Obama State of the Union 2012: Mortgage Refinance Changes Face Obstacles

President Barack Obama's proposal to allow millions of homeowners to reduce mortgage payments is the latest in a series of federal efforts to aid the housing market, but it faces a number of obstacles.

Legislation for such a proposal, contained in Obama's State of the Union message on Tuesday, would have to pass Congress, including a Republican-controlled Senate, where some have resisted additional government intervention in housing. It's uncertain if the bill could be passed before the next election.

But Obama said it was time to expand government involvement, and said the changes could help qualifying homeowners save around $3,000 a year in mortgage costs.

Responsible homeowners shouldn't have to sit and wait for the housing market to hit bottom to get some relief, he said during Tuesday's speech.

Details of the legislation haven't been released, but a senior official told the New York Times it would benefit two to three million homeowners with a cost of no more than $10 billion. Refinances could be issued through the Federal Housing Administration (FHA), a government agency that backs approximately a third of the mortgage market.

It would be funded by fees on large banks with assets over $50 billion, a measure that also must be approved by Congress.

The program would expand on 2009's Home Affordable Refinance Program (HARP), which covers homeowners with mortgages guaranteed by Fannie Mae and Freddie Mac, but not those with privately held mortgages that are not guaranteed by the government-controlled mortgage giants.

The Obama administration hopes the program will expand refinance eligiblity at a time when interest rates have been at historic lows, with the 30-year average rate hitting 3.88 percent last week, according to Freddie Mac. Currently, some homeowners have been unable to take advantage of low rates because of stricter underwriting standards and down payments.

Some say that the proposed program does not go far enough. The National Association of Realtors (NAR), a major industry group, commended the action but called for more efforts to help those facing foreclosure.

Realtors believe that more must be done to stem the rising inventory of foreclosed homes and address the lack of available and affordable mortgage financing, said Moe Veissi, president of the group, in a statement. Realtors are calling upon the Obama administration, Congress and lenders to help keep more people in their homes by taking more aggressive steps to modify loans and help homeowners significantly reduce their monthly mortgage payments.

The NAR also called for a more streamlined short sale process and possibly lessening fees and down payments to expand financing.

The Federal Reserve also called for more government action on housing in a report earlier this month. In addition to increasing refinance activity, the paper explored converting some foreclosed homes into rentals.

However, the Fed noted the tension between boosting housing and minimizing taxpayer losses by reducing risk exposure at Fannie and Freddie, which had cost taxpayers over $160 billion since a government takeover in 2008. More could be done to aid housing if the two agencies took on a bigger role, said the Fed.

Officials said that the full legislation for the mortgage refinance program would be introduced soon.

Separately on Tuesday, Obama announced the formation of the Unit on Mortgage Origination and Securitization Abuses, headed by New York Attorney General Eric Schneiderman, to investigate wrongdoings that led to the financial crisis. The action comes as five major banks are in foreclosure settlement talks with the administration and state attorney generals.