Mortgage Refinancing Plans Gain New Interest in Congress and Treasury

The federal government is looking for ways to help homeowners who are in danger of being affected by the foreclosure crisis. What are some of the plans being discussed and how much money is involved in some of these plans?

There has been renewed interest in the Treasury and in Congress to offer help for troubled home owners since the President’s State of the Union Address last year. There are an estimated 11 million homeowners who are underwater on their homes and fewer than two million of those borrowers took advantage of the Home Affordable Refinancing Program, or HARP, since it was introduced in 2009. Earlier this month, both Congress and the US Treasury have taken action to advance those plans that have been discussed in recent years.

Congressman Merkley’s Plan
One member of Congress – Jeff Merkley (D-Oregon) – is working on introducing a bill that would either guarantee or purchase refinanced mortgages through a federal trust. Merkley outlined the bill last year and in his proposal, the federal trust that would get set up would give financial relief to mortgage borrowers who had privately held loans. The trust would also be set up with a committee from one of the housing agencies in Congress to oversee where the money gets spent.

Congressmen Merkley’s plan would require that homeowners be current on their payments in order to qualify and hence offers help for nearly one million borrows who would qualify under the guidelines.

US Treasury’s Plan
In addition to Merkley’s plan, the US Treasury Department is also working on a program that would start in Oregon to see how it works. This program would purchase mortgages from private securities by using federal housing money. The interest rates would then be modified which would help borrowers lower their payments and overall principle balance. If the program is implemented and it works in Oregon, it could be used as a model for other states in the country.

TARP Funding
Another potential plan for helping troubled homeowners would use more than $7 billion of US Treasury funds. These funds would be used to help homeowners avoid foreclosure in some of the states that have been hardest hit by the housing crisis. Dubbed the Hardest Hit Fund, the money that would be used for this program would come from the Troubled Asset Relief Program, or TARP. It would help homeowners in 18 states eventually, but that is only if it works effectively in Oregon, where the pilot program will be installed.

If the TARP plan is implemented in Oregon, it will begin in one county and it will start with 50 mortgage borrowers at first. Money from the TARP fund have already been tapped by the 18 hardest hit states, but it has been fairly slow in getting the word out about the money. Less than $2 billion has been used of the fund so far. The goal, however, is to disburse all of the money by 2017, when the program actually expires.

These are the some of the major plans being discussed and proposed in Congress and throughout the upper echelons of the government. Which one do you think would work the best?

Are you able to refinance?  Find the best mortgage refinance rates where you live.

It Is Not One Size Fits All - The Pros and Cons of Paying Off Your Mortgage Early

The decision whether to pay down, or entirely pay off your mortgage earlier, is largely dependent on your personal economic situation and confort level with alternative ways to deploy your capital safely.

How to manage housing debt is often the single biggest financial decision a person has to make. For those with the luxury to pay off their debt, the question is whether doing so is a wide decision. Although widely discussed, the President and Congress have not yet eliminated the mortgage interest deduction. Is paying off your mortgage early a good idea? 

Pros

  • Paying of a mortgage early reduces the associated interest cost of a loan. On a 30 year fixed rate loan of $300,000 at 4%, the interest cost over the life of the loan is $177,000. That is over 50% of the original loan value. And because it’s a reduction on spending, the savings are equivalent to getting a guaranteed tax free return.
  • An early payoff will increase the value of home equity.  The amount of equity the homeowner possesses will increase which can then be used as a fallback source of capital in tough times.  Given that most retirees live on a fixed income budget, simultaneously lowering monthly expenses and having a source of readily accessible funds should the need arise is a powerful combination. 
  • Peace of mind. Another, less easily quantifiable benefit to paying off a mortgage ahead of time is the psychological lift that one gets from being without such a burdensome debt load.  Particularly in these difficult economic times, where having any debt has become an anathema, this alleviation of a major source of potential concern cannot be easily dismissed.  

Cons

  • You will be losing a tax refund benefit. Assuming that the mortgage interest deduction is not eliminated in future tax and spending negotiations by the Federal government, homeowners receive a significant tax benefit from holding a mortgage. The tax benefit varies depending on how far along you are in your mortgage. Because fixed rate loans are structured so that interest is paid in the early years of the loan, the tax benefit is greatest during this time period. In the later years of the loan, the interest deduction decreases significantly, because the interest has already been paid.

 

30 Year Mortgage Interest Savings

Year

Payment

Interest

Tax Savings @ marginal rate of 25%

1

$17,187

$11,904

$2,976

10

$17,187

$9,619

$2,405

25

$17,187

$7,947

$1,987

 

  • Opportunity Cost. The excess capital that would have been otherwise employed in paying off the mortgage can, instead, be used for any number of other things, such as paying off higher interest rate debt, like credit cards, or accumulating savings to hedge against future emergencies. Maintaining sufficient liquidity to deal with the unexpected developments of life is a wise and safe decision.  These funds can also be invested in securities, like equities, that traditionally have a much higher return than could be expected from the savings generated off the early retirement of a mortgage loan.  In today’s low interest rate environment, finding investments with lower risk profiles than equities that also provide attractive returns is difficult.
  • Loss of capital. This is similar to opportunity cost but subtly difference. The cash that you use to pay off a mortgage is now tied into your house. Pulling it out via a home equity loan or by refinancing is not always a sure thing. The cash is no longer readily available. 

In the end, the decision on whether or not to pay off a mortgage loan can be reduced to a formula.

If the Real cost of mortgage (Future Payments + Future Interest Cost –Deduction Benefits) > Interest on Other Investments + Peace of Mind.

Then you should pay off the mortgage.

If the Real Cost of a Mortgage is less than the interest you can earn on other investments plus peace of mind, then pay off the mortgage. 

The Improving Housing Market - Should You Buy Now?

Is the housing market in a definite upswing nationally? If you have held off buying a home, is now the time to act before prices go much higher?

Over the past year housing market observers of various stripes –analysts, economists, professional money managers and real estate professionals- have all cautiously noted what appeared to be a nascent housing recovery, one broad based geographically.  Robust improvements in housing starts numbers over the past several months have been significant enough that the adjective nascent may no longer be applicable.  According to the Wall Street Journal, a housing start is defined as the beginning of excavation of the foundation for a construction intended primarily as a residential building. Housing starts hit 894,000 in October, exceeding analysts’ expectations by more than 50,000.  This continues a trend going back a number of months of strong, and at times vigorous, increases in residential construction throughout the country, with September 2012 housing starts showing a 34.8% year-over-year increase.  These numbers, among others, indicate that there is a strong, sustained recovery within the housing market that can be projected with some confidence into the near future.

This conclusion is buttressed by a broader index compiled by Fannie Mae called the National Housing Survey, conducted on a monthly basis in an effort to assess attitudes toward owning and renting a home, mortgage rates, homeownership distress, the economy, household finances, and overall consumer confidence.  Despite the uncertainty surrounding the Fiscal Cliff, this survey illustrates increasingly strong consumer confidence.   According to Doug Duncan, senior vice president and chief economist of Fannie Mae, “Consumer attitudes toward both the economy and the housing market continue to gather momentum, with many of our 11 key National Housing Survey indicators at or near their two-and-a-half-year highs.”

In spite of the promising data, Ben Bernanke, chairman of the Federal Reserve, warned in mid-November that the housing market is "far from being out of the woods," and blamed, in part, overly tight lending standards. He termed these standards as an appropriate response to the housing crisis, but stressed that with the crisis in the past, banks now need to be willing to lend to a broader base of customers than they have during the previous four years, saying that “…overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery."  Bernanke emphasized that the Federal Reserve would continue doing everything within its mandate to help the recovery including the continuation of the ongoing third round of quantitative easing or QE III that is currently engaged in buying $40 billion worth of mortgage backed securities (MBS) every month.

Others were more specific in their critique of the housing market numbers of recent months, pointing out that the housing start levels of October, while representing the highest totals in four years, were similar to levels during the recessions of 1981 and 1991 and remain 60% below the housing start numbers of January 2006.  Additionally, concern was voiced regarding the primary driver of the spike in housing start totals, the initiation of construction of multifamily homes intended primarily as rentals.  Typically these types of structures are owned by investors, not by new home buyers, and while a growth in housing construction cannot be construed as anything but positive, it does support the belief that consumers are still more focused on rentals than on purchases; the number of multifamily housing starts are up 63% year over year, while the number of single family housing starts, homes that are typically purchased, not rented, are flat over the same time period.  Posited reasons for these trends include the still weak economic recovery, the struggling jobs market, uncertainty over future fiscal policy and the possibility that mortgage interest rate deductions will be eliminated as part of the Fiscal Cliff negotiations.

So how can consumers and investors take advantage of the current context?  If you are well positioned enough financially to qualify for a mortgage in this restricted lending environment, buying a home would represent an ideal investment.  With consumer confidence on the rise, the volume of real estate purchases should increase.  This, in turn, should lead to a hike in interest rates due to the increased demand for mortgages.  This rise in interest rates will likely be mitigated, however, by the Federal Reserve’s stated intention to keep rates artificially low via the deployment of open market operations through the end of 2014.  This leaves a window of approximately two years where home buyers or investors should be able to take advantage of lower rates with which to finance their purchase.

Find and compare mortgage rates where you are looking to buy.