How Forgiveness Fits in Housing-Fix Toolkit

The Wall Street Journal, 7/30/2012

“Already, Fannie and Freddie have relaxed refinancing rules so that anyone with a loan backed by the firms can refinance, no matter how underwater, as long as they are current on payments. Accelerating amortization provides less of a break than principal reduction, but it nevertheless returns the borrower to terra firma much sooner.”

COMMENT: Borrowers who are current are not asking for forgiveness. They and their lender have underwater loans and merely want to drop their interest rate. If the loans were not underwater, they could easily do this. If the lender drops the rate, the borrower can more easily make the payments—improving the security for the lender. With a lower monthly payment, the borrower has more money to spend—helping the economy. Fannie and Freddie have the policy right. Now the implementation. Merely send a letter to every borrower, “Your interest rate was 6%. It is now 3%. Your new monthly payment is ____.”

More from the article--
“Columbia University economists Glenn Hubbard, Christopher Mayer, James Witkin and mortgage-bond veteran Alan Boyce spelled out in a paper how this might work. A homeowner who owes 117% of his home's value and who took out a 30-year loan with a 6.7% rate five years ago could refinance now into a 15-year loan with a 3.1% rate. That would increase the monthly payment by just $24. But it would leave the borrower with positive equity in less than three years, assuming home prices stay flat; within five years, the homeowner would have 17% equity. Doing nothing, the borrower would be underwater for more than seven years.”

COMMENT: If the term  were 20 years or 25 years instead of 15 years, the borrower would have a lower monthly payment, helping the borrower, the lender, and the economy. If the borrower has been mature enough to make payments on a bad deal since 2008, then the borrower is mature enough to select the term. Just do it. All the other borrowers whose loans are not under water have been able to do it.

Counties taking refinancing into their own hands

 

BY NICK TIMIRAOS

A bond-investor group is suggesting rules that would make it difficult for banks to provide the lowest-cost mortgages to homeowners in cities that plan to use eminent domain to modify mortgages.

In a draft of the rules circulating among members, the Securities Industry and Financial Markets Association has proposed preventing home loans in those communities from being bundled into the most commonly used—and cheapest—pools of mortgage-backed securities.

This year, California's San Bernardino County and two of its largest cities, Ontario and Fontana, created an entity charged with restructuring mortgages for certain borrowers who owe more than their homes are worth. ...

Banks' Skittishness Limits Impact of Low Mortgage Rates

83% of U.S. banks are much less or somewhat less likely now than in 2006 to provide mortgages to households with relatively low (620) credit scores and a 10% downpayment, according to the Wall Street Journal. Thus, despite the Fed's efforts to stimulate the economy by easing credit, "Monetary policy is having no effect on the vast majority of people," the newspaper quotes Fed researcher Paul Willen as saying.

Source: Fed Wrestles with How Best to Bridge U.S. Credit Divide

Obama Plan

The headline says, "Obama plan to lower home mortgage payments, but how much?"

"Obama's argument is that as more families refinance at a low interest rate, incidences of default and foreclosure will diminish, helping to stabilize home values and restore consumer confidence. The families who benefit will also get extra cash in their pockets each month, which they can use to buy other things in the economy or to pay down debt.”

Of course there are too many conditions:

"Participants must live in the home and be current on the mortgage. Availability would be more limited if a loan is deeply underwater (loan more than 140 percent of home value) or if borrower is unemployed."

Just tell Fannie and Freddie to do it. Refinance all borrowers who are current. Forget the appraisal. They have been the major roadblocks to refinance. They know who is current. Just press a button on their computer, send those borrowers a letter, "Your payment is now lowered to _____. "

This could be one small step for mankind. But the conditions will make it a very small step.