Right now even Fannie Mae and Freddie Mac, who are under the control of the government, are "withholding their best interest rates from potential refinancers whose credit ratings and home equity have eroded in the tough economy," Mark Zandi, chief economist of Moody's Analytics wrote in a Philadelphia Inquirer opinion piece.
He worked with Rep. Cardoza to design the reintroduced HOME Act to solve this problem. Zandi believes this new legislation would help the 14 million homeowners with mortgages that are underwater. Right now many of these homeowner's are locked out of refinancing because they owe more on their home than it is worth.
Cardoza said in a phone interview that programs now offered by the administration require cooperation of third parties. His legislation is designed to "offer refinances directly to people who need the help" and bypass the servicers who are refusing to cooperate. In addition to support from Zandi, Cardoza also worked with a vice dean at Columbia Business School, Christoper Mayer.
Both Mayer and Zandi believe that by allowing people to quickly refinance to lower interest loans they will have more cash to spend, which will help stimulate the economy. Payments will be lowered for all who refinance, whether it's just to get a lower interest rate or to lengthen the term of their mortgage.
The program will be funded by selling new mortgage securities. As the loans are refinanced, the older mortgage securities will be paid off. By getting more people into more affordable loans, Cardoza believes we will have fewer defaults on mortgages, which will improve the finances overall for Fannie and Freddie.
Any American who has a Fannie Mae or Freddie Mac backed mortgage will qualify for the refinance, even if their loans are in default. By refinancing to lower payments, Cardoza believes that the U.S. will reduce the number of defaults and prevent more foreclosures.
Any fees for refinancing will be rolled into the mortgage, to eliminate any up-front cost, and any penalties will be waived.
Right now these mortgages are all financial liabilities of the government because Fannie and Freddie are wards of the state. If homeowners' financial situations are improved so they can afford to make mortgage payments, taxpayers' risk will be lower.
Right now there are about 30 million outstanding mortgages whose losses are guaranteed by the federal government through Fannie or Freddie. Based on evaluations done by Morgan Stanley and JPMorgan Chase, the potential savings from such a program could reduce mortgage payments by about $50 billion. That's money that would then be available to the program's homeowners to spend on other things, helping to stimulate the economy.
This program could help keep people in their homes and stem the rising tide of foreclosures. As designed, there will be no new taxpayer guarantees. With lower mortgages that people can afford, the risk to the U.S. taxpayer should be reduced if the HOME Act passes.
Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask to Avoid Foreclosure" and "The Complete idiot's Guide to Personal Bankruptcy."
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