President Obama last week unveiled a new proposal to widen the refinance net in hopes of increasing the eligibility pool of homeowners seeking to refinance their mortgages.
I don’t think this is part of the changes in the Home Affordable Refinance Program (HARP) because HARP applies only to those loans held by Fannie Mae and Freddie Mac.
Here’s the general scoop on the president’s proposal.
The objective is to accomplish what I have been bellyaching about for months: Eliminate the petty rules and snags that have been preventing so many creditworthy borrowers from taking advantage of today’s remarkably low rates. The plan targets borrowers who are not HARP-eligible because their loan is not held by Fannie or Freddie.
According to estimates, this could amount to up to 14 million homeowners with private mortgages or government-backed loans not held by Fannie or Freddie, many of whom carry loan balances that exceed the property’s value.
Reports indicate a taxpayer cost of up to $10 billion, though President Obama’s plan calls for an additional tax on the profits of financial institutions. Because the proposal needs congressional approval, most political analysts are predicting that the proposal won’t gain Republican support and will fail to get the vote.
I’m no politician, and certainly no economist, but let me give you my take on this from a guy who talks to regular Americans every day about their mortgages.
First, I agree in concept. If a homeowner has good credit and sufficient income or assets to pay his existing mortgage, why shouldn’t he be able to refinance to a lower rate if he already has demonstrated he can afford the higher rate and higher payment? The savings would get pumped into the economy.
Mr. Obama wants to eliminate the equity requirements so those folks can refinance even if they are underwater in their home.
The problem - which I have seen over and over and over - is that the lack of equity often isn’t the only thing preventing a refinance. Many, if not most, homeowners also have second-trust loans, such as home-equity lines of credit.
So far, the lenders holding those loans have not budged to allow a refinance on the first trust if the equity isn’t there. Without an approved subordination agreement, the second-trust holder can prevent the refi, even though the refi would improve the borrower’s financial position. It’s just plain stupid.
Another problem is that mortgage-insurance companies will not renew mortgage insurance in the event of a refinance, once again stopping a refi because of an idiotic snag.
These problems are far and away more prevalent in my experience with HARP than a lack of equity.
One last observation: The president proclaims the program is not designed to help irresponsible borrowers or speculators. However, the program proposes that homeowners with a credit score of 580 or higher will be eligible.
Folks, I can tell you from experience that 580 is not a good credit score. Responsible or not, there will be plenty of defaults if the bar is set that low.
I suggest the KISS theory: Keep it simple, stupid.
The eligibility requirements should be no late payments, a credit score of, say, 680 or higher and acceptable income and assets.
This ideal candidate then can lower the borrower’s interest rate and payment with little or no fees as long as he is not raising his loan balance. Second-trust holders should automatically subordinate, and mortgage insurance companies should automatically transfer the insurance.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.
Please read our comment policy before commenting.