Refinancing Underwater Mortgages a Baby Step at a Time

Fannie- and Freddie-required fees hinder many home owners’ efforts to refinance. A new bill aims to give up-to-date but upside-down borrowers a fair shake.

In the classic comedy film “What About Bob?” Bill Murray’s therapist, played by Richard Dreyfuss, prescribes his patient a technique to solve his chronic anxieties: Murray should take baby steps through life, the doctor says.

Now may be the time for Congress to take a similar baby steps approach to the housing crisis that continues its chokehold on our economy and threatens America’s middle class.
 
Just as a grand bargain on taxes and spending have eluded policymakers, so has a comprehensive solution to the massive mortgage finance problem that now finds 31.4% of Americans with a mortgage underwater on their loan.

Although mortgage giants Fannie Mae and Freddie Mac have improved their refinancing guidelines recently, they could take more steps. Home owners with loans owned by Fannie and Freddie who’ve kept up with their mortgage payments haven’t been able to refinance at today’s low interest rates because they can’t bring cash to the closing table to fund the upfront fees required by Fannie and Freddie. 

Enter the Responsible Home Owner Refinancing Act (S. 3085), authored by senators Bob Menendez (D-N.J.) and Barbara Boxer (D-Calif.), which would eliminate some restrictions in Fannie and Freddie guidelines that have impeded underwater home owners.
 
Among the provisions in the bill is a proposal to eliminate appraisal costs and some upfront fees for home owners who wish to refinance; so-called risk-based fees could cost a borrower up to $4,000 on a $200,000 loan. What’s more, the bill would offer the chance to refinance into a lower rate to home owners who continue to make their monthly mortgage payments on time, even though they owe more to their lenders than their homes are currently worth. Lenders typically don’t green light such loans for a refi.

Helping home owners refinance is an urgent priority for the housing sector and the bill is a good start, NATIONAL ASSOCIATION OF REALTORS® president Moe Veissi told lawmakers in recent testimony before the Senate Banking, Housing, and Urban Affairs Committee.
 
“Swift action is needed to directly stimulate a housing recovery,” Veissi said. “In particular, bringing relief to the millions of home owners who have remained current on their mortgages in the face of declining home values and rising inflationary pressures will go a long way to kick starting not just the housing sector, but the overall economy.”
 
Economists also are hopeful that the measure will help struggling home owners.
 
Mark Zandi, chief economist at Moody’s Analytics and one of the most respected voices in housing policy, says that more than two-thirds of American home mortgages are now financed at APRs of 5% or higher —  significantly above current rates. Removing barriers to refinancing would help more home owners continue to stay current on their mortgage payments.
 
“Millions of U.S. home owners should be refinancing, significantly cutting their monthly payments,” he told the Senate Banking Committee. “This would be a boost both for individual household finances and for the economic recovery. One of the most effective and straightforward policy steps to ensure that the housing market gets back on track is to facilitate more refinancing,” he said.
 
A study by the NATIONAL ASSOCIATION OF REALTORS® reports that the bill would help 3 million home owners refinance their homes, and save the average borrower about $2,800 per year. That’s money that would help spur consumer spending as well as pay down family debt, both essential to long-term sustained growth. In addition, the non-partisan Congressional Budget Office estimates that a program like this one might help more than 110,000 home owners save their homes from default.
 
It’s not a cure-all, but in this instance, baby steps may just be the right prescription for the struggling housing industry; it sure beats the current approach.