Local homebuilders and mortgage brokers say they are intrigued by an Oregon senator's plan for the government to buy up to 8 million underwater mortgages and refinance them into lower rates. They also are leery of its efficacy.
Sen. Jeff Merkley, D-Ore., submitted a 31-page report detailing a plan in which the federal government would buy the overvalued mortgages from banks, reduce the principle for eligible borrowers and refinance the loan into a new Federal Housing Administration-backed mortgage.
"We are very encouraged that Sen. Merkley has recognized the extent of the damage that the housing crisis has caused in Oregon and nationally," the Home Builders Association of Jackson County Governmental Affairs Committee said in an email to the Mail Tribune. "The financial difficulty here in Southern Oregon, however, has been particularly severe since our local economy has been so closely tied to home construction."
Merkley proposed a Rebuilding American Homeownership Trust built by either the Federal Housing Administration, the Federal Home Loan Banks system or the Federal Reserve. The trust would sell bonds and use the funds to purchase mortgages from banks, credit unions and originators.
Under Merkley's proposal, borrowers who owed more than the value of their homes would have three refinance options within a three-year period:
- A 4 percent fixed-interest, 15-year mortgage. If the monthly payment were kept the same, the shorter term would allow borrowers to rebuild toward positive equity within three years.
- A standard 30-year, 5 percent fixed-rate mortgage, lowering monthly payments.
- Break the 30-year mortgage into a collateralized first mortgage for 95 percent of the property value and a mostly uncollateralized second mortgage for the balance of the loan. In that scenario, the trust could sell the first mortgage into the private market and put the remainder into a "soft second." No payments would be charged or interest accrued on the second for five years.
Merkley's plan gained support from the Obama administration Thursday when Treasury Secretary Timothy Geithner endorsed the idea during a Senate Banking Committee hearing.
"We share your view completely," Geithner told Merkley during the hearing. "As you know, the president has been very supportive of legislation in that context. ... It's not just a fairness question, but it would help reduce the remaining pressures that housing is putting on the economy as a whole."
The program is designed to pay its own way, without the use of new tax dollars. Merkley asked Geithner if pilot projects could be launched this year but wasn't given a clear answer by Geithner.
"We'd like to work with you on it," Geithner said. "The question is whether we can find legal authority and resources to test on a pilot basis."
One criticism of the plan is that it hits a narrow target area and those underwater homeowners still able to make payments have continued doing so, while those who can't already have lost their property. Others simply have refinanced to rates better than Merkley proposes.
John Mafrici of Park Place Mortgage in Medford said the range of interest rates being discussed is missing the mark.
"The 7 to 8 percent interest rates Sen. Merkley is talking about is not what we're seeing," Mafrici said. "We're seeing people who were struggling with 5 to 6 percent rates, who have refinanced into the 3 to 4 percent range."
Central Point builder Mark Knouff welcomed the proposal, even though he said it might be too little, too late.
"A 2 percent loan program four years ago would have helped a great deal; 4 percent now, maybe not so much," Knouff said. Nonetheless, the problem will get worse unless "something significant is done soon," he said.
Gary Whittle, president of American Building Co. in Medford, said he was encouraged the issue is being addressed on Capitol Hill.
"The problem is much bigger than most people realize and is getting worse," Whittle said. "Something significant needs to happen soon, and lenders must be given more incentive and flexibility to work with borrowers."
Reach Mail Tribune reporter Greg Stiles at 541-776-4463 or email email@example.com.