Banks can't say no to borrowers who want to refinance their mortgages.
In short, that's what Shaun Donovan, secretary of the Department of Housing and Urban Development, said when asked by a reporter if he believed lenders were going to embrace the Federal Housing Administration refinance plan that President Barack Obama proposed Wednesday. The program would allow underwater borrowers to refinance privately owned mortgages into FHA-insured loans.
"The bank will have no ability to say no to homeowners. There is no way they could stop that loan from being refinanced," because in essence the homeowner is paying off the loan through the refinance, Donovan said during a press briefing Wednesday.
Duh! We know that.
But the question I have and I believe what the reporter at the press conference really asked Donovan was: What makes you think that lenders will refinance underwater loans just because the FHA will insure them?
The refi plan Obama proposed makes total sense -- in theory.
But I'm not sure it will work well in practice. Why? Take FHA loans as an example. The Federal Housing Administration allows lenders to give FHA-insured loans to borrowers who have minimum credit scores of 580. However, most lenders have their own internal rules that require a minimum score of 620. In theory, 580 is the minimum score. In practice, it's 620.
Not convinced? OK, take the previous version of HARP as another example. The Home Affordable Refinance Program allowed underwater borrowers to refinance their mortgages if they didn't owe more than 125 percent of the home's value. Still, most banks had an internal rule that set a 105 percent threshold and refused to lend up to 125 percent. HARP was revamped and that cap was removed to allow homeowners with Fannie and Freddie loans to refinance, regardless of how deeply underwater they are. It remains to be seen whether lenders will embrace the new HARP.
Lenders are not going to embrace the idea of refinancing underwater loans unless you give them a compelling incentive or simply force them to do it. FHA's willingness to insure these loans isn't a compelling incentive. Why? Because lenders don't have to take undue risks in order to get loans that are guaranteed by the FHA. They can get the same FHA guarantee by lending on homes that are not underwater.
Donovan says Obama urges Congress to approve his refi plan to "give families the choice to refinance … to put the power in the hands (of borrowers)."
Unfortunately, even if Congress approves the plan, the decision power would remain in the hands of lenders. They get to choose whether they are willing to refinance your mortgage or not. Obama's latest plan doesn't change that.
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