On July 25, Senator Jeff Merkley (D-OR) released a detailed mortgage refinance proposal entitled, "The 4% Mortgage: Rebuilding American Homeownership.” Merkley's proposal would create a special Rebuilding American Homeownership (RAH) Trust, which would buy mortgages of underwater homeowners from mortgage originators and give families options regarding how they would like to refinance their homes at a lower interest rate.
The proposal details the need for further action to assist homeowners, citing many experts who predict that another four to eight million homes will be foreclosed upon over the next five years. This new program, Merkley argues, would help ailing communities impacted by foreclosures, construction and related industries, and the economy as a whole.
The RAH Trust program would target the eight million homeowners who owe more than their mortgage is worth but have remained current on their monthly payments and meet certain underwriting standards. Interested homeowners would have three years to apply at any bank, credit union, or other qualified mortgage lender. The new loan would then be sold by the participating lender to the RAH Trust. The RAH Trust, administered by the Federal Housing Administration (FHA), the Federal Home Loan Banks (FHLBs), or the Federal Reserve, would exist only to serve these new mortgages and would wind itself down as the mortgages are sold or repaid.
Those seeking to refinance their home loan through the RAH Trust would have three options: a 15-year mortgage at 4 percent interest that would allow borrowers to more quickly restore equity in their homes; a 30-year mortgage with 5 percent interest that would substantially cut their monthly payment; or a “two-part soft second” mortgage that would essentially split the mortgage up into two pieces. In the third option, the first part of the mortgage would cover 95 percent of the home’s current value while the “soft second” mortgage would cover the remaining balance of the loan, with no payments, charges, or interest accrued for five years. Once homeowners have been granted a new loan they would be barred from selling their homes through a short sale for four years, with few exceptions.
To finance its mortgage purchases, the RAH Trust would issue bonds at rates similar to the low rates that Treasury currently pays for its bonds. The plan anticipates the Trust would realize a profit on the difference between the rate it pays to borrow funds and the interest it charges borrowers. In addition, the Merkley plan would also charge participating banks a “risk transfer fee” to compensate the trust for removing risky loans from their balance sheets and would require that homeowners pay mortgage insurance premiums on their RAH mortgages until the remaining loan balance is below 80 percent of their home’s total value.
The proposal also outlines a pilot program that could be implemented on the state level, funded by "surplus" funds from the Hardest Hit Fund program. The proposal cites 3 billion dollars in "surplus" Hardest Hit Funds in Florida, Arizona, Nevada, and California that could be used to establish state level RAH Pilot Programs. These state RAH Trusts could issue mortgages for working families with lower incomes in their state. Other sources of funding identified include the national mortgage settlement funds and anticipated unused funds from the HAMP program.
During a Senate Banking Committee hearing on July 26, Treasury Secretary Tim Geithner told Merkley that Treasury would consider launching pilot programs to try out this initiative. Geithner said that the main question is whether Treasury has the authority to initiate such programs without congressional approval. Current law prohibits Treasury from establishing any new programs with funds that have already been directed for federal refinancing efforts, he added. Merkley contended that this prohibition should not apply, as the RAH program is similar enough to HAMP and other efforts.