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Robert Nusgart: Equity line help would lift housing market

The Federal Reserve spoke. The markets listened. And mortgage rates took another nosedive.

Yes, mortgage rates have moved to another low point after the Fed on Wednesday basically said that the tough economic times are going to stick around for a while. That sent the stock market plummeting and money flowing into the bond market, sending prices higher and yields lower.

Lenders were re-pricing rates for the better late into the afternoon, causing havoc on the lock desks for all the companies. Not only were loan officers reaching out to customers who might benefit from the next stair step down on rates, but they also had to field calls from those wanting to renegotiate their rate.

So, where did rates go?

Today a borrower can get a 30-year fixed mortgage at 3.875 percent. Amazing, considering that just in February the Freddie Mac weekly survey of rates put the national average at 4.95 percent. A government-insured FHA 30-year mortgage is at 3.75 percent.

Or, if a borrower wants a five-year adjustable mortgage, the rate is down to 3.125 percent.

This is great news for those who still have not refinanced or those who are looking to purchase because it has made it even more affordable.

However, the sad part of this is that there is still a vast swath of homeowners who can’t participate in this refi boom. The main reason is that they have a second mortgage or home equity line of credit that when combined with a new mortgage still puts them upside down in relation to the value on their home. This is a problem that so far no one wants to tackle.

In the mid-2000s, equity lines or HELOCs (as they are known in the business) were plentiful, easy to get because values were rising, and most mainstream banks easily permitted them to reach 100 percent of the value of the home.

Homeowners used them to finance college educations, do home improvements or even purchase cars since the interest on these products were tax-deductible. Even if the combined loan to value of the first and second mortgage was at 80 percent loan to value, the homeowner still felt good because he still maintained 20 percent equity in the home. A comfortable cushion.

Then the bubble burst and values plummeted, and all of a sudden that 20 percent equity vanished in a matter of months and then some. So now that homeowner — between the two mortgages — owed more on his home than it was worth.

To refinance, a homeowner would need to get permission from the bank holding the second mortgage to allow a new first mortgage be recorded in front of them. They would have to subordinate. In most cases, the lenders holding the second mortgage would block this and the refinance that would lower a borrower’s monthly payment on the first mortgage would die.

Again, this is a shame and it is something that needs to be solved by Congress and either the Obama administration or by whoever occupies the Oval Office in the coming years.

Just as the FHA was created to help people purchase homes with low down payments and more liberal underwriting guidelines, the government should come up with a way to allow those homeowners to be unencumbered by those equity loans while still requiring them to pay them off under new terms. If a homeowner is current on the equity line, they should be eligible. Just think what could happen if those who couldn’t refinance or couldn’t sell the home because they were underwater were now added back into the housing equation. That certainly would help the housing market get out of the doldrums and in turn help spark a sagging economy.

It’s great that rates are low and that millions of Americans are going to enjoy years of low mortgage payments, but lawmakers should also be thinking about the millions of Americans who are looking for a way to get out of their particular predicament and join the refinance revolution.

Robert Nusgart is a loan officer with Mortgage Master Inc. He can be reached at 410-245-3758 or at rnusgart@mortgagemasterinc.com.