The recent historic drop of mortgage rates has created a refinancing boom for qualified homeowners. Unfortunately, the refinancing wave washing over the country has paradoxically left dry homeowners who would most benefit: those who are “underwater.” Underwater mortgages, or “negative equity” (i.e., they owe more on the mortgage than the property is worth) cause foreclosures and serves to bottle up the housing market. Thus, assisting homeowners who are underwater on their mortgage is good public policy. According to a CoreLogic study, there are currently 11 million mortgages underwater and another 2 million nearly at negative equity in the US housing market – a figure that comprises 28% of all residential properties with a mortgage. In Massachusetts, there are 225,000 properties with negative equity and another 52,000 with near negative equity.
The government has made attempts to address this crisis. Last year the Obama Administration created a loan modification program, the Home Affordable Refinance Program, to help refinance borrowers whose loans were worth up to 125% of their homes value. The program did not take hold, and only a relatively minor number of modifications/refinances occurred.
Writing in yesterday’s New York Times, former chairman of the President’s Council of Economic Advisors and current Dean of Columbia Business School Glenn Hubbard penned an intriguing column proposing easier refinancing of underwater mortgages.
Under the proposal, quasi-governmental entities like Fannie Mae, Freddie Mac, the FHA, and the VA would require loan servicers:
- To send a short application to all eligible borrowers promising to allow them to refinance with minimal paperwork.
- Servicers would receive a fixed fee for each mortgage they refinanced, which would be rolled into the mortgage to eliminate costs to the taxpayers.
- The agencies would issue new mortgage-backed securities to cover the refinanced mortgages, using the proceeds to pay off the loans held in the existing securities.
The proposal also mandates that existing second lien holders provide a subordination agreement (which benefits the holder because it lowers the default risk).
The program would have immediate benefits: a distressed homeowner could save approximately 15% in their monthly mortgage payment, which would greatly help homeowner’s through the current crisis.
Is there a guarantee that this modification will become law? No, there is not, but it certainly makes sense for policymakers to move on it right away.
In the words of Glen Hubbard, “[i]f we can lower mortgage payments for struggling homeowners, it will reduce future foreclosures on federally backed loans, providing savings to the taxpayers.” And that’s a good thing for everyone.