As President Obama grapples with how to jump start the sputtering housing market—which is expected to be part of his address on jobs before Congress next week—a senior Federal Reserve Board member, Elizabeth Duke, is pushing for easing qualifications for mortgage refinancing and converting blocks of bank-owned homes into rental units.
The administration is feeling pressure to improve the housing market to strengthen the economy, but a variety of housing policy experts said on Thursday that because the foreclosure and declining home valuation problem has gone on for so long and become so complicated, Obama is almost destined to disappoint, particularly since so many existing plans have failed to live up to their promises.
“Many Obama ideas are good conceptually. The problem is that they are not effectively implemented,” said Robert Gnaizda, a cofounder of the Berkeley, Calif.-based Greenlining Institute, which advocates fair lending to minorities.
Last month the administration asked for input on how to transition the glut of vacant properties on the market into rental units. Officials have since floated an idea to systematically allow borrowers who are current on their loans but owe more than their homes are worth, to refinance into lower-rate mortgages. This idea has reportedly hit snags since doing so would increase the losses absorbed by the government-sponsored enterprises, Fannie Mae and Freddie Mac, and acting director of the Federal Housing Finance Agency, Edward DeMarco, is said to be resistant to any plan that increases taxpayer burden. (FHFA would not comment.) The GSEs supply the majority of the nation’s mortgage credit, but were taken over by the government in a conservatorship during the height of the financial crisis in 2008.
Both the refinancing and rental ideas have kicked around for years with no administration action.
“Now it seems like what they are doing is coming back out to the field and saying OK, tell me again what were those ideas?” said Janis Bowdler, a housing expert with the National Council of La Raza. “Part of the challenge is the landscape has changed dramatically. We have no money and very little political will.… Touching the GSEs is going to be a lightning rod, that’s the real challenge.”
At a Fed housing conference on Thursday, Duke gave weight to both ideas and pushed for smaller, more specific plans, saying the policy focus has been too centralized around exhausting loan modifications as a way to spare struggling borrowers from foreclosure and more effort should go toward reducing the payment strain on borrowers who are underwater. She also called for swooping up the increasing inventory of housing stock, which is deteriorating in value and could be rental housing for borrowers who cannot afford to buy.
“There’s been an awful lot of attention paid to loan modifications and frankly less attention paid to what happens to the loans that for whatever reason can’t be modified, or won’t be modified and will go through the foreclosure process,” Duke said. “We are getting to the point where addressing that part of it is critically important.… It will take a number of small things, all of which will help and that complement each other in a strategic sense.”
She also pushed back against the notion that enabling greater refinancing would be unfair to investors of mortgage-backed securities.
“I don’t view changing that dynamic as being harmful to the markets,” she said. Enabling more refinancings “would likely provide some support to the economic recovery while improving the circumstances of homeowners and reducing the overall level of credit risk.”
Duke suggested changing the government’s Home Affordable Refinance Program, which allows borrowers who have loans backed by Fannie and Freddie, and who hold little or no equity, to refinance to take advantage of low interest rates. Tweaks like eliminating costly upfront fees for the borrower and eliminating the so-called “put back” risk where lenders who originated the loan and violated the GSEs’ underwriting standards would have to repurchase it, among other changes, could help some 4 million potential borrowers refinance into cheaper loans. (Currently, like the government’s Home Affordable Modification Program, HARP has helped fewer than 1 million borrowers.)
Some analysts said if Obama is serious about improving the housing situation, he is going to have to be realistic about what he can achieve.
“There seems to be some extraordinary outreach and some extraordinary listening going on. Whether that will actually translate into workable programs is yet to be seen,” said Jaret Seiberg, an analyst with MF Global. “If the president decides to unveil some massive new housing initiative, then it means it’s all political theater because there aren’t the votes to pass it or pay for any of it.”
Jay Brinkman, the chief economist for the Mortgage Bankers Association, said he did not know enough details about the refinancing idea but it did not appear to put a floor under sliding home prices or address the backlog of foreclosures where differing state laws and the courts have slowed the process.
His group has warned that such proposed refinancings could spur a rash of lawsuits. “If you do something that violates what existing contracts Fannie and Freddie have, you may end up getting sued by a lot of investors,” he said.
Other analysts panned the latest ideas as unlikely to make much of a dent in the economic outlook.
“Overall, both programs will give the appearance that the administration is doing something to help the housing market, but the impacts of these programs are not very likely to be significant,” said William Longbrake, an executive in residence at the University of Maryland and former vice chairman of Washington Mutual.
Chris Low, the chief economist with First Horizon National Corp.'s FTN Financial, estimated a mass refinancing program would put $80 billion a year in the pockets of homeowners, which would translate into a percentage point of economic growth.