Ban on Student Loan Refis Hurts Home Sales

May 24, 2016

Refinancing the mortgage on your house can sometimes make the difference between keeping your house and losing it to foreclosure. You might wonder why people who are paying back federally insured student loan debt can't do the same.

For the real estate industry, this isn't an academic question. Extending to borrowers the ability to refinance their federally backed student loan debt into another federally backed loan with a lower interest rate could make the difference between their qualifying for a mortgage loan and not qualifying for one. (Borrowers can refinance their federally backed loan into a private loan, but they lose certain benefits.)

That's why the NAR Board of Directors last week approved a policy in support of legislation that would require the federal government, which makes the rules on repayment of federally backed student loans, to let borrowers refinance into another federally backed loan at a lower interest rate.

The legislation is called "The Bank on Students Emergency Loan Refinancing Act" and it came close to passing last year but it never made it across the finish line. It might be able to this time.

The new NAR policy also directs the association to work with the lending community to ensure student loans are handled in a standardized way in the mortgage underwriting process and that underwriting criteria be accommodating to student loan debt.

In other words, loan applicants shouldn't be unduly penalized for having outstanding student loans in their credit profiles.

NAR's involvement comes at a good time. The burden of student loans is at an all-time high and it's wreaking havoc not just on residential real estate but on the broader economy. Some 70 percent of students graduate from college today with debt, and it's not just young households burdened by it; in many cases, middle-aged consumers are shouldering the debt, either because they've borrowed on behalf of their kids or they went back to school themselves and are paying off their own loans. Meanwhile, the federal government is profiting to the tune of $60 billion a year in interest payments because of the prohibition on refinancing.

The student loan issue is a top story in the latest Voice for Real Estate news series. Also covered is NAR's 2016 Legislative Meetings & Trade Expo, which concluded last weekend.

Some 8,500 REALTORS® were in Washington to meet with their members of Congress and to attend forums, committee meetings, and the trade expo. Julian Castro, secretary of the U.S. Department of Housing and Urban Development, was there, and he made two announcements. The first has to do with the student debt problem. He said FHA was easing the way it accounts for deferred student loan debt in calculating an applicant's debt-to-income ratio. The second had to do with condo financing. He said a condo rule is near completion, although he didn't elaborate what was in it.  But he said it would help ease some hurdles to making FHA financing more broadly available for condo purchases.

Washington Post Associate Editor Bob Woodward of Watergate fame was there, too. He shared with REALTORS® tales from his 40 years covering Washington and he applied what he learned to the idea of leadership. He said leadership takes negotiation, and the best negotiators start from a position of strength and work there way to a compromise that lets both sides walk away with something.

—Robert Freedman, REALTOR® Magazine