- - Thursday, September 1, 2011

At the Federal Reserve’s economic summit in Jackson Hole, Wyo., last week, Chairman Ben S. Bernanke decided not to reveal the Fed’s plans to stimulate the struggling economy.

When inflation is not considered a threat, it typically lowers the federal funds rate, which is the interest rate banks charge each other for overnight funds. Other short-term rates often follow, making borrowing cheaper and providing a stimulus to the economy.

The problem is that long-term interest rates, such as fixed-rate mortgages, are determined by market forces. They will not necessarily follow the Fed-controlled federal funds rate.

Mr. Bernanke reiterated his belief that the lackluster housing market is a big factor in the current disappointing economic recovery. While mortgage rates have, indeed, plunged over the past couple of weeks, Mr. Bernanke said in a recent speech that the Fed would wait until it meets late this month to discuss options that would help lower rates even more.

Perhaps what came out of the summit that may be more important is that many economists support an easing of the current underwriting standards that are preventing so many homeowners from lowering their interest rate. This is something I have complained about many times in this column in recent months.

While my phone is ringing off the hook and my loan-application pipeline is full, many borrowers who are perfectly creditworthy cannot refinance because their situation doesn’t fit the parameters set forth by the mortgage giants Fannie Mae and Freddie Mac.

I was never an advocate of the loose credit standards and the sub-prime-loan push that created the mess we are in now, but the overreaction that caused the existing credit crunch is just that — an overreaction.

Here are a couple of examples.

A retired couple has $800,000 cash in the bank. They have a $250,000 mortgage secured against their home, which is worth $500,000. They have no other debt. They have perfect credit and want to refinance their existing 6 percent rate down to 4.50 percent. Sounds like a perfect deal. Tons of money, great savers, huge equity and perfect credit.

Guess what? Fannie and Freddie won’t take this loan because these folks only have Social Security as an income stream. According to the mortgage giants, all applicants must demonstrate enough income to meet a certain debt-to-income ratio. Their Social Security income doesn’t provide enough to meet that ratio.

The fact that they have $800,000 cash, equivalent to about 13 years of the annual income needed to qualify, already earned and in the bank, is of no importance. It’s simply asinine.

Another group of homeowners who have been unable to refinance are those who have great credit, income and savings but have lost value in their homes because of the decline in property values. Because these folks no longer meet Fannie and Freddie’s loan-to-value requirements, they’re ineligible for a refinance and are stuck paying a higher rate.

Again, this makes no sense. All creditworthy homeowners should have the opportunity to lower their rate, which ultimately would help stimulate the economy.

Mr. Bernanke and the Federal Reserve have made great efforts to push down long-term interest rates in order to stimulate borrowing and jump-start the economy. And they have been successful.

But if the various underwriting policies prevent millions of folks from taking advantage of the Fed’s efforts, the economy will go nowhere.

It’s analogous to creating a drinking fountain intended to hydrate millions of thirsty children and putting the fountain too high off the ground for them to reach it.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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