In a letter to HUD secretary Shaun Donovan, Treasury secretary Tim Geithner, and FHFA director Edward DeMarco, the group spelled out the legislation needed to make such a program work.
First, the loan-to-value ratio (LTV) limits associated with the current refinancing program would be removed.
This, they argue, would allow even the most at-risk borrower to refinance instead of simply walking away from the mortgage.
Next, the legislation would eliminate loan level pricing adjustments (LLPAs), which are risk-based fees that make it more expensive to refinance at a higher LTV or a lower credit score.
They argue that the fees aren’t justified on loans for which Fannie Mae and Freddie Mac already bear the risk.
Essentially, these fees wouldn’t allow most borrowers with underwater mortgages to actually get their hands on those record low mortgage rates currently on offer. They’d probably wind up with a rate somewhere between the advertised rates and what they’re presently stuck with.
Finally, the plan would ensure second mortgages don’t act as a roadblock for the refinance.
Most underwater borrowers took out second mortgages during the boom, and their presence can make it increasingly difficult to qualify for a refinance.
Nearly 19 Million Mortgages Have Rates Above 5%
The Senators noted that nearly 19 million borrowers have mortgages guaranteed by Fannie and Freddie with interest rates higher than five percent.
Clearly this is making it more difficult and less attractive to keep paying the mortgage each month.
But you also have to wonder how much a slightly lower mortgage payment will help.
Let’s assume a borrower uses this proposed program to drop their interest rate on a $300,000 mortgage from 5.25 percent to 4.00 percent.
Their monthly mortgage payment would fall from $1656.61 to $1432.25. So roughly $225 less each month.
The savings aren’t unsubstantial, but are they enough to keep a severely underwater borrower (125% LTV+) in their home?
That’s the big question. Remember, home equity is the problem, not necessarily an unmanageable mortgage payment.
So you have to wonder if this type of plan will be effective, or more trouble than it’s worth.
It’s hard to imagine that a slightly lower rate would be the difference between walking and staying.
Sure, it would put some more money in homeowners’ pockets, which could be used to stimulate the economy.
But I doubt it would make or break the decision to stay or go for most.
Read more: New refinance program probably won’t mean much.