An Outmoded Mortgage Contract Costs Economyu Dearly

THE JOURNAL RECORD, December 21, 1993 | Go to article overview

An Outmoded Mortgage Contract Costs Economyu Dearly


This is a story of mortgage lending regulations designed to help homebuyers and safeguard society's economic well-being but which, according to Columbia University economists, are: Forcing lenders to deny loans to borrowers who already have demonstrated their credit-worthiness, while simultaneously endangering the lender's prospects for collecting on existing loans. Often causing hardships for the very borrowers who could most benefit from such financing. Holding back consumer spending. Lowering state tax revenues, thus adding pressure for either a reduction in state services or an increase in tax rates.

The situation arises when owners of mortgaged homes seek to refinance their properties at today's relatively low interest rates and are turned down by lenders, disqualified because the properties have fallen in value.

A loan made four years ago on the basis of 80 percent of value, for example, might now equal 100 percent of market value, even with payments made over the years, and nobody likes to lend more than 100 percent.

The problem exists mainly when lenders, such as banks, seek to resell mortgages to government-sponsored corporations, such as the Federal Home Loan Mortgage Corp. (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae). About 70 percent of all mortgage loans are resold.

Such mortgage purchasing agencies insist that homeowners with existing mortgages requalify for loans, and they set upper limits of about 80 percent to 95 percent of market value.

But, said Professor Joseph Tracy, "the entire requalification process is unnecessary." The risk, he said, is already built into the system, since the borrower, if refused a new loan, remains a borrower with the existing loan. …

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