U.S. Considering Massive Refinance Package for Homeowners

Congress is working to formulate a plan that will guarantee some of the loans that are likely headed for default and eventual foreclosure in the coming months and years. The consensus opinion seems to be that the sub-prime and often-adjustable-rate mortgages are at the core of the current financial crisis. By restructuring and guaranteeing some of these loans, the federal government is hoping to prevent further deterioration of the global economy.

In theory, the fundamentals of the plan are sound. Banks and lending institutions don't want to be in the position of having to take possession of thousands of properties that are not worth what they paid for them. That scenario would create far greater turmoil than we've already seen and is precisely what these new measures are designed to avoid.

Rather than face a dramatic rate increase as adjustable rate mortgages mature, homeowners may be allowed to refinance out of loans that they are clearly not going to be able to repay. By doing so, banks continue to get paid back on their loans and can continue to make money, while homeowners are able to make more affordable loan payments and maintain possession of their property.

It's not really how the system is designed to work, but given the collapse in the credit markets as a result of the recent avalanche of mortgage defaults, it seems to be the only reasonable solution -- at least the only one that's been discussed to date.

It will be interesting to see how much progress Congress and lawmakers can make on actually addressing the underlying concerns of the current financial crisis, when it will be so tempting for them to waste countless days and months trying to assess blame for the current situation. There will be plenty of time for finger-pointing and self-congratulatory acknowledgment once the global markets have been stabilized.

For now, the focus must be on trying to address the US housing market and stemming the tide of mortgage defaults, foreclosures and bankruptcies that will happen without some form of government intervention.