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.