The "increase home prices" part particularly irks us about this (the rest looks as reasonable as can be expected when we assume an increasing "bailout" role for the federal government in housing). So, how did an explicit goal of "increasing home prices" work out for those homebuyer tax credit takers?

Jeff Merkely (D-OR) asked Donovan what it would take, a regulatory or statutory fix, to address the limit on FHA loans to a 115 percent loan-to-value (LTV) ratio.  Donovan said it was actually an even lower ratio in practice but the proposal is for a broad-based refi to allow up to 140 percent with the clear view that any loan deeply underwater would have to be written down to those parameters.  That, he said, along with creating a separate fund from the FHA MMI insurance fund to protect that fund would be the key legislative changes required.

Merkley asked if an insurance fee for borrowers who are refinancing would be the strategy for financing the separate fund and Donovan said another suggestion is a broad-based financial sector fee of some sort but he was also looking at a risk transfer fee as a voluntary opt-in for companies that hold these underwater mortgages.  "And in laying this out over -- over 40 years, if you have basically a spread, because of the federal government guarantee funds between a 2 percent and, say, a 5 percent mortgage, and you throw in the risk transfer fee, you end up with solvency under kind of reasonably conservative assumptions. But it's not zero risk because dramatic things can happen. And that's where the federal government guarantee through FHA becomes essential, or an extension of the federal government guarantee to utilize for the Federal Home Loan Bank system."

Donovan said there is no question that by refinancing loans into FHA loans the government would be taking on some additional risk but the question is how to minimize that risk and by both focusing on current loans that meet additional underwriting criteria, lowering the cost of these already safe loans and being able to fully pay for it, they are hoping to offset any expected losses.

Most importantly, he said, there is enormous up-side potential. "If we can just move house prices a few percentage points through this broad-based refinancing, the benefits to the taxpayers through improvements in the performance of Fannie Mae and Freddie Mac, FHA, and the broader lift that the economy would have are all potentially enormous."


In answer to another question by Shelby as to the number of additional homeowners, above those participating in HARP 2.0, might be helped by the Menendez-Boxer legislation Donovan said he would have to answer as a range with Christopher Mayer estimate of 12 million at the high end. He said his department's expectations are significantly lower than that but not as low as the one million projected by some.


Merkley underlined the urgency of taking advantage of low interest rates, recounting a program he had been involved in which was effectively killed because of rapidly escalating home prices but said to him a more critical issue is how to help homeowners who do not have GSE guaranteed loans. When he talks to constituents about their loans they generally do not know who holds it. Then he looks and finds that some are not GSE-backed and he has no help to offer them. It seems like a lottery, he said, when a family who is doing the right things can't get help simply because their loan isn't the right type. Donovan said it was correct that this is about fundamental fairness and that is one of the important issues here.

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