Will Obama Refinance Your Mortgage?

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Several media reports claim that one of the tools the Obama administration may use to resurrect the housing market and help mortgage holders remain in their homes is a program which will let people refinance at current mortgage rates. With rates at all-time lows, refinanced mortgages could save people hundreds, if not thousands of dollars a year.

The New York Times reports that "A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers' mortgage bills right away and allow them to spend elsewhere." The paper also points out that some federal regulators may try to block such a move. The plan could also complicate the value of certain mortgage-related investments.

The program would face other hurdles. It's possible that financial firms, such as banks, might need new appraisals, a process which can take weeks. There is also the issue of whether the deal would only be extended to people with good credit ratings.

Despite multiple hurdles, the refinancing plan could be smart way to boost the housing market. Data from S&P/Case Shiller shows that the value of homes in the top 10 and top 20 markets continue to fall. RealtyTrac research demonstrates that foreclosures have dropped, but that once court cases involving these troubled mortgages have ended, the rush of foreclosures will rise. The market is also plagued by two million to three million homes which are in "shadow inventory." Most of these are foreclosed properties held by banks but that have not been put on the market yet.

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The last government program which helped the housing markets was one that gave tax credits of up to $8,000 to buyers of new homes. That program expired in April 2010 and home price drops have since accelerated.

The other open question is whether people will indeed take savings from mortgage reductions and start to spend, which would help GDP. Americans are still concerned about unemployment and another recession. Many people who could refinance their homes might rather save the money from the move.

But, the administration knows that without a new plan, the housing trouble could continue for years. That alone will put a continued drag on the economy as people with underwater mortgages cling to homes worth less than their mortgages or simply default. A program like the one proposed may be the only way to build a foundation for a market which is still in free fall.
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