Here's an idea. The government is currently guaranteeing payment on billions of dollars of home mortgages which carry interest rates above today's rates. It would be a big boost to those borrowers if they could refinance their mortgage to lower their monthly payments and have more money in their pockets to spend and boost economic demand.
However since so many of those mortgages are "underwater" or otherwise don't qualify under today prudent underwriting standards, they would get turned down by private lenders if they tried to refinance.
Why couldn't the government agree to guarantee the refinancing of those mortgages? After all the government has already guaranteed them, so no additional funding would be involved since no principle would be reduced or increased. In addition,those new mortgages would be safer than the existing ones since the borrower would be better able to service the same amount of debt.
It would help homeowners, boost the economy and all at no cost the government beyond what it is already on the hook for. In fact it would also help the government since the borrowers on the loan it has guaranteed would be less likely to default if their monthly loan payments are lowered because of the refinance.
Most home mortgages can be freely prepaid, so I don't see a problem doing this.
I think this could be a big boost for homeowners and the economy at no cost to the government.
What am I missing here?
Eric
the refi one is interesting. i'm not sure i have a good enough understanding of what a guarantee means to have a real opinion. i'm guessing that, politicaly speaking, doing something like this would fall into the "helping people who screwed up while screwing people who followed the rules" bucket. no?
ReplyDeleteMy Refinance idea won't really reward bad behavior so much since there would be no forgiveness of principal owed; just a reduction of rate for people whose home values have dropped through no fault of their own. These are people who are making their current mortgage payments so it's not helping people with poor credit issues.
ReplyDeleteMy primary thought is that this would give a boost to the economy, as opposed to further burdening the government, or the banks for that matter. If you and I can take advantage of lower rates, won't it be great if more people who are making their payments could but owing to the timing of when they bought their house, the loan to value ratio test can't be met to refinance conventionally. In a sense you would really be helping out the beloved but ignored "middle class". Hopefully they would go out and spend the savings.
I saw this piece this morning and I think it speaks to why the US Gov’t has been (at least until recently) reluctant to allow homeowners the opportunity to refinance their mortgages.
ReplyDeleteIn this article, the author makes the claim that the banks and Fannie/Freddie are blocking refis b/c they don’t want prepayment of the above-market yields they have been receiving for years on the RMBS they hold! One word: Greed.
To quote the piece: “But because of the actions of the GSEs to prevent Americans from exercising their legal right to refinance, the holders of the high coupon securities have been overpaid for years.
Hundreds and hundreds of billions of dollars worth of Fannie and Freddie securities should have prepaid years ago, but instead the GSEs and other holders of these securities have been receiving above-market yields on their investments.
In the event, this new wave of refinancings will mean a massive prepayment to the GSEs and to private investors, who have been free riding at the expense of home owners and the American economy”