Kid Covers His Face

Fannie’s Offer to Borrowers in Student Debt is No Solution

531 340 Charles Weeks

Fannie Mae’s New Mortgage Solution – “Innovative” or Dangerous

The student loan market is over $1 trillion. That’s 12 zeroes. Put in another way, it would be like having 1 million, $1 million checks. Yeah, it’s a big number…

We all know this debt has been a drag on our economy. People making student loan payments can’t buy or lease cars, get a mortgage, buy new clothes or generally partake in our consumer-driven economy.

Fannie Mae’s new program may have solved the homeownership issue (or at least may be able to get you in a home), but staying there is going to be your own problem. Based on its solution, I don’t think you’ll be staying there long.

Here Fannie Mae’s “innovative” solution and my thoughts:

Student Loan Cash-Out Refinance: Offers homeowners the flexibility to pay off high-interest rate student debt while potentially refinancing to a lower mortgage interest rate.

  • Not sure how this is different than a typical home equity loan, but taking high-interest loans and refinancing them at a lower interest rate can be beneficial.

Debt Paid by Others: Widens borrower eligibility to qualify for a home loan by excluding non-mortgage debt, such as credit cards, auto loans, and student loans, paid by someone else from the borrower’s debt-to-income ratio.

  • Read this carefully: If you can’t afford to pay your own debt payments, you should not be borrowing more money and creating more debt payments. Haven’t we already learned this in the not-so-distant past?

Student Debt Payment Calculation: Makes it more likely for borrowers with student debt to qualify for a loan by allowing lenders to accept student loan payment information on credit reports.

  • Honestly, I am not even sure what this means because student loan payment information already appears on your credit report, at least if you are delinquent. Maybe they don’t currently look favorably at on-time student loan payments, so if this allows them to do so, it would be positive.

The “Debt Paid By Others” is the huge issue. We should not be trying to figure out how to allow people to borrow more money who currently can’t afford the payments they already have. This sounds too much like the NO INCOME, JOB, ASSETS (NINJA) loans and the kind of behavior that led to the real estate bubble.

If parents are making payments on their kids’ behalf, allowing them to qualify for a mortgage under these new rules, do we really want to teach our kids that this is proper personal finance? Rely on me to pay your credit cards and car loan so that you can finance a house and take on a ton of new debt. This is not good.

If you haven’t recently reviewed your financial plan you should contact your CERTIFIED FINANCIAL PLANNER™ Practitioner.

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Charles Weeks
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Charles Weeks

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