Oregon's Senator Jeff Merkley today offered a new plan to tackle one of the most persistent challenges to the sputtering economy: the massive number of Americans who owe more on their mortgages than their homes are now worth. In a white paper containing the proposal, called "The 4% Mortgage: Rebuilding American Homeownership," Merkley laid out a plan to allow underwater homeowners who are current on their mortgages to refinance to a lower interest rate. Merkley announced the plan on YouTube, Twitter and Facebook earlier this morning.
"Four years ago, the U.S. government acted quickly and boldly to rescue major financial institutions. However, we have not done not nearly enough for American families who are struggling with the downturn in the housing market," said Merkley. "There are millions of Americans trapped in high-interest mortgages, and that's not just bad for them, it's bad for neighborhoods hit by foreclosures and it's a huge anchor on our economy. A bold solution to help these families refinance is the fastest way to get our economy back on track."
Merkley's plan, which would not require taxpayer dollars but does anticipate the federal government selling bonds to investors to raise funds, is projected to turn a profit over its lifetime, according to models and stress-tests of the underlying assumptions. The Senator, who serves on the Senate Banking Committee and was once the executive director of Habitat for Humanity in Portland, spent over six months developing the proposal and consulting with experts.
"America's economic recovery is being held back by $700 billion in negative equity in the housing market," said Dr. Joseph Stiglitz, Professor of Economics, Columbia University. "Millions of homeowners are unable to refinance, because they are underwater on their mortgage and their loan does not carry a government guarantee. Senator Merkley's broad refinance proposal would allow these families to refinance into loans with a lower interest rate, freeing consumer resources to be spent on other important needs, or allowing the homeowner to rebuild equity more quickly. If adopted, this proposal would help to stabilize the housing market, create new jobs, and boost our overall economy."
"Senator Merkley's plan is a creative and bold effort to address the serious economic threat posed by millions of underwater homeowners," said Mark Zandi, Chief Economist, Moody's Analytics. "With so many underwater, odds remain uncomfortably high that the housing market and broader economy will continue to struggle. Previous attempts to solve this problem have fallen well short. Senator Merkley's plan is an ambitious one, and should be carefully considered."
Over one-fifth of American homeowners are currently underwater. They are therefore unable to take advantage of historically low mortgage rates and are at much greater risk of default and foreclosure. Merkley's plan would create a new, temporary government-backed trust to purchase mortgages issued by private lenders that meet the program's criteria. After refinancing, average underwater homeowners would, depending on the option they chose, see their monthly payment drop sharply or dramatically cut the amount of time before they begin building positive equity in their home.
In the plan, Merkley calls for the plan to be piloted immediately, a step that could be taken without new legislation from Congress. The proposal envisions a role for the Federal Reserve, Federal Housing Administration, or other agency to create the new trust.
The National Association of REALTORS® announced its support for Merkley's efforts to help repair the dream of homeownership in America: "Senator Merkley's proposal would develop a trust to purchase mortgages from loan originators and investors to offer refinance tools that either help homeowners rebuild equity quicker, lower their monthly payments, or ease the payment burden on severely underwater mortgages," said 2012 NAR President Moe Veissi. "That is exactly the innovative approach that our nation must take to ensure a sustained housing recovery."