Politicians, policy makers, and even the president have acknowledged the economic toll of the dysfunctional U.S. housing market, and yet struggling homeowners still haven't seen much aid from Washington.
Trillions of dollars have been poured into ailing banks and corporations in the hopes that these institutions, on firmer financial footing, would pass along the benefits to average consumers through generous lending, low interest rates, and plentiful job opportunities.
But the trickle effect that proponents were hoping for hasn't materialized—unemployment remains high, consumer and business confidence has sunk to all-time lows, and but for a slight uptick in prices over the past few months, the housing market continues to bump along at the bottom.
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"It's slowly but surely dawning on a lot of folks that if we can't get underwater borrowers into the game, we're missing all kinds of very powerful economic stimulus that really doesn't cost the taxpayers virtually anything," says Keith Gumbinger, president of mortgage-information site HSH.com.
The Federal Reserve recently announced plans—dubbed Operation Twist—to further depress long-term interest rates in hopes of stimulating borrowing, but experts say even the central bank can only do so much. It's running out of levers to pull to restart the economy, and the housing market needs far more than super-low interest rates to dig out from under the rubble of the Great Recession.
With such low interest rates, refinancing mortgages has been suggested as one "cost-free" way to stem the flow of foreclosures, help underwater borrowers, and put extra cash in homeowners' pockets. The Home Affordable Refinance Program (HARP), a government program designed to help refinance troubled mortgages, has fallen woefully short of its projected success, primarily because too many homeowners are ineligible.
Plummeting home values have left an estimated 14 million Americans—more than 20 percent of all homeowners—owing more than their homes are worth. Others can't refinance because they've lost jobs or income and banks won't take a chance on them. "Banks have tightened their standards back to where we were 20 or 30 years ago," says Patrick Newport, economist at IHS Insight. "With refinancing, banks will not lend to you if you don't have equity in your home."
President Obama has alluded to increased cooperation with federal housing agencies to help more homeowners refinance at lower interest rates, but a viable plan has yet to be proposed. "There are some major problems with the [HARP] program," says Tara Sinclair, associate professor of economics and international affairs at The George Washington University. "But nobody has been able to find a better way to design it."
Beginning with efforts during the Bush administration in 2008, the government's mortgage help has primarily involved incentives meant to coax banks holding mortgages to do "voluntary" refinancings. "We've seen that banks are not taking the implication and moving it to action," says Daniel Penrod, economist at the California Credit Union League. "The government has offered stimulus and bailout funds, and the first thing they did was say, 'Quick, give the money back so we don't have to abide by an outside influence.'"
After two years of nudging, hinting, and all but pleading with banks to start lending again, the government needs to take a heavier hand in facilitating and expediting refinancing activity, some experts think. "It should be considered over the next several months how the GSEs Freddie and Fannie could further aid the mortgage-refinance process regarding the fees they may charge financial institutions, which could in part increase the percentage of those that qualify and the propensity to refi," says Joe Davis, chief economist at investment firm Vanguard. "With Operation Twist or any other impact on long-term interest rates, the multiplier effect is extremely low for the mortgage market."