A bipartisan group of 16 Senators urged the Obama administration to remove barriers that have kept underwater homeowners stuck with inflated mortgage rates.
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.
Currently, borrowers with LTVs up to 125 percent can refinance, though most banks and mortgage lenders cap out at a much lower 105 percent LTV.
This, they argue, would allow even the most at-risk borrower to do a rate and term refinance instead of simply walking away from the mortgage.
After all, a lack of home equity is the primary driver of strategic default. So these borrowers should be first on the list in terms of giving them incentive to stick around.
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 with a low 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 also took out second mortgages during the boom, and their presence can make it increasingly difficult to qualify for a refinance if the second lien holder isn’t cooperative.
Nearly 19 Million Mortgages Have Interest 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% to 4.00%.
Their monthly mortgage payment would fall from $1656.61 to $1432.25. That’s 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? To really believe they can turn things around eventually?
That’s the big question. Remember, home equity is the problem, not necessarily an unmanageable mortgage payment. Though some are certainly dealing with both issues.
In summary, 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.