Obama administration ramps up mortgage refinancing effort (Continued)
Additionally, a likely national settlement over complaints about banks filing faulty paperwork to take back homes should clear the way for an additional 400,000 foreclosures in coming months, according to Moody’s Analytics, an economics research firm.
Moody’s predicts that foreclosures will rise next year to a record 1.5 million, or a hefty 30% of all sales of previously owned homes.
The new crush of distressed properties will further dampen home values, especially in hard-hit Florida, California and Nevada, inflicting more damage on the broader economy and job growth.
Amid rising concerns, White House officials are intent on easing the rules of the Home Affordable Refinance Program, which allows mortgages backed by financing giants Fannie Mae and Freddie Mac to be refinanced at lower rates.
HARP, begun in 2009, was supposed to help millions of homeowners, but instead just 865,000 loans have been refinanced through July.
Economists and housing industry executives said the program’s stringent requirements made many homeowners ineligible. For example, borrowers can’t qualify if their mortgages exceed 125% of their homes’ value. Those who do qualify might face stiff fees.
Banks, meanwhile, have been reluctant to participate, partly because they feared they might be required to buy back mortgages if even small violations of government underwriting guidelines occurred.
Obama can’t make changes in HARP. That’s the realm of the Federal Housing Finance Agency, an independent agency that took control of Fannie and Freddie in 2008.
Acting Director Edward J. DeMarco has been reluctant to make changes for fear that they could result in more losses for taxpayers. The takeover of Fannie and Freddie already has cost $169 billion.
Democratic lawmakers have urged Obama to exert stronger pressure on DeMarco, but Treasury Secretary Timothy F. Geithner acknowledged at a congressional hearing this month that the administration’s hands are tied because it is up to DeMarco’s agency to lay out specific steps. Housing agency officials wouldn’t comment when asked about White House pressure.
Fannie and Freddie own or back 30 million mortgages, and, according to Federal Reserve estimates, about 4 million might be eligible for refinancing under a revamped program. But most experts say the effect would be much more modest, with only 2 million more loans reworked. About 15 million loans are underwater.
“Putting aside issues of political practicality, the idea holds some appeal,” forecasting firm Macroeconomic Advisers said in a research report. “However, we doubt that it would give a quick and major boost to overall consumer spending.”
And even with changes, the program won’t do anything for the 3.5 million homeowners who are at least 120 days late on their payments or in default.
The administration is working on another plan that could convert a large number of vacant homes to rental properties. The effort, floated by Fed officials and people in the housing industry, could reduce the number of empty houses that are blighting communities.
With demand for rental housing relatively strong, small investors have been buying foreclosures and other homes to turn them into rentals. But Fed Gov. Elizabeth Duke said at a recent forum that large-scale conversions haven’t happened because it’s expensive to manage single-family home rentals and that the standard practice for the government and the industry has been to prepare vacant properties for sale to new homeowners.
Duke suggested that the government help facilitate the bundling of a large number of rental properties so as to make it more attractive to investors. Community activists, however, worry that turning many owner-occupied homes to rentals will only hurt neighborhoods in the long run.
Administration officials wouldn’t comment on specific ideas or give a timetable for the initiative. But economists say it will be at least a year from now before such a program would begin to show meaningful results.
A far more ambitious proposal is offered by Martin Feldstein, a Harvard professor and top economic advisor to President Reagan: Reduce the principal on the mortgages so that the loans are no more than 110% of the value of the properties.
Banks would absorb half the cost of the principal reduction, and the government the rest. Feldstein figures the losses could amount to $350 billion.
But Feldstein acknowledged there’s political resistance to helping some homeowners while leaving others with smaller loans to fend for themselves. Feldstein’s solution would be to allow the government to go after homeowners’ assets if they default on the new, smaller loan.
“Banks will be careful going forward,” he said, “not to make loans that are at risk of creating very high [mortgage-to-home value] ratios.”
But Feldstein’s plan has little chance in Congress, which is averse to passing anything resembling stimulus legislation. And lenders, too, don’t like the idea of lowering debt for many borrowers who they said can afford to pay or for those who are gaming the system.
“People look at foreclosure as a morality play, not as a broad economic one,” said Elyse Cherry, chief executive of Boston Community Capital, a nonprofit financial institution that is working with lenders to avert foreclosures.
Still, attitudes might change, given that housing is increasingly being seen as the biggest weight on the sluggish economy.
“Prices continue to spiral down,” Cherry said. “Nobody knows what the bottom is.”