Mortgage rates are at their lowest level in decades. Yet, millions of homeowners cannot refinance. Why is not more done to help homeowners refinance?
Refinancing could save homeowners hundreds or thousands of dollars a month, yet they cannot qualify. These savings could help millions of struggling homeowners regain financial stability and could be a spur to our stagnant economy.
Their credit scores, however, bar them from refinancing. Banks and lenders deny many homeowners their chance to refinance (and for some their only chance to stay in their homes) and not based on the homeowner’s ability to pay his or her mortgage but upon an unreliable standard, the homeowner’s credit score..
Sadly, most of the decisions begin, and many times end, with a look at the homeowners credit score. If the borrower’s score falls below 620, lenders will not likely lend to a person or will only lend subprime mortgages (remember that dirty term) that carry much higher interest rates which defeat the purpose of refinancing.
The 620 line in the sand, partly drawn because the FHA, a federal agency, raised the minimum credit score for a person to be eligible for FHA or VA loans from 580 to 620. This, immediately prevents nearly one-third of Americans from refinancing and taking advantage of the historical low rates.
The federal government knows many of these people live in houses whose mortgages greatly exceed the value of their home because they bought when house prices were astronomically high. The federal government encourages people to stay in their homes and pay their mortgages. Yet, the federal government stands aside as banks and lenders refuse to refinance struggling homeowners’ mortgages to rates which would ease their difficulties and make it easier for them to stay in their homes..
Banks and lenders, of course, need some assurance that the person refinancing will be able to pay his mortgage. However, if a person has regularly paid the mortgage at a higher rate, it makes sense to conclude he or she would continue to pay at a lower rate.
Instead, banks and lenders use their credit card score. In many instances, a credit score does not accurately reflect a person’s credit history and does not reliably reflect the mortgage default risk.
A 2004 study showed that 80% of credit reports contain errors and 25% contain errors that could cause a serious dent in a person financing. No significant reports have demonstrated any improvement in these inaccuracies in the past six years. Especially now, during these hard times when many people with good credit histories are falling behind a month or two in payments causing their credit scores to plunge, we should not rely on credit scores for such an important role in rebuilding the economy.
We should not prevent up to one-third of Americans from reducing their mortgage payments to a level they can afford because lenders do not want to get away from a broken system that relies on a credit report and a credit score that may have no correlation to the ability to service ar mortgage going forward.
The federal government must step in and act:
First, the federal government must make refinancing contingent on a person’s payment history on the mortgage. On-time payments throughout the life of the mortgage should mean automatic approval of a refinancing at the best rates. Not only is it incentive to pay on time, the lender is not taking on any more risk but actually reducing its exposure.
Second, if the homeowner can bring a defaulted loan current, approval of a refinancing should also be automatic. The homeowner is than encouraged to become current and the lender becomes more secure because the homeowner becomes current and should be more capable of making the lower payments for the remainder of the term of the loan.
The government has done much to help the banks. It is time for the government to insist that the banks help taxpaying homeowners. Everyone benefits when people who want to stay in their home can remain there. Let’s make it possible for them. Let’s act now.