President & CEO
Intero Real Estate Services, Inc.
A new rescue plan is on the table for underwater borrowers.
Oregon Senator Jeff Merkley submitted a new plan last week for the government
to buy up to 8 million underwater mortgages and refinance them into lower
interest rates.
Merkley says that the lack of a robust program that enables
large numbers of American families who are trapped in high-interest loans to
refinance hurts not only the individual borrowers, but also the communities and
economy at large.
In a paper announcing the plan, the Senator details how a
Rebuilding American Homeownership Trust could be built under either the Federal
Housing Administration, the Federal Reserve or the Federal Home Loan Banks
system. He says this trust would sell bonds and use the proceeds to purchase
mortgages from originators.
Merkley says the RAH program is "designed to be a
modern version of President Franklin D. Roosevelt's Home Owners' Loan
Corp." Qualifying homeowners who are current on their mortgages would have
three options for new mortgages: one that helps to speed the rebuilding of
equity; one that lowers monthly payments; and one that provides even more
flexibility through a two-part "soft second" mortgage.
Merkley's plan would not require use of taxpayer dollars –
an appealing proposition no matter what side of the political debate you sit
on. In fact, as laid out, Merkley explains how the plan would actually turn a
profit in the future. I'm not going to get too far into the details here, but
suggest checking out the full plan as laid out in the paper at this link
(scroll to the bottom for the link to download the full paper).
All politics aside, I do think Merkley is onto something
here. The fact that one-fifth of American homeowners is underwater has a lot of
implications for the future of the market. Without equity, these homeowners
can't refinance under the current system. With negative equity, they can't even
sell. Their options are to try to sell short, strategically default, or stay
put and bear the punishment of being caught up in a housing market that seemed
to defy reality.
Negative equity is bad for the housing market and economy as
a whole. It's definitely bad for individual communities where it's rampant.
Imagine a market where either no one is selling because they can't, or in which
every sale is either short or a foreclosure. How can that possibly be better than
what Merkley is proposing?
Not sure I could even say this better myself, but in his
paper, Merkley states: "America moved boldly and generously to rescue Wall
Street and the auto industry. Let's move boldly to restore the wealth-building
power of homeownership for America's families!"
What do you think?
