Earlier this week, President Obama announced a plan to help homeowners refinance their mortgages.
The White House says it will help millions of people hold onto their homes through a government-backed modification program. But critics are skeptical the plan will be a success, in part because of the dependence on the good will of banks to voluntarily join up.
Raphael Bostic, the assistant secretary for Policy Development and Research at the Department of Housing and Urban Development, is the architect of this new plan. He told weekends on All Things Considered host Guy Raz that the plan is aimed at homeowners who owe more than their homes are worth but have been unable to refinance and take advantage of historically low mortgage rates.
"What this program does is it really changes the criteria for deciding whether you're eligible for a mortgage," Bostic says.
Instead of looking at homeowners' negative equity or how "underwater" they are, Bostic says, lenders will instead look at the homeowners' past performance in paying their mortgage consistently. He says if the homeowner has done that, the homeowner can qualify to refinance at the current 4 to 4.5 percent rates instead of the 6 or 7 percent many are paying.
"[The money saved] should then go back into people's pocketbooks and really help them stabilize their financial situation," he says.
The program also streamlines the process and reduces closing costs, Bostic says, which are often seen as another barrier to refinancing.
Even though the program applies only to homeowners with loans backed by Fannie Mae and Freddie Mac, Bostic says the administration expects that as many as 4 million mortgages will be eligible for the refinancing. Current estimates, however, put the number of homeowners "underwater" in their mortgages at 11 million.
Refinancing is voluntary for lenders. But banks are realizing that by not engaging in refinancing, they are exposing themselves to much deeper costs associated with foreclosure, Bostic says. And, he says, those potential losses have banks concerned.
Bostic says he doesn't think there are any single solutions that would be a "silver bullet" and completely heal the housing market.
"We collectively underestimated how complex the mortgage market is and how many different approaches you'd need to put in place in order to find that kind of relief," he says.