Can America refi its way out of the housing mess
An interesting post by Barry Ritholtz at The Big Picture got my attention. Barry dismissed the idea of changing the loan to value requirements for refinancing to stimulate the economy suggested by Morgan Stanley economist David Greenlaw because lowering the lending standards is what got us into this mess in the first place.
My two cents.
The government programs that have failed miserably thus far are focused on helping distressed "home owers" with modifications. If a home owner has kept up their payments and is probably paying their taxes as well, they are not only getting no help from the many government programs but are paying for their distressed neighbors too.
So why shouldn't they be able to refinance and get a lower rate and either save some money or spend their savings to stimulate the economy.
Because, more than likely, their home will not appraise.
But why should there be any need for an appraisal. The bank (or in the case of Barry's post, Fannie and Freddie) are valuing the property at X so even if the property is now worth Y, what's the difference if the borrower continues to make payments on time.
I am not suggesting that mortgages should be extended to 40 years or any principal reductions. And under no circumstances am I suggesting there should be any cash out refinancing.
Let's use a simple example. 30 year mortgage on a home for $200,000 and now worth $170,000. Interest rate, 6 percent. Payment not including taxes and insurance is $1200. Borrower owes $190,000. If the homeowner wanted to refinance with today's incredible interest rates of 4.375 percent (30 yr fixed), they couldn't because the home won't appraise for $190,000 but if you skipped the appraisal and allowed the borrower to refi the $190,000 that they currently owe, the new payment would be $948 or a savings to the borrower of approximately $250 per month.
What's wrong with that.
A penny for your thoughts.
Please note: this might work well in a reasonable real estate market such as Charleston but possibly not in the most distressed real estate markets like California, Florida, Phoenix and Las Vegas but it certainly seems better to me than most of the failed programs put forth thus far.