Refinancing Plans Still Fail to Help the Neediest

NEW YORK (MainStreet) — Are low-income Americans still too risky for Wall Street?

You bet your Bottega Veneta woven leather briefcase they are.

Fitch Ratings has released data today saying that, as far as continued low-interest rates go, they won’t do much good for those risky “subprime” borrowers bankers and lenders are trying to sidestep on their way to Wall Street every morning.

Economists and financial media types (including this one) have been touting the idea that bargain-basement interest rates would be manna from heaven for all homeowners because, on the surface at least, low mortgage rates allow everyone to refinance and pay less on their mortgages every month.

But when it comes to low-income American homeowners, those refinancing doors are closed, with little or no relief in sight, even as the White House trumpets its new mortgage refinancing plan.

To banks and lenders, the issue isn’t about those high-profile buzzwords such as “income equality” or “economic fairness.” Rather, it’s all about higher-risk loans they simply don't want to make.

The situation has gotten so dour, Fitch reports, that the only way high-risk homeowners can cut their monthly mortgage payments is through loan modification – the consumer finance equivalent of threading a needle with a haystack.

While U.S. homeowners have $700 billion accumulated in negative equity on their homes, according to Zillow.com, actual, sustainable loan modification deals are few and far between.

In fact, according to the U.S. Treasury Department, more than 80% of homeowners who are behind on their mortgage payments are ineligible for a government loan modification – and that includes millions of credit-worthy homeowners that banks claim they want to help.

And it’s much worse for high-risk homeowners, Fitch reports. The New York City-based ratings firm says that only 5% of subprime borrowers have been able to refinance their mortgages since 2009, compared with 40% of qualified “prime” borrowers.

Worse, the deal high-risk homeowners are getting is nothing to write a new loan about. Fitch says that the average interest rate cut on a subprime refinancing deal is from 7.8% to 7.6%, saving mere pennies on the dollar on a big mortgage loan.

With the pace of mortgage loan modifications slowing, Fitch says deals are being closed at a rate of one-third of 2010’s rate. The government is trying to step in with expanded home loan modification programs via the recent White House proposal to allow U.S. homeowners of all stripes to refinance their loans.

But the loan modification proposals, issued through Home Affordable Refinance Program, haven’t really gained traction, and the White House refinancing proposal is opposed passionately by banks and mortgage companies and faces an uphill climb in Congress.

In the meantime, low-income, high-risk homeowners can only sit and wait for that knock on the door – hopefully from a bank representative offering a better deal, but more likely from a lender with foreclosure papers in his hand.

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