Refinance America: A New and Improved Plan

Written By:
Brideen Gallagher
Vice President, The Collingwood Group

Brian O’Reilly raised some very intriguing propositions on dealing with the ever growing issue of borrower income/wealth trapped in deflated, under-water home values. While these ideas address each constituency impacted—borrower, lender, investor, taxpayer—there is still no evidence that the Administration, Congress or the regulators have any plans to address the current crisis.

Much has been made about the impact any mass refinance program could have on servicers and lenders, who would be deluged with new applications that they are not staffed to handle and, in this unprecedented low rate environment, not likely to prioritize. Let’s be honest—it’s much easier, and more profitable, to handle a “traditional” refinance than a refinance under the current HARP program. Also investors in MBS, who will experience prepayments at speeds they did not count on, may be wary of future investment in MBS if these programs can be changed on a dime. OK, say all of this is true. There is still a huge clog in the mortgage finance system and the tub is about to overflow. What about slicing off a segment of the most at-risk and underserved borrowers and launching a targeted campaign to offer these borrowers an option to take advantage of these low interest rates ? If it works, and in my opinion it will, it can be expanded to other borrowers as warranted, and could jump start the climb out of the economic morass where we now find ourselves.

As referenced in Brian’s posting, there are creative, viable private market solutions currently available that could be applied to a specific segment of the housing market that owes more than their home is worth but has been living up to their monthly obligations despite the hardship, and sometimes logic, of doing so. For example, borrowers who find themselves at 105%-125% LTV that are able are continuing to make payments, but no doubt are becoming more discouraged monthly by the fact that they are now, in effect, renters, but cannot “renegotiate” their “rent” and cannot walk away without devastating effects to their credit, not to mention their conscience. So here’s a new and improved plan :

1. Identify these borrowers in GSE/Ginnie Mae MBS and verify they have been making timely payments
2. Offer these borrowers an opportunity to reset their interest rate to a market rate plus some premium ( say .50%) by simply logging into a secure web based system and choosing rate reset option
3. Subsidize reduced payments (average of $250 per month) for a period of time, say 2-5 years, depending on the vintage of the origination.

Technology exists TODAY that can accomplish this in very short order. Yes, there is a cost to any subsidy, but it’s a small investment compared with the huge write-downs that could occur with any sort of principal reduction or true modification / refinance alternative.

Of course we can continue to do nothing, and run the (likely) risk that these borrowers will lose hope and decide to default, tying up the immediate “economic stimulus” of cash flow a rate reduction would give these borrowers to spend or put toward righting their equity ship.

With some political and regulatory will, this sort of initiative can and should happen. There is little ability, or incentive, for the GSEs to implement any strategic plan without the endorsement and direction of the regulator—FHFA. The newly formed CFPB should opine as well, as this is of clear benefit to consumers. Who else needs to chime in??

…(read more)

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