- The Washington Times - Friday, March 6, 2009

The number of e-mails I have received in response to my recent columns compels me to write one more piece about refinancing folks who don’t have sufficient equity in their homes.

Several weeks ago, I shared an idea that the federal government should use some of the stimulus funds to guarantee loans to folks with good credit and verifiable income who wish to refinance but don’t have sufficient equity. This idea occurred to me after I observed the myriad rescue and bailout plans the feds have implemented or will be implementing.

Recently, President Obama announced a plan to allow eligible homeowners to refinance and take advantage of lower rates - even if they don’t have the equity required under traditional underwriting guidelines. Last week, I expressed my opinion that the plan would not be entirely successful. I believe that too few homeowners will be eligible under the specific restrictions and requirements of the plan. Consider the following:

Under the president’s plan, eligible homeowners cannot have a loan balance that exceeds 105 percent of the property’s value. This restriction is likely to eliminate many homeowners from eligibility. Moreover, lenders who are already fearful of making mortgage loans would undoubtedly scrutinize the appraisal report. My recent experience tells me that lenders will pass on these loans for fear of making the loan only to have it be deemed ineligible after the loan is made.

The plan calls for voluntary participation among lenders. My office is currently swimming in paperwork trying to satisfy frivolous conditions on my existing refinance customers who have excellent credit, income and equity. Getting my most qualified borrowers to the settlement table is an arduous task. Why on Earth would I think that lenders will jump at the chance to make loans to folks who have little or no equity when my existing borrowers who have excellent credit, income and equity are having to jump through hoops to get a simple refinance closed?

President Obama, the credit crunch is still alive and well. Let’s not fool ourselves. Lenders are not going to participate in a plan that will make them susceptible to being stuck with mortgage loans that have no demand from investors in the secondary market.

My idea sounds better and better. Since the government is already spending billions, it should set aside a modest fund that guarantees the loans made to folks who lost value in their home but have excellent credit and verifiable income. The details can be summed up as follows:

• The only appraisal report required would be a summary drive-by report without an opinion of value. The appraiser’s objective is to certify that the property exists.

• Borrowers must adhere to a minimum credit score - perhaps 720, which is considered excellent.

• Borrowers must have verifiable income, through traditional means of tax returns, W2s and employment verification.

• Income must be sufficient to cover the loan requested, according to traditional guidelines.

• Cash out is not allowed.

• The borrowers’ purpose of the refinance must be any one or more of the following: lower the interest rate, lower the monthly payment by converting from a 15-year to a 30-year fixed-rate loan, or converting an adjustable rate to a fixed rate.

After more than 20 years in business, I can tell you that the vast majority of folks with good credit maintain their good credit throughout their lifetime. It seems to me that this plan will not only reward responsible homeowners and infuse millions into the struggling economy, but will also minimize the ultimate cost to the federal government. Very few homeowners who take advantage of such a program will actually go into default and require government assistance. Send this column to your congressman.

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

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