Treasury Secretary Timothy Geithner says he likes the design of a plan proposed by an Oregon senator to establish a temporary government-backed trust that would allow about 8 million underwater borrowers to refinance at a lower interest rate at no cost to taxpayers.
The plan, proposed by Sen. Jeff Merkley, D-Ore., would be available to borrowers current on their payments who meet basic underwriting criteria — regardless of whether their mortgages are currently guaranteed by the federal government.
The plan is designed to either lower monthly payments for underwater borrowers who owe more on their mortgages than their homes are worth or allow them to regain equity at a faster pace.
"Four years ago, the U.S. government acted quickly and boldly to rescue major financial institutions," Merkley said in a statement. "However, we have not done nearly enough for American families who are struggling with the downturn in the housing market."
Merkley said "millions of Americans are trapped in high-interest mortgages … and it’s a huge anchor on our economy. A bold solution to help these families refinance is the fastest way to get our economy back on track."
The plan calls for establishing a Rebuilding American Homeownership Trust through the Federal Housing Administration (FHA), Federal Home Loan Banks, or the Federal Reserve.
The trust would buy mortgages that meet the plan’s standards from private lenders with revenue from government bonds sold to investors. The program is expected to turn a profit for the U.S. Treasury over its lifetime due to a roughly 2 percent interest spread between the borrowing costs on the bonds and the interest charged to homeowners, according to the proposal.
Borrowers would have three years to refinance into one of three options:
- a 15-year mortgage with a 4 percent interest rate, which would allow borrowers to rebuild equity at a faster rate;
- a 30-year mortgage with a 5 percent interest rate, which would lower a borrower’s monthly payments; or
- a two-part mortgage with a first mortgage worth 95 percent of the home’s value and a "soft" second mortgage for the balance. The second mortgage would not accrue interest or require payments for five years, thereby lowering a borrower’s monthly payments.
While rising home prices helped more than 700,000 homeowners regain equity in their homes during first quarter, 11.4 million borrowers still owed more on their mortgage than their homes were worth, according to data aggregator CoreLogic. Because negative equity prevents homeowners from selling their homes, the available inventory of for-sale homes has seen double-digit declines this spring.
While restricted supply has shored up home prices, it has also constrained home sales, according to the National Association of Realtors.
In a statement, NAR said it "applauds and supports" Merkley’s proposal, calling it, "exactly the innovative approach that our nation must take to ensure a sustained housing recovery."
Merkley called for a pilot program to test the proposal immediately, which he said would not require legislative action from Congress.
He suggested state and federal foreclosure prevention funds could be used to fund the program — the federal Home Affordable Modification Program (HAMP), he noted, has used only $3.4 billion of the $29.9 billion allocated to it in the three years the program has been operational.
While current law prohibits using funds from HAMP and FHA’s Short Refinance Program to establish new programs, Merkley claims in his proposal that "there are many common elements" between those two programs and the proposed program, which could be considered a modification of the current programs.
At a Senate Banking Committee hearing Thursday, Treasury Secretary Timothy Geithner agreed to look into launching pilot programs to implement Merkley’s proposal, HousingWire reported.
"We like the way you designed it," Geithner told Merkley, who serves on the Senate Banking Committee. "It would help reduce the remaining pressures that housing has on the economy. It doesn’t leave the taxpayer to pay for it."
"I think the policy is very good," Geithner added. "We would like to work with you on it. The question is do we have legal authority and resources on it to launch pilots?"