Helping (More) Homeowners Refinance…

Earlier this week, President Obama announced that the Federal Housing Finance Agency (FHFA) would be making changes to one of their programs, allowing more homeowners to refinance their current mortgage.

Specifically, those who currently owe more than what their home is worth.

With 28% of US mortgages underwater (roughly 11 million), it’s been virtually impossible for almost 1/3 of homeowners to refinance for the past 5 years or so. Without contributing – often a sizable amount – cash at closing, many have been forced into foreclosure when the various hardships that accompany a recession, prevented them from keeping up with their payments.

For those who have continued to pay on time, many have been forced to scrape by, limiting any discretionary income.

Both segments have had a huge impact on the economy.

From a White House Blog post by Gene Sperling, 10.24.11:

Helping more responsible borrowers refinance their mortgages (10/24/11): Today, the Federal Housing Finance Agency (FHFA) announced a set of changes to help a greater number of creditworthy borrowers refinance – particularly those who are underwater on their mortgages. By eliminating the maximum cap on underwater borrowers participating in the program, as well as eliminating certain risk-based fees and encouraging competition by addressing the issue of representations and warranties, these changes should help more Americans save several hundred dollars each month by taking advantage of today’s historically low interest rates.

Make no mistake, this will certainly help, but it’s not enough.

By allowing more people to refinance, up to a million homeowners will receive at least some relief via a reduced interest rate.

However, a general misconception about lowered interest rates is the direct affect they will have on the monthly payment.

Many seem to think that your interest rate dropping from 6% to 3% will correspond directly to the reduction in your monthly payment, cutting it in half.

Not so.

A reduced rate will only affect the interest you pay, each month. Now, that could mean your payment will drop a couple hundred bucks – or more – which will certainly be beneficial. For many people however, more help is needed.

For quite some time, I’ve supported the idea of reducing the amount borrowers owe (also known as principle reductions) as a way of not only fixing the real estate market, but possibly the entire economy.

As Binyamin Applebaum points out in his article in The New York Times, economists from both sides of the political aisle seem to agree.

A principle reduction would (ideally) lower the actual mortgage amount to the current fair market value.

It’s the difference between, for example, cutting your interest rate from 6% to 3%, versus lowering the total amount you owe from $200k to $100k.

Or on a monthly basis: the difference between a couple hundred dollars in your pocket, versus considerably more.

My blog from 9.12.11 “The Hole In The Presidents Economic Plan: Housing” provides some specific examples.

By reducing the principle, you’re not only helping people stay in their homes, but you’re also helping facilitate significantly more home sales – without the need for time-consuming short sales or neighborhood devaluing foreclosures. At the same time, you’re injecting a large amount of cash into the economy, via the increase in discretionary income/spending.

While the expansion of this FHFA program will help keep more people in their homes, thus improving the real estate market, principle reductions will directly help both the real estate market AND the overall economy…