Government-Backed Loans Not Doing the Job

Some people complain about taxpayer-funded mortgage assistance, while backers support government refinance help initiatives. But both may agree on one thing: mortgage assistance doesn't seem to be working, thanks to high mortgage rates and continually-rising loan fees.

At the beginning of 2008, after hot debate in Congress between those who believe in government mortgage assistance and those who oppose it, the economic stimulus plan was passed. Those who crafted it predicted that the refinance help it offered would save us from a real estate crisis. Through initiatives like new HUD refinance programs with inspiring names like "Hope Now" and "FHA Secure," they promised to save millions of Americans from foreclosure. So far, all that refinance help seems to be doing little to stop the ongoing crisis, and experts are pointing to mortgage rates as the culprit.

Government refinance plan

A major part of the government's mortgage assistance plan, for instance, was to raise limits for FHA-insured loans to compensate for house price inflation. The FHA lifted their loan cap from a rather outdated $362,790, to $729,750. The new loan limits were intended to aid not only buyers, but homeowners wishing to refinance more expensive properties-particularly those wanting to refinance away from adjustable mortgage rates. Since the changes went into law, interest rates on jumbo mortgages have climbed, however, indicating that the situation has gotten worse.

Just as homeowners look for refinance help and emergency loans to weather the economic turmoil, banks turn to "Automated Valuation Models" to determine how much homes are worth as loan collateral. The computer models contain erroneous statistics and are flawed. But that hasn't stopped lenders from denying credit in a blanket fashion to entire zip codes, announcing the credit freezes by sending letters explaining that they're doing it "because they are looking out for the best interest of consumers." Nightly Business Report recently aired a special feature about how lenders have revoked $31 billion in real estate-based credit. Banks are looking out for themselves, regardless of how much their customers plea for help.

Are government mortgage initiatives working?

Under government refinance programs like FHASecure, it was anticipated that about a quarter of a million households could sidestep foreclosure thanks to mortgage assistance from FHA refinance loans. FHASecure is supposed to offer homeowners with strong credit histories refinance help through attractive mortgage rates and terms. While programs like these have good intentions, they're not a powerful enough bailout, and the ship is still sinking.

Regardless of whether the FHA plans are working-and many say they're not because homeowners can't qualify for its high standards-the overall government refinance effort looks like a lost cause. About a quarter of a million homes-the number that FHASecure could potentially help-go into some phase of foreclosure every month. We're seeing negative results and higher mortgage rates across the board despite these government refinance initiatives.