Banks Should Let More Homeowners Refinance: Adviser

Published: Monday, 16 Aug 2010

By: Michelle Lodge

Special to CNBC.com

Banks should allow homeowners who are deeply in debt but are current on their mortgage payments to refinance without documentation, an investment adviser suggested on CNBC Monday.

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“If you’ve demonstrated a track record of paying your mortgage consistently, not late, on time, for the past 24 months, we’re going to re-fi you without documentation, without looking at an appraisal, we’re just going to lower your mortgage rate,” said Doug Dachille, CEO of First Principles Capital Management.

Dachille, formerly president of Zurich Capital Markets and global head of proprietary trading for JP Morgan [JPM 37.48 -0.21 (-0.56%) ], acknowledged that if banks became more flexible in their lending practices toward homeowners, it would would upset investors of mortgage-backed securities. But he added that those investors have reaped the financial rewards of the Federal Reserve's policy of mortgage-backed securities to help keep interest rates low.

“Mortgage-backed securities investors have gotten a benefit from something that was unprecedented too,” he added. “And that was that the Fed was buying $1.25 trillion (of mortgage securities) at a time when people couldn’t re-fi, driving up the price to historical levels.”

Dachille said the Fed policy has failed to benefit those it intended to help—the borrowers. He added that some homeowners can't refinance, which would make it easier to repay their loans, because banks require proof from documentation like income and bank statements. Dachille said that many homeowners got the mortgages initially without documentation.

“It’s frustrating to look at a 3.5 percent mortgage rate,” he added, “and have no one able to take advantage of it.”

The government already has spent billions on helping troubled homeowners, including $3 billion in aid to unemployed homeowners announced last week. Meanwhile, US mortage rates continue to hit record lows, helped by plunging Treasury bond yields and the Fed's pledge to continue buying up government debt.

Dachille's suggestion came a day before the US Treasury Department will host a summit on overhauling Fannie Mae and Freddie Mac and the troubled mortgage market, which accounts for about 15 percent of the country's economy.

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