The Obama administration has received strong criticism for its failure to deal adequately with the housing crisis. Besides millions of American losing their homes to foreclosure since Obama moved into the White House, estimates of homeowners who have underwater mortgages range from 11 million to 13.5 million borrowers. The demise of the housing market has cost American approximately $7 trillion in household wealth.
The latest initiatives promoted by the White House involve multiple bills. Homeowners will have a chance to mortgage refinance at lower interest rates and reduce their monthly mortgage payments.
According to a statement made to reporters, President Obama said, "We're going to be pushing Congress to see if they can pass a refinancing bill that puts $3,000 into the pockets of the average family who hasn't yet refinanced their mortgage." The administration hopes the new will persuade the electorate that the President’s housing policies has worked to help the mortgage and housing market recover.
Making Home Affordable Programs
It’s not that President Obama has not made an effort to solve the housing crisis. The administration has implemented two initiatives under the Making Home Affordable (MHA) program – the Home Affordable Modification Program (HAMP) and Home Affordable Refinance Program (HARP).
Initially, Congress appropriated about $50 billion for the (MHA) programs. Nonetheless, most of the allocated funds remain unspent instead of going to help struggling homeowners as intended.
For example, the administration touted HAMP as a program that would help 3 million to 4 million homeowners modify the terms of their mortgages and reduce their monthly mortgage payment by the end of 2012. Since the program’s initial introduction in February 2009, HAMP has only provided assistance to around 1 million borrowers. HARP has also failed to help the number of homeowners as promised – even after a couple of revisions.
FHFA Director Refuses Mortgage Reduction
A few weeks ago, the director of the Federal Housing Finance Agency (FHFA) Edward Demarco exercised his authority, as regulator of the government–sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, to reject another proposed plan to help homeowners.
The administration’s planned to offer the GSEs incentives to reduce the mortgage balance for homeowners who owe more on their loans than the value of their homes. Freddie and Fannie own or insure nearly 60% of outstanding mortgages.
However, Demarco sent a letter to Congress nixing the scheme, stating that it would cost taxpayers’ money and would not help as many homeowners as projected.
Mortgage Refinance Can Stimulate the Economy
The real estate analytics firm Corelogic reports that 75% of homeowners with underwater mortgages have high interest rate loans. The combination of underwater mortgages and high interest rates has increased the instability of their financial predicaments. It also heightens the probability of many of these borrowers entering the foreclosure pipeline.
Economists and housing advocates believe a program that allows for mass refinancing of borrowers into low interest rate loans remains one of the most cost-effective solutions for helping the sluggish U.S. economy.
Some immediate benefits of such a program would include the following items:
- Homeowners will have more money to put back into their homes.
- Borrowers can reduce home loan debt.
- Consumer spending, which represents about 70% of the economy, will spur economic growth.
- Economic growth leads to more jobs.
Mark Zandi, the chief economist of Moody’s Analytics stated that helping to reduce the monthly mortgage payments of homeowners represents the equivalent of a hefty tax cut of $2,500 to $3,000 annually.
Congress Expected to Haggle over Legislation
HUD Secretary Donovan anticipates Congress will consider the legislation after its August recess. One bill, proposed by Robert Menendez (D-N.J.) Barbara Boxer (D-Calif.), expands the number of homeowners with GSE-insured mortgages who can qualify for the HARP mortgage program and reduces refinancing expenses. The scheme also opens the program to borrowers with underwater mortgages held by private banks.
Another plan presented by Sen. Jeff Merkley (D-Ore.) would allow underwater borrowers to refinance into low-interest rate loans at an interest rate just a few percentage points higher than the best rate paid by the federal government when borrowing. The plan entails the creation of a government-owned trust that would own the mortgages and sell them to mortgage investors.