Here is the gist of the new mortgage plan:

The changes, which will take effect over several months, will let people qualify for new loans no matter how far the values of their homes have fallen, so long as they have made at least six consecutive monthly payments. The plan also will reduce borrowers’ fees, for example, by dispensing with the need for an appraisal in many cases and by automatically transferring mortgage insurance to the new loan.

Fannie Mae and Freddie Mac generally require refinancing lenders to assume responsibility for any problems with the original loan because in making the new loan they are relying in part on that original documentation. That has made lenders reluctant to refinance loans for which they are not already responsible. That provision will now be waived, in exchange for a fee.

But the program still applies only to loans that Fannie and Freddie acquired before May 31, 2009. It does not reduce the amount that borrowers owe. And only borrowers with less than 20 percent equity in their homes are eligible; those with more equity must seek a refinancing through the standard and more expensive channels, although the government is considering making some of the same changes, like reducing fees, for those borrowers.

One of my favorite colleagues, Debbie Lucas, who has now moved to MIT Sloan, co-authored a study of the impact of a large scale mortgage refinancing plan while she was at the CBO:

Relative to the status quo, the specific program analyzed here is estimated to cause an additional 2.9 million mortgages to be refinanced,
resulting in 111,000 fewer defaults on those loans and estimated savings for the GSEs and FHA of $3.9 billion on their credit guarantee exposure, measured on a fair-value basis. Offsetting those savings, federal investors in MBSs, including the Federal Reserve, the GSEs, and the Treasury, would experience an estimated fair-value loss of $4.5 billion. Therefore, on a fair-value basis, the specific program analyzed here would have an estimated cost to the federal government of $0.6 billion….Because the estimated gains and losses are small relative to the size of the housing market, the mortgage market, and the overall economy, the effects on those markets and the economy would be small as well.

The plan Debbie studied is larger than the one being implemented right now.  Something more radical is necessary to have a big impact.  It might have to allow borrowers to write down their principal.  Who has the guts to propose a bailout of homeowners?  Ironically, Glenn Hubbard, advisor to Mitt Romney.

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