But today, I'd like to present an idea that I think would be a rather obvious policy choice for the mortgage markets, a choice that I know will not be presented.
I would suggest that with the remaining subprime loans that are in the marketplace, that the government offer an "FHA Streamline" refinance to current subprime mortgage holders as well as Fannie and Freddie mortgage holders.
This gets around two of the primary problems in the current refinance market: 1) Loan To Values, 2) Debt to income.
LTVs are pretty much a universal issue with most properties looking to refinance currently. For example, let's say you purchased a home in 2006, and were extremely responsible and put 20% down on the purchase. At this point, you've probably got roughly a 100% LTV. In short, pretty much none of the homes that were purchased with even 20% down between the years of say mid-2005 through 2007 can refinance without more principal buydown from the borrower. That's a big problem.
Secondly, basically you have to assume that on any sub-prime or alt-A stated income loan, the borrower would not make the same income on a full-doc basis than they stated on their original stated income loan application. This is not to say that all state-income loans were "Liar loans", because frankly, the current underwriting guidelines are overly harsh against many categories of borrowers" self-employed, commission income, retired, mixed income (a combinaton of W2 and 1099). Underwriters are currently not allowing quite a bit of legitimate income, this is a major problem currently in our industry.
Anyway, allowing for FHA Streamline loans, basically a non-FHA to FHA streamline loan would eliminate both appraisals and income from the application. As long as you've got a clean mortgage payment history for the past 12 months, you get to refinance.
Rather than make this program mandatory for the servicing companies, make the program completely voluntary. The government could set up a reasonable amount that they would pay on each traunch of loans. Maybe $0.55 on the dollar for subprime, stated income, 100% LTV originated in June 2006, for example; $0.85 for alt-A, 100% LTV originated in January 2007. You could set up the amount of payout pricing by loan type, origination date, loan charachteristics etc. At the same time, on the borrower's side, have the amount of the new loan be less than the originaly principal amount but more than the payout to the loan servicers.
For example:
Original Mortgage underwritten in December 2006 for $350,000, 100% LTV, stated income, subprime.
Home is currently worth $250,000.
Pay the debt service provider $192,500 for the loan, if the borrower agrees to refinance. Allow the borrower to refinance say a $285,000 loan amount at an FHA 30 years fixed rate.
1) You provide the borrower with an opportunity to refinance at a reasonable rate and a reduce principal amount, although still more pricipal than the home is worth.
2) You allow the service provider, who probably bought this for roughly $0.35 when the investment bankers went under or when the investment bank had to make a distressed sale. So you're offering to provide a reasonably generous profit to the service provider, as provide a source of liquidity.
3) You create a profit margin for the taxpayer, if the loan is paid back over time.
There are clearly problems with this solution, but there are problems with every solution that is currently being discussed. This soultion would:
- be the cheapest and easiest to implement;
- would put the loans in government control, so that the government would then control the foreclosure process through HUD, which already has a system of dispensing foreclosed properties already in place;
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