As the Senate continues work on its $15 billion mortgage relief bill next week, states will be keeping a close eye on one measure: it would authorize them to issue an additional $10 billion of tax-exempt housing bonds to fund mortgage programs.
Up until now, efforts by states to help distressed homeowners refinance have had negligible results. The new measure would give them additional tools. Still it's unlikely to help them refinance large numbers of borrowers with subprime mortgages.
States currently can sell tax-exempt bonds to finance mortgage assistance to first-time home buyers and those who buy homes located in economically disadvantaged areas. The proposed legislation would allow states to use these bonds to help homeowners refinance as well and allow states to issue more tax exempt bonds to finance their mortgage programs. The additional funds would be allocated on a per capita basis.
Some states are already trying to help. In an effort to stem rising foreclosures, nine states -- including Ohio, Maryland, Illinois and New York -- have started or are preparing to start refinance programs aimed at subprime borrowers facing interest-rate resets, according to the National Governors Association.
The problem, however, is that the refinance programs are turning out to be far less effective than officials had hoped, in part because borrowers seeking state help tend to be in such bad financial shape they don't qualify. Healthier borrowers are bypassing the state programs and seeking other options to refinance their subprime loans, such as the Federal Housing Administration, which has already refinanced 145,000 mortgages in the past seven months.
"Our experience, like the experience of other states, is that refinance programs have limited success," says Philip Lentz, a senior vice president with the State of New York Mortgage Agency, which has refinanced just three borrowers since its "Keep the Dream" program, aimed at those with subprime mortgages, began accepting applications in September; it has another 17 loans in the pipeline. The legislation "will allow us to be more flexible," Mr. Lentz says. But it won't, for instance, make it possible to refinance borrowers whose loans are underwater.
Other state officials say the measure would lower their costs, making the loans they offer a more attractive alternative. They say it also would allow them to make more loans to first-time homebuyers and help homeowners who aren't in serious financial trouble refinance.
"It adds another tool for us," says Clarence J. Snuggs, deputy secretary of the Maryland Department of Housing and Community Development. "But I don't think refinancing is going to resolve the lion's share" of mortgage problems, he adds. "Restructuring [loans] is going to the place where most people get relief."
The state bond measure before Congress isn't likely to address one of the fundamental problems for the refinance programs: many borrowers don't qualify because they have missed too many payments or owe more than their home is worth. Maryland, for instance, has closed 18 loans since its "Lifeline" refinance program was announced in June and has another 17 in the pipeline.
The Ohio Housing Finance Agency tried to boost participation in its subprime refinance program by relaxing underwriting guidelines, and ran an eight-week radio advertising campaign to boost awareness. Still, the program has refinanced just 37 borrowers.
Many borrowers "have credit problems that go beyond our expanded criteria," says Cindy Flaherty, director of special projects.
By: Ruth Simon
Wall Street Journal; April 5, 2008
