Yet another mass refinancing program has been proposed, this time by Oregon Senator Jeff Merkley.
His program, “The 4% Mortgage: Rebuilding American Homeownership” (RAH), is geared toward underwater borrowers who have kept up with their mortgage payments, but haven’t been able to receive assistance via existing programs.
It specifically targets those who hold mortgages that aren’t government-backed, and therefore do not qualify for HARP or HARP II. Presumably, it includes those with jumbo mortgages as well, who have also been left out of the refinancing party.
So basically all homeowners with private-label mortgages, which is a figure somewhere north of three million. Clearly a lot of individuals have been left out.
A refinancing program for these borrowers is certainly overdue, so perhaps it could work. Let’s look at the details.
How RAH Would Work
A temporary, government-backed trust would be created by the Treasury, the Federal Reserve, or the FHA to purchase mortgages from banks, credit unions, and mortgage lenders that meet the program’s criteria.
The trust would create a secondary market for the loans, and sell bonds to raise funds so it could purchase the mortgages.
Investors would buy the bonds because of their implied government guarantee, thus creating ongoing liquidity to fund the program.
RAH would make money via the near 2% spread between the cost of funds and the interest rate charged to homeowners, and therefore would not need taxpayer money to operate.
It would only offer mortgages for three years, at which point it would only exist to service the mortgages. Once all the loans were sold, paid off or refinanced, it would be closed down entirely.
The guidelines are pretty straightforward. If you’re current on your mortgage payments, you qualify.
There do not seem to be any loan-to-value limits, though those with mortgages greater than 140% LTV would need a write-down to qualify. In other words, these homeowners would probably be out of luck.
Additionally, borrowers would still need to pay mortgage insurance until their LTV dropped to 80%, and those who chose to participate would not be able to entertain a short sale for the first four years of the loan. Makes sense.
RAH Mortgage Options
There are three options for homeowners, including a 5% 30-year fixed mortgage, a 4% 15-year fixed mortgage, and a two-part combo mortgage.
The first two options are pretty self-explanatory. You get a better deal with the shorter-term mortgage, but you’d be more invested, as much larger payments would be required each month.
In both cases, you’d be paying above the prevailing market rate, which is how the program would have funds to operate, but ideally much lower than your existing mortgage rate.
Their case study assumes a borrower has a mortgage rate around 7% on a first mortgage, and 8% on a second mortgage, so switching to a 15-year mortgage would leave payments nearly unchanged.
But those who stayed with a 30-year mortgage term could save $500 or so a month in some cases, which would boost the economy and reduce foreclosure starts.
The third option would be a two-part combo loan with a soft second mortgage. The mortgage would be broken up into a first mortgage at 95% LTV, and a second mortgage for the remaining balance.
The soft second would not accrue interest for the first five years, and would not require any payments during that time.
This would essentially make it act like a temporary principal reduction, without the “moral hazard” of reducing balances for some but not all homeowners.
Does It Make Sense?
The program seems to be fairly sound in theory, and provides enough of a benefit to borrowers without putting too much risk on whoever decides to helm the program (via those higher-than-market mortgage rates).
And it’s certainly a worthy idea, given how many homeowners still can’t take advantage of loan modifications, most of which are reserved for those with government-backed loans.
But it might be too late for most borrowers, who have either already been foreclosed on or have simply given up on their current home.
At the end of the day, you kind of have to wonder how many homeowners are still waiting for help six years later…
For the record, Obama floated a similar idea back in February called the “Broad Based Refinancing Plan,” though because it requires congressional approval, is likely dead in the water.