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Refinancing Mortgages Without a Credit Check

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On my drive into work last week, there was a segment on NPR’s Morning Edition that reviewed different ideas to spur economic recovery.  A particularly interesting plan came from Christopher Mayer, an economist at Columbia University: homeowners with government-backed mortgages through Fannie Mae or Freddie Mac (the overwhelming number of mortgages in the U.S. today) should be able to refinance their homes at lower interest rates, regardless of their credit score.

The idea as outlined is pretty straightforward:

  • Fannie Mae and Freddie Mac would identify mortgage holders who are current on their mortgage (and have been so for an unspecified time period).
  • They would then identify those current mortgage holders whose interest rate is higher than the prevailing low rates.  As of today, that is around 3.8% for a 30-year fixed loan for FICO scores of 760+ according to the publishing company Informa.
  • These selected consumers would receive a letter from Fannie Mae or Freddie Mac offering them a streamlined opportunity to refinance their mortgage at a lower rate.
  • The consumer would contact their current mortgage servicer (who is technically servicing the loan on behalf of either Fannie Mae or Freddie Mac) to orchestrate the refinance.
  • The refinance process would be streamlined (and have lower fees than a standard refinance) as Fannie Mae and Freddie Mac are already underwriting and guaranteeing the mortgage. There would be no need to go through normal underwriting procedures (pulling a new credit report, getting an appraisal, verifying income, etc.).

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This is an interesting idea that has the potential to help thousands of current homeowners obtain a lower monthly mortgage payment, which could help reduce the likelihood of future foreclosure by making the monthly payment lower. As an added benefit, it places more disposable income in the hands of consumers which could be used to pay down other debt and/or increase spend on other goods and services that could have positive macroeconomic impact.

The table below, which I’ve calculated using data available from myfico.com, illustrates potential impacts from such a program, which could infuse several billion dollars of money into the economy on an annual basis.

# mortgage holders targeted for program 1,000,000
# who take advantage of program 750,000
Average current mortgage balance to be refinanced $200,000
Average current interest rate being paid & average monthly payment (principle & interest on 30-yr fixed mortgage) 7%                                                                    $1,331
Average refinance interest rate & average monthly payment (principle & interest on 30-yr fixed mortgage) 4%                                                                   $955
Amount of savings on the monthly mortgage payment $376
Total monthly savings if 750,000 mortgage holders took advantage of the program $282 Million
Total annual savings 750,000 mortgage holders took advantage of the program $3.84 Billion

Note, the proposed idea assumes there are a substantial number of mortgage holders who have good payment history who have not already taken advantage of lower interest rates through refinancing. These could be consumers who are paying as agreed on their mortgage, but tend to have high credit card debt or missed payment history on non-mortgage obligations, which prevents their credit score from being in the higher tiers that allow them to be eligible for the lower rates.

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It also (at least initially) excludes that population segment who would probably benefit the most from such a reduction in the monthly mortgage payment amount—namely those who are currently late or have a recent history of missed payments on their mortgage obligations.

While the proposed plan appears good for those targeted mortgage holders, there are other items that would need serious evaluation and resolution. Bondholders would likely take a hit as the mortgage holder would now be paying less interest to the bondholders and negatively impacting their return.  Mr. Mayer notes that as an issue that needs attention, and he also points out there would be impact on the government budget deficit.

Given the current state of the economy—the mortgage sector, specifically—outside-the-box ideas like that presented by Mr. Mayer should, at a minimum, be vetted and debated by those leaders looking for ways to get the U.S. economy back on track.

[Related article: Fannie and Freddie to World: Uh, You Guys Got Any Better Ideas?]

Image: nikcname, via Flickr.com

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