What if at the same time, you could make it easier for people now living at the margins to stay in their home?
For the last two years, mortgage interest rates have been falling to the lowest levels in 50 years. Indeed, this past week, 30-year fixed rate mortgages have hit successive new lows.
And yet, refinance applications are historically low. In fact, it’s pretty tough to get approved for a refinance these days. Lenders are questioning everything single line item on the application, from the appraisal to your credit history. And watch out if you’re self-employed or have a small passive investment in a start-up business or you’re buying in a condominium association with any type of litigation. Anything out of the ordinary is cause for rejection – and if the lender doesn’t want to reject you, grounds to just delay, delay and delay.
What’s going on? With interest rates this low, lenders should want to lend and borrowers should want to borrow. But nothing is quite that simple.
This week, Senators Robert Menendez (D-N.J.) and Barbara Boxer (D-Calif.) announced legislation to help millions of responsible underwater homeowners refinance at lower rates. The bill, called the “Responsible Homeowners Refinancing Act,” is designed to help as many as 3 million homeowners save as much as $3,000 per year by refinancing at today’s historic low interest rates.
That’s a $9 billion shot in the arm for the U.S. economy. While not a huge amount (out of a $14 trillion dollar budget), it’s the kind of cash that economists prefer, because it’s often used to buy the necessities of everyday life, like food, clothing, and gas. It could also be used to continue to “deleverage” or pay down debt.
In a press conference, Boxer explained how the bill could ease borrowers’ refinancing troubles by extending streamlined refinancing for Fannie and Freddie borrowers, eliminating up-front fees on refinances, eliminating appraisal costs for all borrowers, removing additional barriers to competition, requiring second lien holders who unreasonably block a refinance to pay restitution to taxpayers, and requiring mortgage insurers who unreasonably fail to transfer coverage to refinanced loans to pay restitution to taxpayers.
Moreover, the legislation would pay for itself, the Senators argue, by reducing default rates and foreclosures, and therefore reducing Fannie and Freddie’s reliance on taxpayer bailouts.
It all sounds great: Cash gets pumped into the economy as homeowners are more easily able to afford their homes and spend leftover money in the budget. By not going into foreclosure or doing a short sale, all the other homeowners in the neighborhood benefit as home values firm up. The housing market gets rewired and hopefully reinvigorated.
The problem is that not everyone will be able to keep making those payments.