Here’s a novel idea, let's help the employed, good credit home owners who are making their payments and want to stay in their homes. Let's help these borrowers save money on their mortgages.
Imagine putting $300 dollars a month into the hands of a person who can actually meet all of their obligations, that $300 would become real disposable spending money. Wouldn’t that help the economy?
We are dumping millions of dollars to support people who are in trouble on their mortgages, in many cases these are people who over stretched, underemployed and really can’t be helped because they never qualified for their mortgage obligations in the first place.
But what about the others...
There are at least three categories of responsible homeowners who deserve some support and cannot get it. Who are they?
1. Five years ago these borrowers bought their first home, they put 20% down, they had and continue to have excellent credit, income and employment history. Five years ago the Fannie Mae underwriting engine called DU for desktop underwriter or the Freddie Mac underwriting engine, LP or Loan Prospector approved these borrowers, they had at the time a back end ratio of 65% of their total income. That was fine, the credit risk was evaluated and the borrowers were approved.
Today those borrowers still have perfect credit, have a perfect mortgage payment history, are still employed but now they cannot benefit from today’s low interest rate environment because even with the monthly savings that a refinance will bring them their back end ratio drops from 65% to 59% and that loan is declined. Today the maximum back end ratio allowed is 50%.
With a perfect payment history, do we really believe that these borrowers will stop making their payments when those payments drop by almost $300 a month?
2. Borrowers bought a condominium in a 3 unit property with 20% down. At the time all three units were owner occupied. Borrowers have again a perfect payment history and good employment and credit. The other two unit owners in the building tried to sell their condos, when they couldn’t because of the today's depressed real estate market they choose to rent instead. Now the remaining owner occupant cannot refinance because the condominium does not meet the new more restrictive guidelines. 2/3 units must be owner occupied. The remaining owner cannot sell easily either because a buyer will also have issues getting financed because of the condo regulations.
It is also true that a few years ago that same buyer could have purchased in a property with 2/3 units investor owned and gotten the loan approved with a “limited project review” finding, but today they cannot refinance the identical transaction because the condo is no longer acceptable by Fannie Mae or Freddie Mac.
On another, more ridiculous note, we are seeing refinance loans declined because the condo project does not have the utilities that are ‘separately metered’. Are you kidding me? This loan was fine when it closed and now because the 3 unit association has one central heating system the loan does not qualify for a refinance?
I appreciate that in the “go go” years of mortgage finance the underwriters may not have read every word on the condo docs, or the appraisal and that some of the loans approved at that time did not meet guidelines but to punish quality borrowers today because of lax underwriting standards in past seems short sighted and unfair.
We will pay $3000 to a homeowner in a short sale to assist with moving costs but we cannot find a way to help a high credit quality borrower save some money on their mortgage because the rules have changed and the building does not qualify.
3. Then there are the borrowers whose appraisals don’t come in. Yes there is the Fannie Mae ‘Refi Plus’ program and the Freddie Mac ‘Home Possible’ program to assist these borrowers but not every one gets approved for reasons we cannot discern.
What about the borrowers who have a first and second mortgages, there is absolutely nothing we can do for them in this environment if they appraisal comes in too low to roll the second mortgage into the first mortgage. Second mortgage servicers are still not subordinating their mortgages essentially handcuffing the borrower from any ability to refinance to take advantage of the current market.
Can we make it mandatory that second lien holders subordinate purchase money second mortgages if the credit profile meets certain criteria? Again, I would suggest that a second mortgage is more secure if the borrower is saving $300 a month on their first mortgage.
There is an easy solution to put more money into our economy, and to secure and stabilize homeownership for those who have proven that they can be successful homeowners: Create a true streamline refinance program.
If the borrower has a perfect mortgage payment history, remains employed, and meet some general credit score requirement – simply refinance their mortgage no matter what the property value, loan to value or condominium make up. The servicers have these mortgages already, Fannie Mae and Freddie Mac have these mortgages on their books, and do these mortgage holdings become more risky if we drop the payments for the borrowers?
The large mortgage servicers cannot possibly meet the needs or return the calls of each borrower seeking relief. The most qualified of those have been left out of the dance and we are doing that part of the population a huge disservice. We are rewarding consumers who cannot meet their obligations and are over extended and we are completely ignoring the responsible consumers who should be shown some love and appreciation. Remember these are also the consumers who are paying the bulk of income taxes in this country.
Fannie Mae and Freddie Mac need to create a streamline program, one with very easy processing guidelines, and these refinances should go back to their original servicers so that they do not loose the servicing revenue from their portfolios. The servicers could pay a flat per loan fee to correspondent lenders or brokers to originate the loans. Streamline the closing requirements to keep the closing costs low, make this a true streamline process so that the originating company can process and close these loans quickly and help millions of American homeowners who have been left out of the conversation but deserve more than anyone to get some reward for their good credit and fiscal management.
