I have been asking myself this question for some time now and still cannot think of any reason, why banks can not let people who are underwater with their mortgage refinance their loan. I don’t mean the people who cannot pay or are not paying their mortgage, I am talking about people who pay their mortgage every month, but would dearly love to refinance into today’s low rates. According to a CNBC report currently 23% of all mortgages are underwater, so the potential for refinancing is quite considerable.

Now obviously there would have to be some restrictions, and rules.

1. The borrower must refinance with the same mortgage company where they currently have their loan. After all banks are unlikely to want to take on other banks underwater loans, and I can’t blame them for that.
2. The borrower cannot refinance for more than their current loan amount.
3. The bank must offer the same interest rates regardless of if the customer is underwater or not (obviously credit score etc still comes into play).

If we did let people refinance, what would be the benefits? As far I can see it would have two major benefits.

1. Free up extra money for the consumer, which would be an immediate stimulus for the U.S. economy.
2. Provide more incentive/make it easier for people to stay in their homes, reducing the number of short sales and foreclosures.

On the down side (if there is one), the extra stimulus could potentially be too much, driving up inflation too fast, and overheating the economy (although somehow I doubt it).

Now obviously this idea will not be popular with banks, but after all that has happened maybe the banks need to give a little bit back to society.

You can find the original post Allowing Underwater Mortgages to Refinance on my Salt Lake Real Estate Blog.