This is the third of three columns on human behavior and systemic problems. The first column covered in general how our complacency allows us to be taken advantage of, especially when information technology is involved. The second column, based in part on my friend Ralph’s mortgage problems, showed one example of how a class of investors has been able to keep millions of Americans trapped in high cost mortgages, creating a sort of economic time machine that benefits one group at the expense of the other and the nation. This third column, addressed to President Obama, is about a cure for that specific mortgage problem — a cure that would also create a huge, and very cost-effective, boost for the economy.
As a nation, we’re out of time, money, and jobs. Despite hundreds of billions of economic stimulus the economy is still in the toilet facing a possible double-dip recession. The new mood of austerity in Washington suggests that more hundreds of billions won’t be available for further stimulus, nor should they be. It’s time to find better solutions that cost little or nothing to implement — solutions that can be directly imposed without having to seek permission from anyone. The foreclosure crisis needs to be addressed, as does the housing market. If solving those problems can also stimulate the economy, well that would be a win-win. If it could be done for no cost at all, that would be a frigging miracle. I think such a miracle is possible.
There are several goals here: 1) slow the pace of foreclosures which would not only keep people in their homes but also help the housing market in general to recover; 2) find a way for underwater homeowners stuck with mortgages at high interest rates to refinance at present very low rates, saving money in the process and creating origination fees for the mortgage industry; 3) give people lower house payments so they can spend the savings, boosting the economy, and; 4) do the whole thing elegantly and at no cost, as if by magic.
The way to do this is for Fannie Mae and Freddie Mac and the Federal Housing Administration and the Veterans Administration and any other government-sponsored mortgage programs you can name to waive the appraisal requirement on non cash-out refinance applications for owner-occupied homes under these programs.
The main problem with refinancing mortgages for underwater houses is the underwater part. And the extent to which homes are determined to be underwater is based on comparing the appraised value of the home to the amount being refinanced. If the mortgage is underwater, refinancing is a no-can-do, so we go through the monkey-motion of mortgage modification — programs that have generally been undermined by the mortgage servicers.
Efforts to help the housing market to this point have been expensive and not very effective. Frankly they’ve benefited mortgage investors and done little or nothing for homeowners.
The trick here is to stop moralizing and pointing fingers and just find a loophole that will allow 30 million mortgage holders to refinance their loans at lower rates. This isn’t a write-down or a bail-out. People will still owe more than their homes are probably worth, but they’ll owe it at current interest rates, not past rates. Their mortgage payments will be lower and they’ll be less likely to walk away from their homes or otherwise go into foreclosure. Their homes will come off the market more or less permanently, reducing the inventory of unsold homes which will inevitably lead to a firming of prices and possibly stimulating new home construction.
Just temporarily eliminate the appraisal requirement for federally insured mortgages. That’s it.
There is no legal requirement that there be an appraisal and, in fact, there is a long tradition in the mortgage business of appraisals not being required for homes that were recently bought or sold. The key is that the homeowner is not trying to take cash out of his house, just lower his interest rate and therefore his monthly payment.
So the Federal Housing Finance Agency would order that for the next 12 months all refinances of existing mortgages for owner-occupied homes under its constituent agencies and not involving cash out will not require an appraisal. The transaction comes down to exchanging a mortgage at a higher rate with one of a lower rate, that’s all. Millions of homeowners will go from 6-7 percent down to 3-4 percent, saving an average $300 per month in the process — the equivalent of a $100 billion economic stimulus for no real cost at all.
Understand that people will still effectively owe more than their homes are worth, so they won’t be able to sell them. But since their payments will be lower they also won’t want to sell them, at least not as much. Foreclosures will ease dramatically and everyone will feel happier. The banking industry will love it because they’ll still have their federal insurance on mortgages while enjoying an explosion of mortgage demand which will create new banking jobs.
Understand these aren’t modifications, they are re-fi’s. Nobody is losing anything.
Yeah, but aren’t we engaging in a ruse? How can this work? Won’t it end up costing the government a bundle?
Nope. Payments will be lower so people can afford their homes, but they’ll still be essentially trapped in those homes, though that’s okay. Eventually the market will recover (sooner because we’re doing this) and those homes will come out from underwater and can slowly go back on the market for resale.
It is simple, it would work, it requires no act of Congress or even a Presidential order. It can be implemented on Tuesday with an impact measurable on Wednesday. It won’t cost the government anything and everyone involved will be happy.
Run with it, Barry. Be a hero.