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Why Can't I Refinance My Underwater Mortgage Directly With Uncle Sam?

I've wondered for awhile why Uncle Sam (a/k/a the Federal government) doesn't just take all of these underwater mortgages and start to refinance them, one-by-one.

The power of leverage (not applied the way Treasury Secretary Tim Geithner did with AIG) would allow the Uncle Sam to negotiate with the mortgage lenders to sell the loans for the home's current market value.

The mortgage lenders would take a haircut (which would be entirely fair, given the situation) but not as much as if the loans were sold at a short sale or went into foreclosure.

In a short sale, the lender might lose 30 to 50 percent. In a foreclosure, the lender might lose 80 to 90 percent of the value of the property.

In most locations, home values have dropped only 30 to 35 percent. That's a good deal for lenders looking to get out from under their toxic (to them) loans.

And since mortgage interest rates are still at historic lows (although up from the 50-year bottom of 4.75 percent for a 30-year fixed rate mortgage), it's a good deal for Uncle Sam. More importantly, it gives homeowners a way to start fresh.

And now you can have uncle Sam refinance your underwater mortgage. Well, sort of.

At the tail end of March, in the latest iteration of the Home Affordable Modification Program (HAMP), President Obama said that the federal government will push lenders to write off equity balances, bringing under water homeowners to par with their home value.

He'll also push mortgage lenders to allow unemployed homeowners to stop making their mortgage payments for up to three months.

But perhaps the most interesting part of the measure is that FHA will be used to finance home loans that are deemed ineligible for refinance by Fannie Mae and Freddie Mac.

Why should FHA step in? FHA is pure government lending, as opposed to Fannie Mae and Freddie Mac, which are officially in conservatorship (as opposed to bankruptcy) and still have stock trading on the open market. (I'm still looking for someone who can explain this one to me.)

Well, when your credit score has sunk through the floor because lenders have reported you as not making your full payments through trial HAMP modifications, it becomes practically impossible to get a loan anywhere.

But Uncle Sam knows how to find you - the IRS knows where you live, how much you earn, and whether you pay your taxes on time. So, if the Federal government refinances your underwater mortgage, and you fail to make your payments, figuring out where you are and whether you're earning a living isn't that hard.

It's also easier to give you a break on payments or the interest rate if you lose your job and can't afford it.

Will this work? What do you think?

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Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and the upcoming Buy, Close, Move In!.
She blogs about money and real estate at
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