Just about everyone agrees that the housing market would be much stronger if millions of mortgages could be refinanced. It sounds like a good idea because borrowers with lower rates would pay less each month and that would make homes more affordable, reduce foreclosures, cut short sales, and generate more free cash for consumer spending.
Now, Senator Jeff Merkley (D-OR) has proposed a broad and general refinancing plan that would create something called the Rebuilding American Homeownership (RAH) Trust. The Trust would sell bonds to raise money. Next it would buy troubled loans held by originators. Then homeowners could refinance into one of three options:
New Mortgage Terms
"The first," said Merkley, "would be a 15-year, 4 percent mortgage that would rebuild a family’s equity much faster. The second would be a 30-year, 5 percent mortgage with far lower monthly payments. The third option would be a two-part mortgage, consisting of a first mortgage for 95 percent of a home’s current value, and a soft second mortgage on the balance. The soft second, by not accruing interest or requiring payments for five years, would further lower a family’s monthly payments."
Is the Merkley idea viable?
One attraction is that lenders can avoid foreclosures and short sale losses with large numbers of loans. This is good for lenders and would also help stabilize neighborhood home values. Another attraction would be new financing at low rates for millions of homeowners — but not the lowest rates.
The program requires owners to pay interest as well as a 1.25 percent insurance premium on outstanding loan balances. While many homeowners would see monthly costs fall they certainly would not get the full benefit of today's record-low interest levels — just 3.49 percent for 30-year financing according to Freddie Mac's latest weekly report.
Lower Mortgage Rates
There is a way to substantially reduce loan costs. Instead of funding through bonds that pay interest and bond brokers who charge commissions, why not use the tried-and-true Wall Street relief approach and just borrow directly from the Federal Reserve? Banks can now borrow funds at pretty much zero percent so why should the Merkley Trust pay more? Going directly to the Federal Reserve would allow loans to be profitably financed at 2 percent or so.
And speaking of assumptions....
Another way to stabilize home prices is to make today’s low-cost financing assumable. This means down the road a “qualified” borrower could take over a Merkley loan at today's rates — a marketplace advantage for a seller if interest rates rise.
Qualified assumptions have been common since the late 1980s. The FHA, for example, permits qualified assumptions and the allowable lender fee is just $500. Last year, there were nearly 9,400 FHA assumptions and there’s no reason the same quick-and-easy system could not be used to make Merkley loans more attractive.
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