The market simply has not refinanced all the loans that need refinancing (see our related discussion of why mortgages are so hard to get). Interest rates have fallen to record lows, but many homeowners remain trapped in underwater loans at higher than market interest rates. In a normal real estate market, those borrowers would refinance, but because values have dropped so severely in many markets, they can’t, leaving them with higher housing cost and more vulnerable to foreclosure. Despite policy changes through the HARP program and the efforts of FHA, refinancings have not reached many borrowers.
Senator Jeff Merkley of Oregon introduced yesterday a new proposal to address this problem directly, by creating a federal government trust to buy refinancing loans at 4% interest (for 15-year loans) or 5% (for 30-year loans). It would target current borrowers committed to staying in their homes for at least 4 years. Private lenders could originate the standardized loans and sell them to the trust, much like they do to other secondary market outlets. For a fuller summary, see the announcement.
The plan is bold step to cut through an apparent market failure. It addresses real housing need and deserves real attention to address questions it raises, including:
- Will private lenders who originate mortgages to the new trust retain any risk or obligation post-origination?
- How high of a jump in interest rates can the new trust survive without needing additional funds?
- Are the proposed funding sources (bond financing, a fee on banks, and interest rate spread) viable, either economically or politically?
- Once created, how long will it take to wind down the new trust?