- The Washington Times - Friday, February 27, 2009

President Obama flew to real estate-challenged Arizona last week to sign the massive stimulus bill designed to prevent our economy from continuing deterioration. In the last few weeks, I have written a couple of articles suggesting that responsible borrowers should be eligible to refinance their loans even if they don’t have sufficient equity in the property.

Much of the stimulus plan is dedicated to bailing out borrowers who (for whatever reason) have a mortgage that they can’t afford and are facing foreclosure. Some argue that these folks are victims of unscrupulous lending practices. Others maintain that a gun wasn’t pointed at their heads when the papers were signed. I happen to believe the subprime mortgage market was a product of lenders who were happy to sell loans and borrowers who were happy to buy big houses.

There are millions of homeowners who have great credit, put 5 percent or 10 percent down and have verifiable income to obtain a fixed-rate loan that is affordable. As mortgage rates drop and some responsible homeowners are able to lower their interest rates and monthly payments, other folks don’t have the required equity in their homes to refinance because their property values have fallen.

Part of Mr. Obama’s plan calls for loosening the underwriting guidelines to allow these folks to take advantage of today’s low rates. It’s pretty easy to understand that the easy mortgage money of the past is what caused this mess. It also seems to me that if the government is going to throw away billions bailing out the folks who were (arguably) irresponsible, why not throw the responsible folks a bone?

As usual, the devil is in the details. While I would support such a provision, I think implementation is going to prove to be difficult. Consider the following:

The administration wants to limit eligible borrowers to those whose loan amount doesn’t exceed 105 percent of the property’s current value. This means a property that was once worth $350,000 and has dropped to $300,000 cannot have an existing mortgage of more than $315,000.

Existing loans must be owned or guaranteed by the newly government-controlled mortgage giants, Fannie Mae and Freddie Mac. This is a problem. Thanks to the excesses that created this meltdown, mortgage loans have been chopped and sliced like lunchmeat into mortgage-backed securities.

Many folks have second trusts and equity lines. Lenders holding this paper must agree to be “subordinate” to the new loan. My experience tells me that they are not likely to be fully cooperative.

Banks and lenders are not required to participate. While business has been good for me over the last three months, it has not been easy. Lenders are scared to death. All of my refinance applications are being conditioned with ridiculous requests, despite the fact these folks have excellent credit, great income and lots of home equity.

March 4 is the implementation date. I’ll keep you posted.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at henrysavage@pmcmortgage.com.

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