They are at it again. Despite numerous unsuccessful tries to develop a government-facilitated plan to refinance problem mortgages, another one appears to be on the horizon. This one, currently being considered by state and federal officials and large mortgage lenders, has a better focus than earlier versions, but would at best help only a small minority of those who have been promised assistance in the past.
The good news is that it would focus on providing help for those who have continued to pay their mortgages on time, despite the fact that they owe more on their houses than the homes are now worth. However, as with the many previous attempts to assist at-risk homeowners, the devil will be in the details of how the program—if approved—is administered, which mortgages are eligible, and who would bear the cost. For instance, it appears that the program would apply only to loans that are owned by certain major banks, a limitation that would include only about 20 percent of mortgages.
According to The Wall Street Journal, the plan would allow borrowers who are current on their mortgages but owe more than the house is worth to refinance their loans, despite having no equity. The offer was made to banks negotiating with both the federal government and the states to settle the banks’ liability for problems in their foreclosure processes. The cost of this plan would be paid by the banks as part of the damages they would owe for failure to follow proper legal procedures in foreclosures. This means that the program would be limited to mortgages owned by those banks and would not apply to the vast majority of mortgages that have been securitized by Fannie Mae and Freddie Mac and sold to investors. And, of course, its appeal to banks would depend on what else the governments include in the settlement.
Those who developed the plan do get credit for focusing on homeowners who are current in their payments, rather than on those who either have intentionally stopped paying or simply don’t have the income to meet their mortgage obligations. As such, it avoids the moral hazard of previous proposals that appeared to reward those who acted irresponsibly while ignoring those who sacrificed to meet their obligations. While this approach would also seem to exclude borrowers who cannot pay their mortgages due to lost jobs or other circumstances beyond their control, the sad fact is that these homeowners would almost certainly not be able to repay a refinanced mortgage, either.
If there is to be another effort to assist troubled mortgage holders, this proposal is better that previous attempts. However, context and details are everything. If the proposal is part of an unfair deal or is structured in an unrealistic way, then it will fail just as all of its predecessors have. It is important to keep in mind that it appears only a fairly small proportion of mortgages would be included.
Of course, the biggest problem remains the continued government attempts to “fix” the mortgage mess. While many borrowers are having trouble through no fault of their own, it is simply not possible to refinance large numbers of mortgages all at once. Mortgages were made one at a time, and they must be refinanced the same way. This means that any refinancing program will unfold slowly and is very unlikely to help anyone in need of immediate assistance.
While this proposal is better targeted than most, it is likely to be announced as a general solution rather than the limited program that it is. That means the hopes of many will again be raised, only to be dashed when the details are uncovered.