October 17, 2011

Will Refinancing Underwater Loans Help Ease the Foreclosure Crisis?

Will Refinancing Underwater Loans Help Ease the Foreclosure Crisis?

This morning, I read an article on RISMEDIA, Executive Action to Ease Foreclosure Crisis?  The basic summary of the post is that the President has the authority to change the rules to allow "responsible" homeowners to refinance their homes at today's low interest rates and also to basically compel the lenders to do the refinance.  It would only help homeowners that aren't currently behind on their payments and the premise is that it would help stem the tide of foreclosures by stopping those considering strategic defaults.  By reducing their monthly payments, it would also increase their spendable money, thereby helping the economy.  Unfortunately, it's far too short-sighted in it's approach.

First, it's aimed only at those that are current on their mortgage AND who have a house that is "under water" (the loan amount is higher than the current value of the property).  That's becoming a rarity, these days.  So the amount of people it could possibly help is small in comparison to the amount of people actually needing help.

Second, it's aimed at people that already can afford the mortgage.  The primary criteria for determining if you can qualify is that you are current on your existing mortgage.  If you're able to pay your existing mortgage, chances are very good that you've already went the refinance route (if you were so inclined).  Again, while there may be a few people who can afford their existing mortgage but for whatever reason, they could not get a refinance, that number is small in comparison to the number of people actually needing help.

Third, it totally ignores the primary reason people choose to Strategically Default: the house isn't worth what's owed.  Does it really matter if you're paying 4% or 10% interest on the loan if the loan amount exceeds the value of the house to the extent that you are willing to considering defaulting on the loan?  If you're considering that option, the hope of "saving" a few hundred bucks a month on your payment usually isn't going to change your mind as it's not the payment that is the issue (remember, we're talking about those that can afford their current mortgage), but rather the difference between property value and loan value.

Should the President move forward with this?  By all means, most definitely.  At least, it's a start.  But there is more that needs to be done.


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