Congress should create a refinancing vehicle for creditworthy homeowners who cannot refinance because they owe more than the house is worth. Currently available programs do not address the needs of borrowers facing default and foreclosure who find themselves with negative equity in their homes as a result of local housing market declines. While many of these borrowers might be sufficiently creditworthy to refinance at a fixed rate, having otherwise reasonable debt-to-income ratios and a solid history of timely payments prior to reset, they will not qualify for any products available today, including FHA Secure and the HOPE NOW Alliance. And, as markets continue to weaken, the proportion of resetting loans in this “under water” category will grow.
Andrew Jakabovics of CAP initially proposed that Congress create the Family Foreclosure Rescue Corporation to refinance otherwise creditworthy borrowers who have no alternatives because of the negative equity in their homes. This FFRC proposal is based on the 1933 Home Owners’ Loan Corporation (HOLC)—a temporary market intervention that briefly refinanced almost 20 percent of the mortgage loans outstanding in the country and eventually was liquidated having returned a small surplus to the U.S. Treasury almost 20 years later. Representative Joe Baca has introduced H.R. 4135 based on this proposal.
Jakabovics’ original proposal called for the creation of a new government corporation to manage the transactions, in which the loan would be refinanced into a government guaranteed, above-market, fixed rate loan at a new loan balance based on the current value. But with $514 billion in loans scheduled to reset this year, of which 70 percent are subprime, we must act quickly to develop the program and gain market acceptance. Establishing a new program and agency will take too much time. Therefore, we must design a mechanism that would rely upon existing market players, the existing mortgage finance delivery systems, and familiar financial market instruments coupled with federal credit enhancement.
A time-limited but broadly available mechanism to restructure large proportions of loans currently “under water” could restore economic confidence in the housing and financial markets, keep responsible and creditworthy homeowners in their homes, and allocate both shared responsibility and shared benefits to homeowners, investors, lenders, and the government.
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