January 27, 2012

Since President Obama proposed in his January 24 State of the Union address a plan to allow all homeowners the opportunity to refinance their mortgages, some additional information about the plan has emerged, despite the fact that the Administration has not formally released additional details.  Preliminary reports indicate the program would allow underwater homeowners who are current on their Fannie Mae, Freddie Mac, and privately financed mortgages to refinance those loans with FHA-insured mortgages. 

The program requires legislation, both to fund it and because current FHA loan-to-value ratio requirements do not permit underwater borrowers to qualify for FHA-insured loans without significant pay-offs or principal reduction.  The President proposed to impose a fee on financial institutions with more than $50 billion in assets to fund the program.

Congressional staff and others predict that Congress is unlikely to approve the new refinancing program and the fee on banks to pay for it.

Obama also announced tax reform measures that incentivize domestic job creation and provide relief to middle class taxpayers, and the establishment of a unit of federal prosecutors and state attorneys general to investigate abusive lending practices.

The President dubbed his address, “a blueprint for an economy that’s built to last,” and focused broadly on areas ranging from increasing domestic manufacturing and energy innovation to reducing unnecessary government regulation and curbing Wall Street excesses.  While the President did not lay out a comprehensive plan or timetable for tax reform, he expressed a desire to see a tax code that promotes economic equality and shared responsibility.  Administration officials have since said the President will propose a corporate tax reform plan in mid-February, around the time the Administration releases its FY 2013 Budget.

The President did not suggest eliminating all tax expenditures.  Rather, he asked Congress to refocus the tax code and reprioritize its allocation of expenditures by expanding the tuition tax credit to help middle class families afford college, replacing tax deductions for jobs created overseas with assistance for companies that bring jobs home, and exchanging subsidies to oil companies with clean energy tax breaks to encourage a nascent domestic energy industry.

On deficit reduction, the President acknowledged last year’s agreement to reduce the federal deficit by over $2 trillion dollars, but urged Congress to obtain further savings by ending the Bush-era tax cuts for the wealthiest 2 percent of Americans and eliminating loopholes and shelters in the tax code that permit “a quarter of millionaires to pay lower tax rates than millions of middle-class households.”  In reference to billionaire investor Warren Buffett’s criticisms of a system under which he pays lower tax rates than his secretary, the President said tax reform should follow the “Buffett Rule,” and proposed a new minimum 30 percent tax rate for individuals making more than $1 million per year.

Some congressional leaders have indicated the President’s proposals may reframe Democrats’ tax reform priorities in 2012 and 2013, focusing them on increasing tax rates and establishing minimum tax rates for the wealthy—and reducing the pressure on lowering or eliminating deductions heavily used by the middle class, including the mortgage interest deduction. 

Obama announced that he has asked U.S. Attorney General Eric Holder to create a special unit of federal prosecutors and leading state attorneys general to expand investigations into abusive lending practices and the packaging of risky mortgages that led to the housing crisis.  He stated that the new unit will “hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”  New York Attorney General Eric Schneiderman will lead the new unit. 

It remains unclear how the new task force may impact the settlement being negotiated between the major servicers and U.S. state attorneys general over foreclosure practices, but preliminary reports suggest some servicers may be less willing to finalize the settlement until learning more about the new unit’s plans.  It was recently reported that the servicers would agree to pay as much as $25 billion and to reform some mortgage and foreclosure practices.