The Problem with Government Mortgage Refinancing Plans

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Illustration by Alexander Ho for TIME

Remember “Cash for Clunkers” — that stimulus program that got Americans to buy, by one estimate, 125,000 new cars? It cost $3 billion. Any guesses as to how much money is set aside for housing stimulus that remains unspent? According to an article about mortgage refinancing in The New York Times, a little more than $20 billion.

So it’s really tempting for industry observers to try to figure out how to spend that money to support the housing market and nudge along a recovery. The problem is that all parties involved have to play. If the support in question is a mortgage refinancing program, then it’s got to have the blessing of the banks who would administer it. And if you’ve ever talked to anybody who tried refinancing under Making Home Affordable, the administration’s first refinancing support program, that’s exactly what was missing.

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Consumers who tried for refinancings (under a program called HARP) or “modifications” (under a program called HAMP) complained that they didn’t know if they should be delinquent on their loans or not in order to be eligible; they often got conflicting advice from different mortgage and government professionals; and they faced calls for mountains of paperwork, during which they could never talk to the same bank staffer twice.

Here’s a typical example: On the Mortgage News Daily chat boards, there’s a woman whose refi is being held up because she can’t provide a K-1, an investment tax document, from 2005 — despite the fact that that investment club has been dormant since 2008. And she can’t find the K-1 because in 2005 she didn’t file it with her taxes in the first place!

I’ve been writing about HAMP for years now, and I’m sad to say, this isn’t an atypical story.

To move from the realm of anecdote to the realm of statistics, when HAMP was launched two-and-half years ago, the hope was to help more than 3 million homeowners; less than 1 million have actually received permanent modifications.

So yeah, let’s totally do more of this. (That was sarcasm.) Since this is a family column, I’m prohibited from using the words that actually come to mind when describing this morass.

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The other problem with the “refinancing” idea is a sort of twist on the law of conservation of energy. Just as matter can be neither created nor destroyed, lenders are pretty darn reluctant to wave a magic wand and reduce loan principal.

So what “refinancing” usually means is an increase in the “duration,” or term, of the loan. You make smaller payments to me now but you make them further into the future. The problem with that as a solution for borrowers is that the future always comes.

Going from a 6% loan to a 4% loan may seem like a great idea today (especially if your hours are being cut at work) but it sets you up for a tough time 35 years from now, when you may want to retire and your mortgage still isn’t paid off.

As someone who works in the real estate industry (I’m a sales and rental agent) I’m happy that our experts are working on a plan.

But I have to say, we need to go back to the drawing board on this one.