- The Washington Times - Friday, January 30, 2009

A few weeks ago, I wrote a column predicting that if interest rates continue to stay low in 2009, the refinance wave will continue, but not to the proportion many would expect. I gave two reasons for a muted refinance wave.

First, rates are only low for homeowners with excellent credit. A borrower with a credit score of 680, once considered perfectly acceptable, is now likely to pay a higher rate than a borrower with a score of 720.

Second, many homeowners have experienced a decline in property values, decreasing their equity stake to levels that make them ineligible for a refinance.

I concluded my column with a suggestion that folks with excellent credit and solid verifiable income be eligible to refinance to today’s low rates without an appraisal report. Millions of responsible homeowners were unlucky enough to purchase at a cyclical peak and are now looking at considerably less equity because property values have fallen, preventing them from taking advantage of lower rates.

With the exception of one appraiser who called my idea “asinine,” I was flooded with e-mails from folks supporting the idea. My lone dissenter missed my point completely, so I’d like to clarify it.

The federal government is taking extraordinary measures in an attempt to stop the economy from falling into an ever-growing serious recession. Much of its efforts involve throwing money at the problem in one form or another.

Specifically, the government has announced plans to:

Purchase underperforming loans currently held by banks by and mortgage giants Fannie Mae and Freddie Mac

Purchase an equity stake in troubled financial institutions

Provide financial relief to the Big Three automakers

Implement the HOPE for Homeowners program, which is designed to lower borrowing costs to homeowners already in trouble.

When you think about it, the steps taken by the government can be interpreted as a necessary reward for irresponsible behavior. The financial institutions being bailed out are in trouble largely due to their appetite for high-yielding (but risky) subprime mortgages. Automakers in Detroit have been criticized for failing to stay ahead of the curve and adapt to a changing environment and create better products. The HOPE for Homeowners program lowers borrowing costs for folks who, for whatever reason, got into a mortgage situation that they couldn’t intrinsically afford.

If the federal government is prepared to take these measures, why wouldn’t it provide relief for responsible homeowners whose house purchase was ill-timed?

I think I know the answer. The devil is in the details. Investors are gun-shy of mortgage-backed securities. It would make sense that they would not have an interest in investing in mortgage loans without an evaluation of the collateral, despite the borrowers’ stellar credit and income.

On the other hand, the Fed seems to be throwing its weight in all directions. Perhaps it should consider using some of its $700 billion in relief funds to guarantee the loans of credit-worthy borrowers to investors. One thing that I have observed in my 20-year career is that the vast majority of folks with excellent credit maintain their credit rating over time.

It’s just a thought. However, it seems to me that rewarding responsible behavior should be somewhere in the package.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at [email protected]

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