What we need is a RESCUE Mortgage program, a reduced equity, spoiled credit, unemployed/underemployed expectation loan that brings mortgage relief to those who cannot otherwise qualify for the refinance programs that are currently available. It’s taken me two days to figure out why I had nothing to say about the enhanced Home Affordable Refinance Program (HARP) the White House announced this week. As much as I want to get in line behind other bloggers and applaud the president’s efforts, it is hard to get excited about HARP when I know in the back of my mind that 11 million mortgages are underwater, 8 million mortgages are delinquent and 14 million people are out of work. For the delinquent and unemployed, HARP might as well be a fiddle
But instead of criticizing President Obama for doing all he can do, given the limited powers of the executive branch and an uncooperative Republican Party that controls the House of Representatives, I am going to lay out my RESCUE mortgage idea, one his administration can feel free to use as they see fit.
Making loans to people with reduced home equity who have stable jobs and good credit scores is easy. Making loans to people with reduced home equity who have spoiled credit is a challenge. Making loans to people with reduced home equity who have spoiled credit and are unemployed or underemployed is practically impossible. But many of these same borrowers, despite their circumstances, find ways to make some form of mortgage payment month after month. Many of them, who may be 30 or 60 days late on their mortgage have made these late payments—what we used to call “rolling lates”—for the last two or three years. They don’t have any savings left. Their retirement accounts, if they ever had any, are tapped out. Yet month after month, they are able to scrape together enough money to continue to have a place to call home.
If that’s not the sign of a person who believes in the future of this country, I don’t know what is. Which is why I call the RESCUE mortgage an “expectation” loan, because these beleaguered homeowners believe, as bad as the economy looks, that sooner or later it will get better. So why don’t we bring these Americans to the front of the bailout line for a change? In a lot of ways, they are better risks than the mortgage banks who loaned them the money to buy the houses they are living in.
I know people of all income levels need relief, and I can appreciate the diligence of Senator Schumer to make sure, in a state like New York, that mortgages up to $729,000 are included in any mortgage relief plan. But the average mortgage in this country is right around $185,000.
Take someone with a $185,000 mortgage whose current rate is 7.5%. With principal & interest of $1293, $50 a month in insurance premiums and $150 a month in taxes, their principal, interest, taxes and insurance (PITI) ends up being $1493 a month.
Refinance their home through the RESCUE mortgage program at 5%, which is about a point over the rates a prime borrower can get today, and with their principal and interest now $993, their total payment drops to $1193, which cuts the amount they have to scrape together each month by $300. In much of the country, the average mortgage is even lower than $185,000. In the state of Kentucky, for example, the average home purchase price right now is $143,000, which means the average home mortgage is probably quite a bit less than that.
How would I qualify borrowers for a RESCUE mortgage loan?
Is this an owner occupied property?
Is the applicant listed on the security deed as the borrower(s)?
Are the applicant’s mortgage payments less than 60 days late?
These are the only borrower supplied items you need to know to refinance a loan when you are offering to help the borrowers who need help the most. The rest of the underwriting process, from the Automated Valuation Model (AVM), to the title search, to the mortgage payment history, will serve mostly to verify collateral, which is about the only one of the 4 C’s—capacity, character, credit, and collateral—that can be measured in this instance.
The enhanced HARP program guidelines announced this week seem to be more stringent than the requirements for some of the Expanded Approval Level II and Level III products Fannie Mae offered back when I was a loan officer. However, something is better than nothing, and with an obstructionist Congress willing to sacrifice the very people they are supposed to be serving so long as it helps to destroy this president, this is probably the best President Obama can do. HARP will help borrowers in places like Atlanta, Chicago, Los Angeles, New York, and Houston, where even in a bad economy, many people still have stable jobs and sizeable incomes.
The paradox of our current mortgage dilemma?
If we don’t do anything as a nation to drastically reduce the number of homes that are going to go into foreclosure, the billions in home equity that no longer exists may finally have to reconcile with the billions in make believe home equity our nation's banks are still carrying on their balance sheets.
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