Help with Refinancing from Municipal Bonds

Politicians and economists are clamoring to come up with a solution to the nation's mortgage crisis. One measure that's currently being considered will allow states to issue tax-free bonds to fund mortgage refinances.

In the 1960s, Gilligan (and the Skipper, too) made sitcom history out of being stranded on a deserted island. Unfortunately, it's really not that easy to share laughs when you're stuck in a bad spot. Just ask any homeowner who's wondering how she's going to refinance her adjustable-rate mortgage (ARM) before the rate resets.

State governments to the rescue

With the mortgage crisis in full swing, Congress has been generating ideas to alleviate some of the pain. One proposal that might stick gives state governments the authority and capacity to fund mortgage refinances. Many experts believe that helping homeowners refinance unaffordable mortgages will go a long way towards stimulating the economic healing process.

Currently, state governments are authorized to use the proceeds from tax-exempt municipal bonds to fund single-family mortgages. But this authority is limited. All of the money has to be deployed in "distressed" areas, and none of it can be used for refinances. There's also a cap on the dollar amount of mortgages that can be funded via these municipal bonds.

Taking the lid off municipal bonds

Now, Congressional lawmakers are looking at raising the cap, broadening the permitted use of funds, and removing the restriction on funding mortgage refinancing. How much the cap will be increased, and whether the change will be permanent or temporary, are still points of negotiation. One group of senators is proposing a temporary $15 billion increase during the next three years. Another plan calls for permanent increases of $10 billion in 2008, $10 billion the following year, and $3 billion in 2010.

Since the details of the plan are still being worked out, it's difficult to predict how effective the measure will be. It's likely that municipal bonds won't be helpful to homeowners already in foreclosure. And homeowners who owe more than the current market value of their properties will probably have to find another solution, as well. If the measure goes through, it will probably be an option only to those who are struggling but still making their payments.

Homeowners taking action

Given the lingering uncertainty, homeowners are advised not to wait around for the money to become available. Experts say that it's still the best course of action to contact the lender and local housing agency at the first signs of trouble. History has shown that many homeowners simply wait too long to seek help. Once the wheels of foreclosure start turning, it's difficult to qualify for any type of refinancing-state-funded or not.

The characters on Gilligan's Island never did make it off the island in the series' original run. Hopefully, this will be another difference between real life and television, and struggling homeowners will find a way out of the mortgage bind. Perhaps the updated municipal bond program will be the rescue crew that they need.