Obama Housing Refinance Proposal and Program - Essay Example

Inserts His/her Inserts Inserts Grade (23, 02, Obama Housing Refinance Proposal and Program Introduction President Obama announced a new plan to help struggling homeowners who are current on their mortgages, but underwater by refinancing. Mortgage rates are currently at historical lows and Obama would like to make refinancing into these historic rates available to more homeowners across the country. Obama anticipates providing relief to about 3.5 million people with underwater mortgages. Obama expect the average homeowner to save roughly $300-$500 a month by refinancing into these new low rates. He explained that refinancing would help free up additional money for consumers, therefore helping to stimulate the economy. Obama faces stiff opposition from Republicans in Congress on his refinancing plan, which must first pass congress. United States is known as the ‘land of opportunities’ and people from all over the world come to the country in hope of a better future. But this land of opportunities is facing some serious crisis lately. The financial crisis of 2008 has hit the country badly and has affected the majority of the population. Approximately 11 million people are suffering from serious financial watershed and they cannot even afford a proper shelter to live in. The reason for these problems in the United States and the attempts that American President Barack Obama made to ease the issues of the citizens will be discussed in this paper. The residents of the United States were mortgaged in large numbers and therefore the collapse of the housing market forced many people out on the streets. The homeowners were to pay off the amount of money that was worth more than their houses which was due to the decrease in property rates all over the country. This is where the decision maker Obama stepped in. He decided to revise the Housing Refinance Proposal that would bring out the homeowners from their misery. Previous Financing Policies The United States government is well known for their extra ordinary Housing Finance Policies. The housing policies of the country are considered as standards for the less developed countries. Let’s discuss briefly about the previous Financing Policies that were implemented by the United States government. The United States Housing Policy allowed residents to have tax deductable interest payments. This practice is unique because a certain amount of tax is always applied on the interest payments for loans in different parts of the world (Barth, et. al.178). The deduction of tax meant a great assistance for the house owners of the country. Furthermore, the United States government also set up an organization that would be responsible for providing securities to the loan borrowers. The organization was named as the Federal Housing Administration and the FHA was there to handle the security issues. Therefore no one was denied a loan because of absence of security or collateral. Unfortunately the policies that were devised by the US government did not work even though they contained some points that were exemplary for the rest of the world. The Housing Policy of the US failed dramatically because every other person was given loans that they couldn’t afford. The assumption behind the policies was that property prices will continue to increase in future. The reason behind the failure was also the benefits provided to the borrowers. Giving loans without proper collaterals was a big mistake of US administration. Issues of the existing policies and poverty of people The policies that were set up by the US government were for the prosperity of the homeowners. US being a democratic nation, prevailing policies were not appreciated by all. Many banks austerely protested against the deduction of tax. According to their point of view, excluding the tax would not be fruitful for the banks in the long run. Also the numbers of the customers getting loans certainly increased as a result of these policies. This resulted in more foreclosures and more people weren’t able to meet their mortgage payments. As a result instead of increasing prosperity US policies aggravated the problems of the people. Also when people did not have anything to lose, they simply walked out of their houses and banks had to suffer loses. This brought the housing prices down which were something US administration was not expecting. Because loans were handed out to people who couldn’t pay them back eventually they were asked to leave their houses. This was a burden on those who couldn’t afford another house and those who invested everything they had on their house. After the foreclosures they were left with absolutely nothing. Eventually the ones who have to suffer are the middle class people. There was no way by which they could have saved their hardly earned money. The average salary of a middle class person is around 1500$ – 2000$ a month. This is already not a handsome pay with respect to the expenses of a family. Furthermore, shelter is only one of the expenses. There are many more needs one has to fulfill in order to survive. The schooling of children, utility expenses and travelling expenses are just a few of them. It became nearly impossible to survive under such dreadful circumstances. It was approximated that more than 14.5 million people paid 30% off their wages in rents and about 7 million citizens had no choice but to spend more than half of their monthly income in house rents (Quigley, 158-162). Situations like these are a disgrace for any nation and especially United States (Page, Benjamin, and Lawrence, 213). It is important to understand what the US administration was aiming through its housing policy. The aim was to provide housing to everyone no matter what. In this process blunders were made as people were made to live a dream that was too good to be true. Yes partly many homeowners were at fault but banks and other financial institutions should also be blamed for the failure of the housing policies. They were actually selling dreams that homeowners could never have had realized no matter how hard they tried. The factor of greed came in as well and people tried to have bigger houses for themselves. Therefore it can be safely asserted that one of the issues of previous financing policies was that it promoted greed among the house owners and enticed bad judgment calls. The Role of Obama in the new Housing Policy Considering that the previous Housing Finance Policy set up by him was not up to the mark the American President, on whom the eyes of millions of needful citizens stared at, decided to take an immediate and effective action. He knew that many people were suffering from poverty by the existing policies. He knew that the action would not be appreciated by many but something had to be done right away. In one of his interviews, Obama said that it is a duty of every member of the society to help each other in these hard times, no matter if the person is of your family or a stranger. He also raised his voice against the existing policies and decided to revise the Housing policies (Bernanke, 1). In order to accomplish the new plan Obama asked the largest banks of the nation for assistance. This included increasing taxes in the name of fee on large banks. The republicans rejected this proposal straight away. The president was prepared for such a reaction but still he didn’t step back. He was strongly against the fact that the homeowners were to suffer until the housing market gets lower because some mortgage owners were paying back on their mortgages that were significantly more than the value of their houses. He maintained that the refinance policy must be revised that would make the borrowers pay back their loans with ease (Recovery.gov, 1). The objective behind this action was to be advantageous not only for the house owners but also for the economic reputation of America. The key points of the Proposal The administration of the United States aimed to get the people out of the housing crunch. The people despite having a handsome salary were not able to fulfill their needs just because they were confined by the loans they had to pay back. The plan was aiming to help such people by decreasing the interest rates on their loans. Previously refinancing at lower rates was offered only to borrowers who had their loans backed by Fannie Mae and Freddie Mac. This was one of the main reasons why many people weren’t appreciating the finance program. But in the revised refinance proposal borrowers who were not backed by these organizations were also offered lower rates. The point was highly cherished by the people as it empowered them to save a rational amount of money at the end of the year. To be accurate it was expected that an average of 3000$ per year would be saved on loans (Acharya and Richardson, 1). The homeowners who were mortgaged were in large numbers. It was true that attempts were made to support them but despite of offering lower rates to the eligible borrowers, there were still many who were neglected. It is quite obvious that nothing can be 100% efficient or perfect. But this plan can be seen as a step to change the situation of the homeowners. It was also decided that the monthly mortgage installments that the borrowers had to pay will also be decreased. This could help people to utilize the money for things that are essential to sustain (Schatz, 453). Obama wanted to stop the collapse in the housing market as soon as possible. Henceforth, the borrowers who had a good record of paying their mortgage installments on time were offered even lesser rates than normal. It was fair for the people who were forfeiting all sorts of luxuries of the world just to pay back their loans. One thing that captivates their minds whenever they get their salaries is the mortgage payment and therefore this justice was unquestionably mandatory. Therefore the plan was not eligible for the people who were failing to pay their installments. It was stringently mentioned in the proposal that the people who were short of their payments from several past months are not at all eligible for this proposal. This could be counted as a very lawful point. The people who were eluding their duties will now realize how erroneous they were. This proposal therefore was not for irresponsible mortgage owners. The above mentioned plan was not pertinent to borrowers who had huge amounts of loans (loans for huge property, buildings and lands). This is a serious issue because such borrowers are still not kept under consideration. It is important to solve the smaller issues first and then deal with the complex ones, however the problem of these people are not addressed in the proposal. Advantages of the Program The previous conventional programs were not aiding the borrowers and were not pulling them out of their misery. But Obama’s proposal program brought many advantages for the borrowers (Christopher Cox). Firstly, the proposal clearly mentioned that the rate of mortgage will be reduced. This ensured that the homeowner will now be able to manage the payments within their financial boundaries. It would be easier for them to pay off their liabilities. Unlike previous proposal, people will not have to give a mammoth amount of their wages in mortgage payments. This made their life wretched and they were left with nothing and were unable to fulfill their elementary needs. But the introduction of Obama’s proposal made it possible for them to live their life in a better way. Secondly, there are some people in the United States who have variable income with respect to hours, weeks and months. Having no base salary, they opted for the mortgage rate that was modifiable. They were no suspicious about the complexities associated with the modifiable rate. It was up to the banks to adjust the rate as they deemed fit. As time passed, it became problematic for them to overcome the complexities. Considering such cases, Obama came up with a plan of giving the borrower the option to fix their mortgage rate. This certainly proved beneficial as it is easier to manage things if a target has been set in front of you (U.S. Congressional Budget Office, 256). The introduction of the fixed mortgage rate made life easier for the people. They know that an amount has to be barred from the salary to pay back the mortgage installments. It also saved them from the complexities that were present in the adjustable rate. Thirdly, the mortgage term was also abridged. This was the most advantageous point that was set up in the proposal. This provided the borrower with some space to finish off its payments earlier. Once a person gets involved in any kind of a liability, it spontaneously pings and makes the person apprehensive therefore it is good to get free from it as soon as possible. Another advantage of the proposal is that it supports people who have kept their obligations by paying their mortgage. These people might be behind their mortgages but are still bearing the burden of their debt. Such people must be appreciated for their efforts as they are going the extra mile to fulfill their obligations. This proposal can make a difference in the lives of these people. It will also be understood by the people that it is important to fulfill obligations no matter what. People who have not been reckless should be compensated so that positive behavior is encouraged by the government. However, Obama’s financing proposals have been far too short from the expectations. But the revised proposal seems to be fruitful for the nation. It is pragmatic as the housing crisis has affected the economy of the United States gravely. Hence this was an affirmative approach from Obama to provide support to the troubled homeowners. Reaction over this Program The innovative housing proposal set by Obama had many positives. It was also treasured by many inhabitants all over the country. But the fact that there were some adverse reactions also cannot be ignored. The republicans and the Congress were against these proposals. According to them, there were many similar proposals presented in the preceding governments. But if we take a look at the past, almost none of the proposals lived up to the expectations. It was argued that if the same kinds of proposals were introduced before and failed there is absolutely no chance that the proposal having almost the same points would work this time (U.S. Senate Finance and House Ways and Means Committee, 388). Similarly, many have counted this act of Obama as a political step instead of a revised policy. Obama’s proposal is still in Congress and there is already so much opposition that it is highly unlikely that the proposal will be accepted. Also the amount of 10 billion dollars for this plan was also highlighted by Obama again and again. This could not actually make a difference in the housing crisis. It was analyzed that to overcome the mishap almost trillion dollars will have to be spent therefore it is being termed as a political step by many economists in the United States. Unlike the above mentioned opinions, many people think that this administration plan has been the best so far. It will not only ease the pressure of the homeowners but also upsurge employment. This will also give an opportunity to the borrowers to compensate their savings by the payment of their remaining mortgage amount that will enable them to get rid of their liabilities as quickly as possible. It will ultimately help them to utilize their money in other productive things rather than mortgage payments. But we should keep in mind that this reaction is from the people who are suffering as a result of this crisis. For many years American government criticized banks and mortgage companies for not lending money to the low income people, and this can be considered one of the reasons of housing crisis today (Reynolds, 1). Some experts suggest that low income home owners are better off without housing policies designed for them because they will end up biting the home owners in the back (Reynolds). This proposal can be seen as an extension of the governmental intervention in markets. Giving reliefs such as these might not work when the main problem lies in the system. In simple words homeowners took loans that they could not pay and now government can do nothing to revert that. Also the transferring of debt of homeowners to the government is not a good move because eventually the cost of this debt will eventually be borne by the people (Khimm, 2012). Many experts view the current refinance bill as a result in negative light because the overall benefit of the plan might not be worth spending so much money on it. Economists also argue that this plan might not be able to save millions of home owners who are facing foreclosures (Kuhnhenn & Feller, 2012). This is another evidence of how this bill will not do ‘wonders’ for the homeowners. The problem is that the cost of such a bill might outweigh its benefit according to experts. The risk of the new mortgages will increase the risk of refinanced mortgages will be on the Federal Housing Agency now and this agency is already facing high levels of risks, according to experts (Schmidt & Wolf, 2012). This is another serious reservation experts have about the new housing bill. The ground reality is that people are suffering because of the housing crisis. But it is also important to understand that they knowingly took the risk of taking those loans. Apart from cases of fraud (where banks lied to consumers about the rates) all people who took the loans knew what they were doing. It is therefore not a good idea to shift their burden on the shoulders of other tax payers. The government cannot bail everyone out and some will have to bear the cost of the crisis. The fact is that many people are suffering from the housing bubbles due to the past policy errors of the Washington administration but this does not mean that more mistakes must be made to decrease the effects of past mistakes. Therefore after having a critical look at the proposal of Obama keeping in mind expert opinion and ground realities it is safe to assume that this proposal might not be a good step for every party involved. Shifting the burden on banks will not help the economy generally and people in general will have to bore the costs. Conclusion The current policy of housing refinance has positives for the people as it will ease the pressure on existing mortgage owners. But the fact is that expert opinion is against the housing policy. Economists believe that this bill will only partly shift the burden from the homeowners to the government. The logic given by them is also sound as they say that the risk of government institution will increase and eventually the cost of this will have to be borne by the public. Even the taxes laid on largest banks will hurt the overall economy as they will be passed on to the people. This is why in the light of expert opinion and ground realities this proposal will not help the economy but might hurt it instead. . Works Cited Page Acharya, V.V. & Richardson, M. Restoring Financial Stability: How to Repair a Failed System. New York: Wiley, 2009. Print Barth, James R., Tong Li, Wenling Lu, Phumiwasana, T & Yago, G. The Rise and Fall of the U.S. Mortgage and Credit Markets. Santa Monica, CA: The Milken Institute, 2009. Print Bernanke, B.S. Financial reform to address systemic risk. Speech at the Council of Foreign Relations, Washington, DC, 2009. Print Christopher C. US Senate Committee on Banking, Housing and Urban Affairs. Hearing on US Credit Markets: Recent Actions Regarding Government Sponsored Entities, Investment Banks and Other Financial Institutions, 2008. Print Khimm, S. Big questions about Obama’s mass-refinancing plan. Washington Post, 2012. Web. http://www.washingtonpost.com/blogs/ezra-klein/post/big-questions-about-obamas-mass-refinancing-plan/2012/01/25/gIQAbjzJRQ_blog.html Kuhnhenn, J. & Feller, B. Obama Outlines Mortgage Refinance Plan. The Huffington Post, 2012. Web. http://www.huffingtonpost.com/2012/02/01/obama-mortgage-refinancing-plan_n_1246765.html Page, Benjamin I., and Lawrence R. Jacobs. No Class War: Economic Inequality and the American Public. In The Unsustainable American State, ed. Lawrence Jacobs and Desmond King. Oxford: Oxford University Press, 2009. Print Recovery.gov. Track the Money, 2008. Web. http://www.recovery.gov/Pages/home.aspx Reynolds, A. Housing Horrors. CATO Institute, 2008. Web. http://www.cato.org/publications/commentary/housing-horrors Schatz, Joseph J. Obama’s Budget Proposal Alters the Typical Tax and Spend Equation. CQ Weekly, pp. 480–81, 2009 Schmit, J. & Wolf, R. Obama wants Congress to act on expanded home refinance plan. USA Today. 2012. Web. http://www.usatoday.com/money/economy/housing/story/2012-02-01/obama-extended-refinancing-plan/52914946/1 The New York Times. Who Will Rescue Financial Reform, 2011 Print U.S. Congressional Budget Office. An Analysis of the President’s Budgetary Proposals for FY2010, 2009. Web. http://www.cbo.gov/ftpdocs/102xx/doc10296/TablesforWeb.pdf U.S. Senate Finance and House Ways and Means Committee. The American Recovery and Reinvestment Act of 2009 Full Summary of Provisions, 2009. Web. http://?nance.senate.gov/press/Bpress/2009press/prb021209.pdf Read More