New refinance plan seeks to rebuild your equityby Peter Miller
The Obama Administration brought out its nationwide mortgage refinance program once again last week. HUD Secretary Shaun Donovan was on the phone with reporters and adviser David Plouffe sent an email from the White House.
When it comes to refinancing, the big question is what to do about underwater homes. The President has proposed what is called an “equity building opportunity.” The example given by the White House looks like this:
Susan is making monthly payments of $1,350 on her 6.5 percent 30-year mortgage, which has an outstanding balance of $200,000 — although her house is now worth $160,000. If Susan simply refinanced into a 4.25 percent 30-year mortgage, she would reduce her monthly payments by $370. But at the end of five years, Susan’s mortgage balance would be $182,000 — still more than her house is worth.
Under the equity-building opportunity the President is proposing, she could instead choose to refinance into a mortgage that allows her to pay more toward the principal on her loan. After five years of making monthly payments roughly equal to what she was paying before refinancing, she could bring the mortgage balance to $152,000.
In other words, the idea is to refinance underwater homeowners and to use the monthly savings (that would come from lower mortgage rates) to pay down existing debt.
Usually, the homeowner’s monthly savings can be used for any purpose. However, in this case it would be used to create a mortgage prepayment system.
Plan pleases borrowers and lenders
There are two groups that should be happy about this proposal:
- Homeowners would not see an increase in monthly costs. For the same dollars they are now spending for monthly mortgage costs they could reduce their loan balance, lower their debt and perhaps even start to build equity.
- Lenders should like this idea because it does not ask them to engage in principal reductions. Instead, it requires that lenders do no more than refinance at today’s mortgage rates.
Underwater borrowers would have to meet the following standards in order to qualify:
- No missed mortgage payments in the last six months, and no more than one missed payment during the past 12 months
- A FICO score of at least 580
- In accordance with the conforming loan limits in your area, the refinance loan can’t be worth more than the median home values in your area
- Refinance must be for a single-family, owner-occupied principal residence
If approved by Congress, the president’s proposal suggests that homeowners would be able to refinance without closing costs–the costs would actually be underwritten by fees charged to major lenders. Think of it as getting back some of the money advanced under the Wall Street bailout.
Program deserves consideration
Given that big lenders would greatly benefit from this program, they might actually support it as an alternative to the costs of foreclosure and strategic defaults.
Given that this is the political season, there’s no question that this proposal has electoral implications–and there is also no question that it will be opposed for the very same reason. But beyond election-time sniping, the Obama plan has a lot of merit and should seriously be considered.