Ask Stacy: Why Do Good Borrowers Get Punished?

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Here’s a recent reader question – maybe you’ve wondered about it as well:

I would like to know if there are any programs to help homeowners who are current but owe more than their house or property is worth. I would like to refinance, but no one will lend me money when I have negative equity. Others tell me to quit paying my house payments and then I can get help. I can’t believe I am being told that from lenders. How is that going to help the economy? The government is helping people who are going into foreclosure so they won’t lose their house, but what about the people who have been lucky enough to stay current but can’t refinance to get lower interest rates? I don’t think that is fair. I hope you know of some program or type of help that is out there. – Sheila

Good question and even better commentary, Sheila. Let me start in the middle: DON’T quit making your payments, at least if you have a choice. Even if that really helped you refinance at a better rate – and trust me, it won’t – your credit rating can take a serious dive. And that will cost you much more money in the long run.

You can refinance with negative equity (meaning you owe more on the house than it’s worth) but it’s not going to be easy, Sheila.

First of all, you need to be careful. Scams abound. When I wrote about 3 Mortgage Rescue Rip-off Tip-Offs, that was only the tip of the iceberg. More scams crop up every day.

There’s a legitimate way to go, but you need to make sure you qualify and that you follow all the rules. It’s called an FHA Short Refinance, and you can get all the details at this link: New Program May Reduce Mortgage Principal for Underwater Homeowners. If you qualify, this is your best bet. In fact, it’s probably your only bet.

This entire mortgage mess is deeper than you think, Sheila. In fact, next week, I’m spending the entire week explaining it. Check out Monday’s Money Talks News.

Finally, let’s address some of Sheila’s commentary, because I’ve received many, many similar comments from many other readers in various forms.

“Others tell me to quit paying my house payments and then I can get help. I can’t believe I am being told that from lenders. How is that going to help the economy?”

Lenders aren’t in business to help the economy – they’re in business to help themselves. When the bank helps the guy across the street who isn’t making his mortgage payments, it’s not being nice – it’s doing everything possible to get it’s money back. When the bank won’t help you when you’re current, it’s not being mean – it’s trying to earn as much as possible from people who have the ability to fulfill their contractual obligations.

There are only two things that will cause a bank – or any business – to stray from the path of maximum profitability: first, if it’s forced to, either by government regulation or media scrutiny. Second, if the human beings running it choose to forgo money to help people on moral grounds.

Now let’s look at this statement:

“The government is helping people who are going into foreclosure so they won’t lose their house, but what about the people who have been lucky enough to stay current but can’t refinance to get lower interest rates? I don’t think that is fair.”

You’re absolutely right – it’s not fair. But keep in mind that the government’s plan is to try to protect the overall economy by using taxpayer money to bail out some homeowners – and businesses – that it deems crucial. That means people like you and me who can help ourselves are on our own, while other people and businesses who can’t make it are getting help with our taxpayer money – even some who may not deserve it.

Is it just to use government funds or create laws that benefit a minority at the expense of the majority? From civil rights to social security to health care reform, it’s an argument as old as the United States.

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  • Anonymous

    I’d like to know why no one will allow US to refi our tiny mortgage. We did everything right, buying only as much house as we could afford–a lot less than some people would be willing to live in, so we have only $20K on our mortgage now. (It was only $25K two years ago and we’ve been paying an extra hundred a month to get rid of it in ten years instead of the fifteen which was the shortest they’d let us have.)

    So now, although we have excellent credit and a 6.375 interest rate, no one can be bothered to give us a refi without requiring that we pay them $3K for the trouble–even a credit union. We’re old–mid-fifties and mid-sixties–and we WERE in very bad shape financially twenty years ago. Now we’ve worked our butts off to have a house and a LITTLE in our IRA’s. We could really use the extra few bucks a month. Why can people who are still trying to get something for nothing get a refi when we can’t?

    That’s just wrong. It sucks to be really frugal and have the system spit in our faces.

  • Anonymous

    Another question–why, if the point is to enhance fairness and fix inequities–can people who have a small mortgage that’s paid up and a great credit rating NOT get a refi because it’s just TOO small? We dug and worked our way out of debt years ago and now have two great ratings and a $20K mortgage because we bought far less house than most people our ages would be willing to live in and have been paying for the first two years more than the fifteen-year mortgage requires so as to get rid of it by the time we’re both retirement age. The rate is 6.375, and no one will refi us without charging us $3K, not even a credit union. We’re not worth it to them. Sure, they’ll take their profit from our tiny IRA’s–and when we had to borrow $5K to lend our son for his overseas doctoral studies last year, they were happy to charge us BIG interest on that (briefly, thank God), but forget a refi.

    It sucks to work your butt off to get out of debt and stay there and then lead a frugal life for years so as to be debt-free in our older age and have the system spit in our faces while those who want something for nothing can still get theirs.

    Am I bitter? Gee, maybe a little. I work for a big, famous university that won’t let me buy into their health insurance group, too. Thank God I live in New York!

  • http://twitter.com/Money_Reasons MoneyReasons

    Sheila is right, there should be a way that she get help too. After all, she’s doing what she’s support to be done, working within the system. It’s a same the system ignores her!

    Sometimes government programs are short-sited and very unfair!