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."
But other experts have speculated that the Fed's decision to roll over the proceeds from maturing investments into mortgage-backed securities (MBS) could indirectly give the housing market a boost as well, completely apart from the low-interest rate policy the central bank is pursuing. For any expanded refinancing program to work, lenders need to be willing to refinance loans and someone must be willing to invest in the MBSs produced. With rates so low, one of the biggest stumbling blocks has been getting investors interested in investing in MBSs. But, with the Fed's recent announcement that it will reenter the MBS space, the market could now have a willing investor.
"The idea is speculative but certainly reasonable," wrote Tim Manni, managing editor of HSH.com, in a recent article. "Since Fannie and Freddie are already under the government's control, it stands to reason that a large pool of underwater mortgages could be refinanced via HARP, packaged into mortgage-backed securities and sold to the Federal Reserve again, who declared their renewed interest in purchasing mortgage investments."
A coordinated effort by the government could also "put more than $2,000 a year in a family's pocketbook, and give a lift to an economy still burdened by the drop in housing prices," Obama said in his American Jobs Act speech. Economists say a large-scale refinancing effort could free up more than $70 billion for consumers to, hopefully, spend elsewhere.
While the extent of Congress' and the Obama administration's involvement in the housing market remains to be seen, it's clear that policy makers need to come up with some measure to repair the gash the housing market has left on the economy. Otherwise the slow bleed of dropping home prices coupled with a host of other domestic and international economic worries could keep the economy on the brink of another, possibly deeper, recession.
"There are important considerations about the administration's stated goal of getting private mortgage money back into the market, and that's really a crucial key element for the long-term health of the market," Gumbinger says. "But the question is how much more do we need the shorter-term benefit? There is a balance to be achieved there."