Boehner must live in the Sunniest part of OhioDuring President Obama‘s SOTU address he touched on something about making it easier for people to refinance their mortgages at the current bargain basement prices and today I’ve seen two or three articles about it.

I haven’t researched it (at all) but I’m assuming that this is some kind of after-the-fact reactionary federal government proposed “solution” to the housing crisis of the past few years, you know, an attempt to quell the number of foreclosures that dot the landscape.

But that’s where I lose the connection.

Refinancing at a lower rate (at best, 3 or 4 percent lower which, technically speaking, is nothing) doesn’t solve the foreclosure problem.

For instance, my newest neighbor moved in back in 2006 and paid around $275k for their home.

In general terms, it’s pretty much the same house as mine except that I only paid $141k for mine in 2002.

Following the housing “slump” our homes are currently only worth around $200k.

It’s not rocket science to come to the conclusion that my neighbors are underwater (they owe more than the house is worth) and are likely prime candidates to “walk away”.

The re-finance “solution” won’t ease their pain.

It’s not the interest rate on their mortgage to blame — it’s that they paid too much for their house.

So what’s the point of this government proposal again?

To make it easier for people who can’t afford homes in the first place…again?

It’s too soon for history to repeat itself.

This blog apparently is repeating itself…

Back in 2008 I asked, Are Home Values Important to the Economy?. That post was along the exact same line.

It was a better read, though…

I’ve lost my touch.

No, really…

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Full Disclosure: I freely admit that I benefited from the easy and available money back when I purchased my home with a tiny tiny tiny down payment.

Yes, mortgages were easy to come by and I’m fortunate enough to have rolled the dice, made a “wise” investment with the money loaned to me, and come out the other side a winner with a low rate, a low monthly payment, and a house worth more than double what I still owe.

3 COMMENTS

  1. I’m in your neighbor’s shoes. We bought in 2006 at the height of the market, paying 335 for a house in AZ that is now worth about 200. I disagree with your assesment of this plan that it is, “To make it easier for people who can’t afford homes in the first place…again?”

    We did pay too much, which sucks, but we can afford our home just fine. I am not a fan of government programs that enable people to buy things that they otherwise couldn’t afford, but I have to say that HARP is one that I’m going to try to take advantage of. The difference between HARP and other programs is that you do have to qualify using legitimate standards and it’s not encouraging people to buy things, just to keep what they already bought. It allows people who got stuck in underwater homes to refinance into these great rates like everyone else. Actually, that’s not entirely true – the rates are about 1% higher than prime. Still beats 6+ though!

    We have great credit scores, and could easily qualify for a 3 or 4% rate on a home worth more than what we paid for this one. However because I’m underwater, banks assume I’m going to bail and won’t refinance me. I have no intention of trying to get out of this house. I signed a contract agreeing to pay, and that is what I’m going to do. Dropping 2% will save us more than 5k per year in interest, money that I would love to use for other things like college accounts and pre-paying our 2nd mortgage.

    Anyways, that’s what it looks like on this side of the fence. Have a good night :)

  2. Okay — so it’s specifically directed towards folks like you, not people just looking to buy for the first time (they got their perk a couple of years ago with the tax credit thing). That makes me feel better.

    I just really hope the banks (or government?) “ignore” the underwater end of things only and still look at how able a person is to re-pay the loan. I don’t see my neighbors — or you — as a deadbeat. You should be able to refinance or even buy another house.

    A lot of other people just out of their foreclosed McMansions, well, they don’t deserve a break…

    I guess that’s where I was going — six figure loans should NEVER be as easy to get as they were for me. I don’t want to see them go back to how it was…so soon.

    But I also think that the interest rate change will make a minimal difference — you could refinance now from 6% to just shy of 4%.

    The difference in your payment will have little to do with a 2% interest change but a lot to do with extending the term to pay it back another 5 or six years so…that $5k savings per year in interest is pretty much all on paper, no? I could be way off…

    I do, however, think that realtors should stop saying “Location, location, location…” It’s really more about “Timing, timing, timing…”

  3. If you re-finance to a lower rate, one of two things should happen:
    1) You pay the same amount but more goes to principle than before. This means you will still be underwater but you’ll be moving faster toward getting back above water.
    2) You pay less. You still stay underwater longer but you have more money in your pocket that was before going to the house.

    It’s not perfect but what I think it does is it makes homeowners less inclined to just walk away. In the first case, it brings the light at the end of the tunnel into a faster moving view. In the second option, it might make it so staying in your home is less costly than renting.

    Both would ideally lead to a slowdown in foreclosures and indirectly slow or end the falling prices.

    The ‘best’ solution to restore equity is to just wipe out the balances of underwater homeowners. But they’ve said that they’re not going to do that. So, is this the next best thing? Perhaps. We’ll have to see.

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