The Federal Reserve released a report last week claiming that 2.3 million homeowners could have refinanced their homes last year if lending standards weren’t so stringent.
With the Fed launching “operation twist” last week, a program to replace short dated treasuries on the Fed’s balance sheet with longer dated one’s in an attempt to push down long term interest rates, the Fed is doing everything it can to get every last one of us to refinance.
The problem isn’t interest rates though – its that nearly 11 million homeowners are underwater on their homes – in other words, they owe more on their current mortgage than the home is worth. And banks won’t refinance a mortgage that’s underwater. There is, however, a Federal Housing Finance Agency program called HARP (Home Affordable Refinance Program) that is supposed to help homeowners who are up to 20% underwater refinance their mortgages. To date only 838,000 homeowners have taken part in the program – a far cry from the 11 million homeowners who the Fed would love to have participate.
Don’t be surprised if the Federal government launches a new program to up participation or at least tweaks the existing rules in order to allow more homeowners to qualify. Last week’s Fed action makes it clear they want us all to refinance to free up more cash to spend to prop up the flagging economy.