Create a government lender to directly purchase and rewrite a portion of any mortgage where a homeowner is turned down (and is under threat of losing his good credit standing) on his re-finance application.
This refinance denial should be easily documented by the lending institution which turned down the applicant. The lender could check that the applicant has inadequate supporting assets to assure the payment of his debt, but otherwise has acceptable credit scores and a regular income.

Here’s the basic proposal:
The homeowner who applied for, but is turned down for refinancing, (Can’t qualify with stricter lending standards) obtains a ‘qualifying form document’ from his ‘qualified lender’ (who refused the refinance), stating the reason for denying the applicant’s re-finance application. This document would be used to enable the homeowner to seek relief directly from the government.
The Government would create an entity corporation to obtain treasury funds as they are needed and pass those funds directly to that lender for that homeowner who does not qualify for refinancing and who otherwise has good credit standing.
That borrower who ‘qualifies for assistance’ would obtain a second loan from the government that would be spent to also reduce his first mortgage by an equal dollar amount. My thought is that the target amount to be loaned would be 50% of the original loan. In other words the government loan would PAY OFF 1/2 of the homeowner’s mortgage debt. This payoff must be subject to note-holder’s agreement because that first loan would have to be re-written to halve that first loan’s monthly payment. That loan would keep the same interest rate, the same amortization period, but for ½ the amount. (Otherwise of course the minimum monthly payment would not change, as per original contract.)
Simultaneously at that 50% pay-off, the Mortgage Assist Corp. (My fictitious name for the corp. facilitating this new loan) puts a 2nd lien against the property in favor of the MAC, for the amount used to pay down the 1st loan, with proceeds payable to MAC for the Dept. of Treasury. The 2nd lien is to be written, amortized for the same time period as the first, but with the interest at HALF the rate of the 1st (or some other reduction ratio designed to create the effect I’m proposing).
In my example if 50% of an existing 6.6% per annum original note is paid off, then the second, or MAC loan, would be written and recorded at 3.3%.
The 2nd (new additional loan), would be paid, together with the first loan payment, in one payment just as a “wrap-around payment” (a not uncommon real estate practice). I.e. the total of the payment due on the 6.6% loan plus the payment on the 3.3% loan is paid as a single payment. The payment would be paid to the MAC which shall also act as the ‘collection escrow’ for the wrap around mortgage. The result of such a scheme will be that the monthly payment (as outlined) will be approximately 75% of the previous whole 6.6% mortgage payment previously made.
Advantages:
1. The lender who owns the note will receive 1/2 of the remaining balance due, greatly relieving his risk exposure.
2. The homeowner is in a much better financial position as his payment is about 25% lower each month, easing his burden and also contributing to stimulating the economy.
A homeowner paying down a $200,000 mortgage with a remaining 20 years at the rate of 6.6% will be paying about $1,503/month. With my scheme his payment is reduced to about $1,127/month. Homeowners who can refinance 100% of their existing loan through a conventional lender would receive about the same benefit but without government assistance.
3. The Treasury would receive 3.3% interest from the homeowner. That would be paid off at the time the home owner sold his home to a buyer qualifying for a conventional loan. It might even be set up to allow some ‘nearly qualified’ buyers to assume that existing ‘wrap around’ loan if it can be seen as the most opportune practice to effect a sale.
4. The economy benefits if homeowners who would otherwise sell their homes, take those homes off the market. Remember, the MAC rate would last as long as the 1st mortgage. (Such a deal.) My own home is on the market. My mortage is about $815/month. I would ‘qualify for a MAC loan so my payment would be reduced to about $610/month. At that rate I would take my home off the market since I know I wouldn’t find a decent rental for that amount! Reducing the real estate inventory is also a big effect of my solution!
Stopping the foreclosure bleeding is more important than most people realize. I believe it is essential and a remedy like mine is the least expensive and the most direct repair possible. The lender who ‘disqualifies’ the home owner for refinancing would be eligible to earn a ‘lesser fee’ for effecting the 50% pay-off and the paperwork for the 2nd. That paper work should be ‘industry standard’.
The MAC, by handling the collection escrow for all these loans will be perfectly able to adjust (continue) the program as payment success, and foreclosure reduction, can be easily and immediately measured.
Thomas Manning

If I lived in no-recourse state (i.e., foreclosure is the sole remedy for default on a residential real estate mortgage–the biggest example of which is California), there is no way I’d throw any more money than is absolutely necessary at a depreciating asset. If you live in such a state, but need the house, stay and pay. If not, walk.

I still would consider walking in a full-remedy state, but wouldn’t sleep as well at night. They might just try to get some money back.

Otherwise I’d just ride this out. Your money (the extra 20%) is not losing value in this deflationary environment, (although I think that will change soon enough). If inflation rears its ugly head, there’s more ways to protect cash (seem’s odd though, doesn’t it) than there are to protect real assets. With cash, you can just figure which real asset is doing well and buy into it. And, in an inflationary environment, it won’t be residential real estate.

My 2cents.

“Treasuries slid after Geithner’s remarks fueled concern that foreign demand for U.S. debt may ease. Yields on benchmark 10-year notes climbed to 2.63 percent at 12:52 p.m. in New York, from 2.55 percent late yesterday.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aglY3XdKiWp0&refer=home

Things really could turn on a dime.

For now, I’m seeing most of the closing costs being wrapped into the new loan. Some lenders have no closing-cost options, but for now it just adds a quarter-point or so on the rate, so the closing costs are there, just in different form.

Also, that 4.75% had a discount point. I’m seeing lots of that these days. And I think things have bumped up a bit from there. By the time I see the closing, rates have been locked for a month or more.

Still, like you say, this is a great time to ditch the ARM.

I should have clarified in what I said to Thisson above. He/she should get the hell out of that ARM, I just don’t think people need to jump the gun, that said if you are seeing some people locking in at 4.75% fixed, if you have a fixed rate around 6.5% and are planning on staying there for some time that is awfully attractive. Are you also seeing what I am which is lots of closing costs getting covered/waived, not all but just a good portion of what you normally might pay yourself or wrap up in the new loan.

IMO arms are a bad idea come higher rates or not. Who wants the mortgage interest to be an unkown.