The Federal Reserve just unleashed its latest ploy to drive interest rates lower in an effort to get the economy moving. This latest move, called “the twist” involves the feds selling short term securities, and using that money to buy longer term securities. Buying these securities will drive yields lower, with fixed mortgage rates following suit. Thus far, we’ve seen mortgage rates improve by an .125-.25%. Now granted, this might allow a certain number of people with a mortgage rate in the high 4 to low 5% range to refinance, but this segment is made up of people who aren’t in financial duress, and have already benifitted by refinancing within the past two years. The homeowners that need help are those with mortgages underwater, or have seen their income decline as a result of the flagging enconomy. You might think that the government created all sorts of special programs to help these homeowners, but these programs either don’t go far enough, or banks won’t take the risk to write the loans, even though federally backed institutions such as FannieMae will take them off their books. Fannie Mae has what’s called in the industry, recourse, meaning that if the loan defaults, the original lender may be forced to buy it back. Take for instance the “refi-plus” program that was established by the government nearly two years ago. This program allows homeowners to refinance up to 125% of their home’s value, however very few mortgage lenders will approve a loan that exceeds 105%.
There are thousands of homeowners who have either demonstrated the ability to make their current mortgage payment on time, but don’t have sufficient equity or income to meet underwriting standards, or those who meet the income or equity standards , but have blemished credit histories. The government could easily create programs to assist these homeowners, while giving banks the confidence to lend. This would free up millions of dollars of disposable income, while substantially reducing the number of short-sales on the market, which is vital to stabilizing the housing market.
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