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The idea as outlined is pretty straightforward:
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This is an interesting idea that has the potential to help thousands of current homeowners obtain a lower monthly mortgage payment, which could help reduce the likelihood of future foreclosure by making the monthly payment lower. As an added benefit, it places more disposable income in the hands of consumers which could be used to pay down other debt and/or increase spend on other goods and services that could have positive macroeconomic impact.
The table below, which I’ve calculated using data available from myfico.com, illustrates potential impacts from such a program, which could infuse several billion dollars of money into the economy on an annual basis.
# mortgage holders targeted for program | 1,000,000 |
# who take advantage of program | 750,000 |
Average current mortgage balance to be refinanced | $200,000 |
Average current interest rate being paid & average monthly payment (principle & interest on 30-yr fixed mortgage) | 7%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $1,331 |
Average refinance interest rate & average monthly payment (principle & interest on 30-yr fixed mortgage) | 4%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $955 |
Amount of savings on the monthly mortgage payment | $376 |
Total monthly savings if 750,000 mortgage holders took advantage of the program | $282 Million |
Total annual savings 750,000 mortgage holders took advantage of the program | $3.84 Billion |
Note, the proposed idea assumes there are a substantial number of mortgage holders who have good payment history who have not already taken advantage of lower interest rates through refinancing. These could be consumers who are paying as agreed on their mortgage, but tend to have high credit card debt or missed payment history on non-mortgage obligations, which prevents their credit score from being in the higher tiers that allow them to be eligible for the lower rates.
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It also (at least initially) excludes that population segment who would probably benefit the most from such a reduction in the monthly mortgage payment amount—namely those who are currently late or have a recent history of missed payments on their mortgage obligations.
While the proposed plan appears good for those targeted mortgage holders, there are other items that would need serious evaluation and resolution. Bondholders would likely take a hit as the mortgage holder would now be paying less interest to the bondholders and negatively impacting their return. Mr. Mayer notes that as an issue that needs attention, and he also points out there would be impact on the government budget deficit.
Given the current state of the economy—the mortgage sector, specifically—outside-the-box ideas like that presented by Mr. Mayer should, at a minimum, be vetted and debated by those leaders looking for ways to get the U.S. economy back on track.
[Related article: Fannie and Freddie to World: Uh, You Guys Got Any Better Ideas?]
Image: nikcname, via Flickr.com
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