My friend Paul and I are sitting on a park bench when Paul tells me his story…

“I’m upside down on my mortgage”, he says, meaning his house is worth less than what he owes on his mortgage.  “My current rate is in the 6% range – from when I first bought it.  I want to take advantage of these low rates.  It will save me so much money every month which I can spend on things I want to buy, a new car, my kid’s college and it will help me save for retirement by funding my IRA.  I still have a good paying job and my income qualifies me for the payment now and will do so even more so when it is lowered by the lower interest rate”.

“Sounds good”, I say.

“Yep, I’ve made up my mind”, he says, “I’m going to refinance this week”.  So he meets a local mortgage rep to fill out the application.  He’s so prepared.  “I brought him my tax returns, W-2’s, recent pay stubs, bank statements, showing all my assets and a credit report showing that my credit is stellar.  My mortgage rep can’t believe his luck and tells me how well qualified I am when he finally asks me about my loan amount and home value.  I tell him my loan is $417,000 so I’m a conforming loan candidate, and my home is used to be worth $650,000 when I bought it, but now is only about $400,000.  I can see the blood drain from his face.  He tells me how sorry he is but that if I want to refinance and lower my interest rate by 1.5%, I need to get my loan balance down to 80% of the value; ($400,000 x 80% = $320,000).  So I need to pay the bank $97,000 to be able to get to the 80% loan to value (LTV)?!  But I don’t have that kind of money! and he tells then he can’t help me unless I do this”.

Paul says, “Now I’m really depressed.  I could really use that extra $600 a month savings.  But what troubles me most is that the Federal Government gave tax credits to first time buyers last year and the government owns my loan, but they won’t let me refinance because of my negative equity?  Why?  A smaller payment means I’m less likely to default.  If I had equity, I would refinance anyway, so basically they are holding me captive to a higher interest rate because of my equity position.  That just isn’t right.  My sister is in the same boat except her loan is a jumbo and she can’t refinance either.  My boss can’t refinance either even though his loan is just under the $729,750 – also a Fannie or Freddie loan, because his home’s value is $700,000.  What gives?”

Freddie, Fannie, let my people go!  Why are people like Paul being punished while people who’ve been irresponsible able to get a lower payment or out of their obligations?, Allowing Paul to refinance costs no one a dime: not the bank, the government nor the tax payer  “I just want to refinance and I’m qualified, but my house is not.  I just don’t get it”, he tells me.  “It’s really too bad too because now I’m thinking maybe I should default so my lender will do a loan modification.  It will ruin my credit and prevent me from buying things like a new car which I need, but I really want a current market rate; nothing special”.

I really don’t have a friend named Paul with a sister or boss all trying to refinance, but this parable is true none the less for millions of borrowers across our great nation.  The time is now for the Federal Government to recognize this fact and to help the little guy.  The guy who’s done everything right; isn’t subprime, out of work or over extended.  Just the guy who pursued the American Dream and bought high in a hot market, had a down payment (and lost it) but just wants to take advantage of today’s favorable interest rate environment.  If we want to stop wandering the financial desert for the next 40 years, it’s time for Freddie and Fannie to hear these words: Let my people go and for crying out loud, just let them refinance.