Our friends at Think Big, Work Small once again bring up the topic of a bill recently introduced in congress that would allow for any and every mortgage owned by Fannie or Freddie to be refinanced at current rates. This refinance would be granted regardless of credit, income, loan to value or any other criteria except that the loan had to be on a primary residence and it had to be a loan written before the passage of this bill. Call it your ultimate no-doc loan. The bill is HR 6218 and you can read it here.
This comes at a time when the industry has pushed underwriting away from the subprime excesses of low/no doc to the extremes we see these days where self employed borrowers are penalized because they write off allowable business expenses (that’s why we had stated income loans in the past). The pendulum has swung savagely in the opposite direction, and where we once had easy money, now good credit risks can’t get a loan.
That’s why this thing might just work…
We are seeing foreclosure rates increase, in spite of the fact most subprime loans have been dealt with. Yes unemployment is having a huge effect, but so is underemployment and strategic default. We know chronic unemployment will frequently leave a family unable to support the cost of a home; but it’s the underemployed that are just scraping by and defaulting only when they become overwhelmed.
Stay with me on this- there is a fix…
What if, instead of just giving everyone this no-doc refi we add just a few common sense guidelines? What if we require that the mortgage being refinanced have an on-time payment history of at least 12 months and that the new payment must be lower than the previous one? This would reward the people that have been playing by the rules and making their payments, but that can’t take advantage of current rates because their property values and/or income have declined to the point they are un-financeable.
It would take performing loans (loans being paid as agreed) that we, as taxpayers, are currently on the hook for (if Fannie/Freddie own them, that means we all own them) and make them MUCH less likely to ever become non-performing loans. Don’t lose sight of the fact that although these loans are performing now, they are the ones at greatest risk for future default. All of the A+++ deals are refinancing at these rates, and those deals are solid gold.
Can it stop, or at least slow down, the next wave of impending foreclosures? I think so and if you do too please pass this around to your legislators and members of the industry.
Truth is the bill is improperly written on many fronts (hey politicians don’t know how our business works- that should be painfully obvious by now!) but with a little re-writing, this bill could be the beginning of a true recovery. Do you agree?