I wrote this article several months ago. I recently talked with a friend who is refinancing under the mortgage plan that Obama set up to help folks with underwater mortgages. My friend is underwater by about $10,000. He is refinancing a 6% mortgage with a 3% mortgage and will have lower payments. I am happy for him, but have no idea how this will help him with his underwater mortgage other than making his payments lower? It does solve a problem for lenders who get rid of the loan, maybe he wants to help the banks.
I have been reading about the mortgage deals Obama is proposing for folks whose home values are less than their mortgage balances. As I understand it, he wants to get lower rate financing for these folks that are current on their mortgages and would like a lower payment on their loans. I don’t understand how this will solve their problem of being underwater on their mortgage unless folks take the freed up cash and make principal payments on their loans to bring down the shortfall. That is the only way the shortfall problem will go away other than home values once again increasing. If we really want to get rid of the shortfalls, why don’t we offer refinancing at lower rates, but keep the payment the same. The result will be that principal will go down faster and soon the shortfall may be eliminated via repayment and hopefully appreciation. Then the home owners’ would be free to sell or move, whatever they want. A lower payment may make people feel better about their homes investment, but it won’t solve their problem. I don’t understand why we are so concerned about underwater mortgages anyway, other than making it difficult to move or trade homes. Most of our major expenditures that we finance go down in value much quicker than our debt on them; car, appliances, electronic toys etc all take a hit the day we buy them. I think we have been confused with the house bubble even as folks made and lost fortunes in the internet bubble. Maybe we should have bailed out all those internet investors too.