I recently commented about this idea and it looks like it might have some legs…
The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing.
One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.
It seems to me that this is a no-brainer. “Who” would object? Reducing millions of homeowner’s interest rates on their mortgages would stimulate billions of dollars worth of spending by people in all income levels and every town, city and state in the country. I also think it would enjoy support from Republicans and Democrats… and the President.
Another positive outcome of a program like this might be a modification of the existing “refi” process which is laborious, intrusive and counter-productive. (assuming you are not taking extra money out) If you have a mortgage with bank “A” and find a lower rate with bank “B”, why doesn’t bank “A” just send you a one page mortgage modification letter changing the note to the lower rate? Instead, you spend closing costs, appraisal costs, lawyer fees, cut a tree down for all the paperwork… and ultimately Bank “A” loses the mortgage to bank “B” anyway. I know there’s more to it than this but let’s change it (Elizabeth Warren, we need some help here!)
So let’s get behind a program like this and help everyone refinance down to a lower rate, regardless of the loan-to-value ratio, regardless of their credit score, regardless of their income levels… and free up many billions to help out the economy.
What will it add up to, I don’t know but here’s an interesting fact from the NYT story…
As of July, an estimated $2.4 trillion in mortgages backed by Fannie and Freddie carried interest rates of 4.5 percent or higher.
Are the banks on board?
The problem is the borrower can’t get a new FNMA mortgage at the lower rate because the property is underwater, and it wouldn’t pass underwriting at the refi bank. Also, the underlying mortgage at the higher rate has been spliced and diced, and you can’t force them to refi or consent to a partial payoff because that would be an impairment of contracts, I think.
It could work by decree if the only note holder is Fannie or Freddie.