The Time is Now for Freddie and Fannie to Help Our Non-Delinquent Homeowners
November 25, 2010 1:01 AM
I’m not a military man; I’m in the mortgage business. And like the foot soldiers in the theatre of war, home owners and mortgage brokers alike are in need of disciplined, strategic leadership to guide our country through the current war torn landscape of confusing new lending regulations, falling home prices, inventory gluts, essentially worthless government sponsored modification programs and seriously flawed banking foreclosure practices. Amongst this turmoil, there remain a large number of homeowners who, like the last fighting soldiers holding true to their mission, have held true to their responsibilities to their creditors and neighborhoods by continuing to pay their above- market rate mortgages on homes valued far less than the debt owed. These “good soldiers” are at high risk for joining the legions of strategic defaulters if no help is forthcoming to pull then to safety.
Prior to 2007, a mortgage broker could almost guarantee an easy loan refinancing approval process for a client with a 742 FICO score, a debt to income ratio of 33 and 12 months of cash reserves. Today, however it’s a different story. Due to falling home values, even clients with strong credit stats are unable to take advantage of the historically low interest rates due to lack of equity. Aside from the “fairness” issue, it makes economic sense to provide a mechanism for these borrowers to refinance their loans while rates are still low. A program like this could prevent further strategic defaults while putting money into the pockets of hard working Americans – with the potential added benefit of stimulating the economy. For example, a loan amount of $200,000 refinanced from 6.25% to 4.25% saves the borrower a tidy $247 per month, month after month – equating to tens of thousands of dollars over the life of the loan – enough perhaps, to put a kid through college.
The government sponsored, Home Affordable Refinance Program (HARP) is specifically designed to provide a way for borrowers who were current on their mortgages but have negative loan to value (LTV) ratios, to refinance out of high or adjustable rate loans to fixed loans at the low prevailing rate. For several reasons HARP has refinanced only small percentage of the millions of homeowners it was designed to help. According to a statement by the Federal Housing Finance Agency, more than 4 million refinanced mortgages purchased or guaranteed by Fannie Mae and Freddie Mac in 2009, only 190,180 were HARP refinances with LTVs between 80 percent and 125 percent. (See: here)
As with the other government sponsored home assistance program, the Home Affordable Modification Plan (HAMP), a major reason for the dismal success rate has not been a lack of interest by home owners, but a lack of cooperation by the lenders. Further dampening participation is the fact that only homeowners with loans held by Freddie and Fannie are eligible. Is there a way we can refinance these borrower as well as all the other borrowers who have been unable to modify or refinance through the existing programs and prevent a second wave of defaults and foreclosures? I would suggest that the ill-fated and much maligned government sponsored mortgage buyers, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) take on this task.
Conservative columnist and political pundit, Larry Kudlow has long championed the call to abolish or at least “phase out” Fannie Mae and Freddie Mac. More recently, this position has gained a foothold amongst more liberal political players as well, with both Democrat Barney Frank, chairman of the House Financial Services Committee and Treasury Secretary Timothy Geithner calling for reestablishment of private capital (ie banks) to provide mortgages in place of government programs. While many on both sides of the aisle may applaud the idea of reducing the role of government in the housing market, the fact remains that private banks are far from having the capital and infrastructure in place to manage the U.S. mortgage market. Before the crisis of 2008, Fannie and Freddie backed about half of all the mortgages in the U.S. Since the housing crisis, that number has increased to about 2/3rds of all new mortgages and $5 trillion dollars of outstanding loans. Today, government programs (Freddie, Fannie and FHA) buy over 90% of the loans in the U.S. The bottom line is that government based housing institutions are doing too much of the heavy lifting in the US mortgage market to be abolished anytime soon.
I suggest that Freddie and Fannie make a new loan product available to the banks that is limited to the most qualified borrowers who have been unable to refinance due to lack of equity. The program as I envision it would have the following inclusion and exclusion criteria:
1) The new loan product would be a rate and term refinance for primary residence loans.
2) The loan would be a 15 or 30 year fixed at the market rate up to a $729,000.
3) The loan will allow any first and second lien combination with no LTV or CLTV restrictions.
4) There will be no mortgage insurance required.
5) For legal purposes an appraisal will be done but the appraised value will not be used to qualify the loan.
3) Loans would be fully documented for borrowers with good FICO scores and adequate capital reserves (2 months PITI; principal, interest, taxes and insurance).
I acknowledge that there will be a large number of borrowers who will be left out of this program because they obtained their loans with “stated income” – and today could not qualify for a fully documented loan. However, limiting this program to the most credit- worthy borrowers would reduce the risk for future defaults –a major problem plaguing the other government sponsored housing assistance programs.
It is important that a program like this be implemented immediately in order to take advantage of the currently low interest rates. The obvious drawback to its implementation is that a government entity will be taking on more debt. But this type of program will not be offered by the private sector for multiple reasons. This can only be accomplished with government leadership and through the Freddie and Fannie institutions. It is time for a summit of our Generals from the Government and private industry to develop and instigate this plan to pull our good soldiers to safety. It will require the combined leadership of House Financial Services Committee Chairman, Barney Frank, Chair of the Council of Economic Advisers, Austan Goolsbee, Chairman of the Federal Reserve, Ben Bernanke, and Secretary of the Treasury, Tim Geithner and lastly, President Obama. Working cooperatively, I believe our leadership could successfully develop and implement this plan and educate the public as to its immediate and long term benefits to the economic health of this country. Although not a total solution to current economic crisis, giving our non-delinquent borrowers the ability to refinance may stave off some strategic foreclosures as well as put more money in their pockets, and thus provide more “bullets to fire” on the economic battleground.
Logan Mohtashami is a senior loan officer in his family run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1988.