Why Not Let People Who Are Underwater With Their Mortgage Refinance

Real Estate Agent with Urban Utah Homes & Estates

I have been asking myself this question for some time now and still cannot think of any reason, why banks can not let people who are underwater with their mortgage refinance their loan. I don't mean the people who cannot pay or are not paying their mortgage, I am talking about people who pay their mortgage every month, but would dearly love to refinance into today's low rates. According to a CNBC report currently 23% of all mortgages are underwater, so the potential for refinancing is quite considerable.

Now obviously there would have to be some restrictions, and rules.

1. The borrower must refinance with the same mortgage company where they currently have their loan. After all banks are unlikely to want to take on other banks underwater loans, and I can't blame them for that.
2. The borrower cannot refinance for more than their current loan amount.
3. The bank must offer the same interest rates regardless of if the customer is underwater or not (obviously credit score etc still comes into play).

If we did let people refinance, what would be the benefits? As far I can see it would have two major benefits.

1. Free up extra money for the consumer, which would be an immediate stimulus for the U.S. economy.
2. Provide more incentive/make it easier for people to stay in their homes, reducing the number of short sales and foreclosures.

On the down side (if there is one), the extra stimulus could potentially be too much, driving up inflation too fast, and overheating the economy (although somehow I doubt it).

Now obviously this idea will not be popular with banks, but after all that has happened maybe the banks need to give a little bit back to society.

Article written by Mark Bird. You can find the original post Allowing Underwater Mortgages to Refinance on my Salt Lake Real Estate Blog.


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Ryan Frost
Compass Lending Solutions, LLC - Draper, UT

I agree with you for the most part. I think borrower's should be able to refinance with the lender who can get them the best rate. Fannie Mae and Freddie Mac own the mortgage in most cases no matter who services the loan, so if they say they will accept them, the borrower should be able to shop around for the best service and rate. 

Apr 08, 2011 07:02 AM #1
John Saari
Worcester, MA
"The Mortgage Buddy"

Borrowers are able to refinance if hey are upside down. Fannie and Freddie have an expanded guidline program and FHA has a Streamline program that allows current FHA home owner's refinance without a new appraisal.

Apr 08, 2011 07:04 AM #2
Bill Gillhespy
16 Sunview Blvd - Fort Myers Beach, FL
Fort Myers Beach Realtor, Fort Myers Beach Agent - Homes & Condos

Hi Trela,  Your suggestion makes way too much sense !  LOL  Yes, the banks would probably not buy into this idea.  Have a terrific weekend !

Apr 08, 2011 07:10 AM #3
Justin Coleman
Fairway Independent Mortgage Corp - Salt Lake City, UT

I agree wholy with you. John, not all people are able to refinance their mortgage regardless of the Fannnie/Freddie guidelines. Take a guy who has a Freddie Mac insured loan but has mortgage insurance on the property and his refinance loan to value is 102%. This is acceptable by Freddie Mac under the Refinance Relief program....but there is not one single investor out there that will buy the loan. I have looked far and wide and have found no one. Help for some but not all.

Apr 16, 2011 01:59 AM #4
Rosanne Fett
FHA home loan, VA home loan, zero down home loan - Dallas, TX
NMLS #205558 - Home Loan Expert, Jumbo Home Loan, USDA

I agree with Justin. There are a number of "streamline" refinance programs out there, but the investors have no appetite for them so lenders cannot offer them.  Even the FHA streamline refinance requires an appraisal if you are rolling in closing costs. In Texas this can amount to about $6000 or more since you have to set up an escrow account, and most people just do not have that much cash laying around, so there truly are not a lot of options for refinancing.  Yes, I do agree that it would make some sense, but considering the ways loans are sold, it is not easily workable.

May 04, 2011 08:19 AM #5

What realy sucks about having an underwater mortgage is having it through an bank who does not belong to fannie may or Freddie mac.  In which case not being able to take advantage of the govermant programs that are available.

I have my mortgage through HSBC and they are not willing to help in any way at all!  they just want thier money!  All i want is to refinance and get away from HSBC!!!!


Jun 06, 2011 08:16 AM #6
David A. Weaver
Peoples Bank & Trust Co. - Scottsdale, AZ
24 years helping folks finance their dreams.

Part of the problem is that the lenders are not real excited about taking a hit on their returns from a borrower who is making their payment on time.  Would you?  I'm not saying its not the right thing to do to help fix the mess.  The greed of the lending institutions is partially to blame for this mess and they have made a boat load of profit already.  It will literally take an act of congress to make this happen unfortunately.

Jun 08, 2011 02:24 PM #7
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Trela Bird

Realtor, Salt Lake City Utah
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