By: Adam Simmons
President Obama is expected to release the details of his refinance plan that he touched on in his state of the union address. This plan is expected to be targeted to "responsible" home owners that have not missed a payment in the previous 6 months and whose homes may be worth far less than they owe.
Rumor has it that appraisals will not be necessary, nor will income qualification. As a prospective borrower, you must prove that your credit score is above a 580 and that you are currently employed. This refinance program will be geared towards those people that have privately held mortgages (loans not secured by Fannie Mae or Freddie Mac or FHA). These refinances will be sent through the governments FHA program. The FHA program is a wonderful product but I see a few problems with this right now:
- FHA already has a disproportionate volume of all new loans. They have had to raise their fees and mortgage insurance premiums several times over the last few years to keep their reserves in line. Their reserves are not in line yet, as they hold over 1 trillion in notes with only a couple billion to insure against default.
- FHA loans have higher monthly PMI premiums and have higher up front fees rolled into the loan. Therefore a borrower may get a lower rate but they will be even further underwater on their home and perhaps their payment might even go up due to the higher PMI than they currently pay.
- The government is proposing new, higher fees and taxes on the big lenders to fund this 10 Billion dollar effort. Who do you think pays these higher taxes and fees? It is not the banks. These fees get passed on to the consumer. Therefore everyone that is buying a new house, or refinancing a house will be subsidizing this effort.
Raising fees and taxes on banks will just create higher interest rates and higher fees. If the administration thinks that we need the housing market to come back to lead us out of our recession then they have a odd way of showing it. This is the second time in the last 30 days they have called on current home buyers and people refinancing to take higher rates for the success of some other temporary program. In January, home buyers and refinances will be paying higher rates through 2016 just to fund a one month extension in the payroll tax (true story!). Political feelings aside, this is not a good idea. The mortgage industry is not the administrations (current or any other) personal piggy bank. This would only hurt main street in my opinion.
There are many other options that can be rolled out. Let's hope this does not pass through Congress as it will not be a good program for very many people. Helping people get further underwater on their homes does not help the situation.
Underwater mortgages are the number one reason people default right now. Let's try to address that problem instead.
Crystal Clear Mortgage LLC
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