Sen. Jeff Merkley, D-Ore., submitted a new plan Tuesday for the government to buy up to 8 million underwater mortgages and refinance them into lower rates.
"There is no robust program that enables large numbers of families trapped in high- interest loans across America to refinance," Merkley writes in a paper detailing the plan. "The lack of such a program hurts our families, our communities, and our economy. That is unacceptable, especially because such a program is entirely feasible."
Merkley describes how a Rebuilding American Homeownership Trust could be built by either the Federal Housing Administration, the Federal Home Loan Banks system or the Federal Reserve. The RAH Trust would sell bonds and use the funds to purchase mortgages from banks, credit unions and originators.
Borrowers of these home loans would then be given three choices to refinance within three years.
A homeowner could choose a 4% fixed-interest 15-year mortgage. If the monthly payment were kept the same, the shorter term would allow the borrower to rebuild toward positive equity within three years.
A standard 30-year fixed-rate mortgage could be provided as well with lower monthly payments.
Or the borrower could break the 30-year mortgage into a collateralized first mortgage for 95% of the property value and a mostly uncollateralized second mortgage for the balance of the loan.
The RAH Trust could sell the first mortgage into the private market and structure the uncollateralized part into a "soft second." No payments would be charged on the soft second and no interest will accrue for five years.
Merkley details how each of the three options would affect the balance over time (click the graph below to expand).
According to the plan, the RAH Trust would profit off the difference between the cost of funds on the bonds and the interest rates charged to borrowers.
There would be other rules put in place. No short sales will be considered in the first four years. Borrowers would pay mortgage insurance until they reach an 80% loan-to-value ratio.
Eligible borrowers would have to be current on their mortgage. Many of the estimated 11 million underwater homeowners are.
Merkley said in the paper there could be other sources of revenue such as the Hardest Hit Fund or money unspent on underwhelming programs of the past.
The Federal Housing Finance Agency recently expanded the Home Affordable Refinance Program, which has swept hundreds of thousands of more Fannie Mae and Freddie Mac borrowers into lower-interest loans. But the boom could slow by September as lenders reach capacity.
Other programs such as HAMP, FHA Short Refi fell short of original estimates, and legislation to provide more refinancing opportunity for underwater borrowers remain stalled in Congress.
"This program is designed to break through many of the obstacles that have bedeviled earlier efforts to fix our housing market," Merkley writes in the paper. "By utilizing competing lenders, the program would end the voluntary, sole-source system that has bogged down mortgage modifications."