Since the housing market peaked in mid-2006, an estimated 4 to 4.5 million homeowners have lost their homes to foreclosure and 3.5 million borrowers have delinquent mortgage payments (60 days or more days late) or received at least the initial notice of foreclosure. Depending on the source, somewhere between 11 million and 13.5 million borrowers have underwater mortgages. Most economists and average people would agree that the biggest drag on the economy besides a lack of jobs has been the housing market.
Since 2009, the federal government has rolled out a line of new and revised programs, such as Home Affordable Refinance Program (HARP), Home Affordable Modification Program (HAMP) and the FHA streamline refinance program, but the number of homeowners who actually receive assistance – around 1.4 million, have fallen far short of the 4 to 4.5 million homeowners initially targeted for assistance.
One of the largest roadblocks has been the refusal of Edward Demarco, the acting director of the Federal Housing Finance Agency (FHFA), and refusal to allow principal reduction for homeowners with mortgages insured by Fannie Mae or Freddie Mac. Demarco -- who has Congressional approval as the lone authority in charge of overseeing the activities of Fannie and Freddie -- controversial stance on writing down mortgages has Uncle Sam searching for other alternatives.
Rebuilding American Homeownership
An innovated approach put for by Senator Jeff Meekly (D, Oregon) could help millions of Americans refinance from high interest rate home loans to low interest rate mortgages. Senator Merkley scheme has several features, which could help the plan attract support from both side of the isle.
The Rebuilding American Homeownership calls for the establishment of a government-owned trust to purchase the mortgage of homeowners who would refinance their existing loans at a rate about 2 percent higher than the Treasury rate paid by the federal government when it borrows money.
The interest generated by the program will cover defaults, administrative expenses and other costs. Homeowners would have up to three years to refinance under the program. At the end of the third year, the trust will cease purchasing loans and gradually wind down as borrowers pay off their mortgages.
The Federal Housing Administration (FHA) or Federal Home Loan Bank would finance the initiative. Another approach would have the Federal Reserve Board underwriting the program. According to Fed chairman Ben Bernanke, the Fed’s effort would operate similar to the Bank of England’s Funding for Lending program. This program offers lenders enticements to make loans to homeowners and most businesses.
Benefits of Mass Refinancing
The Rebuilding American Homeownership refinancing program does not require taxpayer funding. The program not only helps homeowners reduce their monthly mortgage payments, but households could use the extra cash to spend on goods and services, which helps the overall economy. The plan also decreases the number of potential defaults with homeowners who have underwater mortgages.
Some other benefits include the follow items:
- Lenders can reduce the number of toxic assets on their books
- Banks can make more loans
- Fewer vacant homes in neighborhoods
About 50% of homeowners with high interest rate mortgages could benefit from the refinancing program. Most borrowers have the income; credit and home equity needed to meet basic requirements. Borrowers who have underwater mortgages and are current with their mortgage payments can choose to refinance their loans to lower their monthly payments or obtain a loan with a shorter term and quickly rebuild their home equity.