program.

The issue of premiums is expected to come up at a Senate hearing Thursday on the state of the housing market. Also, housing advocates asked about premium sizes last week in a conference call with administration officials, according to one participant on the call.

To help pay for his plan, the president proposed a new fee on big banks. It would raise $5 billion to $10 billion to subsidize premiums -- "a big chunk of the cost" -- the administration official said. The subsidies would help keep the program affordable and attractive to as many eligible borrowers as possible, he said

The program would be limited to homeowners who are current on their payments and also would be available to “underwater” owners whose properties are worth less than their outstanding mortgage balances.   

“While government can’t fix the problem on its own, responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief,” the president said in his address. He claimed his plan would save eligible homeowners about $3,000 a year on average.  

Last year, the FHA collected about $8 billion in premium income on about $1 trillion in mortgages it insures in its existing programs. With the recession, weak economic recovery and continued high unemployment, more FHA loans have gone bad. To help beef up its finances, Congress has allowed the agency to raise premiums, most recently last February.

With current FHA premiums, an example of a refi provided by the White House last week would not generate as much in advertised savings: The administration said a person who borrowed $300,000 in 2005 at 6% has been making a monthly payment of about $1,800. He could refinance the remaining balance, $272,000, at 4.25%, saving about $460 a month. But a 1.15% FHA surcharge would raise the monthly charges to 5.4%, reducing savings by $190 a month. 

"We'll make sure we strike the right balance" with premiums, the administration official said. "Prohibitively high" charges "would kind of defeat the purpose of the program," he said.

The agency also charges homebuyers a one-time “up front” fee of 1% for its insurance. The government’s other mortgage insurance entities, including Fannie Mae and Freddie Mac, levy similar charges. The president also proposed improvements to their refinancing programs last week to complement existing programs.

In a research report last week, Amherst Mortgage Securities suggested that the “breakeven” point in the refi program for homeowners would be about 5.5% at current mortgage rates and including current FHA premiums.

Amherst Mortgage gave the plan a “low probability” of passing Congress because it would raise fees on banks, which many Republicans oppose as a tax increase. Other analysts think its chances of passing are low because many Republicans are concerned the FHA faces an eventual taxpayer bailout due to increased loan losses and that it cannot support a new mortgage finance program.    

Citing concerns about both issues, Sen. Johnny Isakson, (R-Ga.), a former real estate agent who has led bi-partisan efforts in the Senate to help the housing market, said Senate Republicans are willing to work with the president to help struggling homeowners, but that “there are a lot of questions that have to be answered” about the FHA plan.

“I think it makes perfect sense to try and help those who can make the payment, are making the payment, (to) keep them from having a strategic foreclosure, but you can’t necessarily refinance somebody back to health, and you have to make sure the [strong] underwriting [standards] and the ability to repay is there,” he said.

Last week, House Republican Leader John Boehner, (R-Ohio) criticized the president’s proposal, saying, “We’ve done this at least four times, where there’s a new government program to help homeowners who have trouble with their mortgages.”

“None of these programs have worked,” he added. “I don’t know why anyone would think that this next idea is going to work. All they’ve done is delay the clearing of the market. The sooner the market clears and we understand where the prices really are will be the most important thing we can do in order to improve home values around the country.”

On Tuesday, a House Financial Services subcommittee approve an FHA bill – an “emergency solvency” measure -- to improve its finances that includes tough new controls on the agency.