A new rescue plan is on the table for underwater borrowers. Oregon Senator Jeff Merkley submitted a new plan last week for the government to buy up to 8 million underwater mortgages and refinance them into lower interest rates.
Merkley says that the lack of a robust program that enables large numbers of American families who are trapped in high-interest loans to refinance hurts not only the individual borrowers, but also the communities and economy at large.
In a paper announcing the plan, the Senator details how a Rebuilding American Homeownership Trust could be built under either the Federal Housing Administration, the Federal Reserve or the Federal Home Loan Banks system. He says this trust would sell bonds and use the proceeds to purchase mortgages from originators.
Merkley says the RAH program is “designed to be a modern version of President Franklin D. Roosevelt’s Home Owners’ Loan Corp.” Qualifying homeowners who are current on their mortgages would have three options for new mortgages: one that helps to speed the rebuilding of equity; one that lowers monthly payments; and one that provides even more flexibility through a two-part “soft second” mortgage.
Merkley’s plan would not require use of taxpayer dollars – an appealing proposition no matter what side of the political debate you sit on. In fact, as laid out, Merkley explains how the plan would actually turn a profit in the future. I’m not going to get too far into the details here, but suggest checking out the full plan as laid out in the paper at this link (scroll to the bottom for the link to download the full paper).
All politics aside, I do think Merkley is onto something here. The fact that one-fifth of American homeowners is underwater has a lot of implications for the future of the market. Without equity, these homeowners can’t refinance under the current system. With negative equity, they can’t even sell. Their options are to try to sell short, strategically default, or stay put and bear the punishment of being caught up in a housing market that seemed to defy reality.
Negative equity is bad for the housing market and economy as a whole. It’s definitely bad for individual communities where it’s rampant. Imagine a market where either no one is selling because they can’t, or in which every sale is either short or a foreclosure. How can that possibly be better than what Merkley is proposing?
Not sure I could even say this better myself, but in his paper, Merkley states: “America moved boldly and generously to rescue Wall Street and the auto industry. Let’s move boldly to restore the wealth-building power of homeownership for America’s families!”
What do you think?